Australian Taxation Office - Statutory Garnishee Notices

The Commissioner of Taxation (“Commissioner”) has a number of options to enforce the collection of outstanding company taxation debts. An option that we are seeing being used more often by the Commissioner is the issuing of a “Garnishee Notice”. A Garnishee Notice to an entity (including an individual) owing money to the tax payer directs that debtor to remit that money to the Commissioner and not the taxpayer.

A Garnishee Notice may be issued by the Commissioner for any debts owing to the Australian Taxation Office, including SGC, penalties and GST. A Garnishee Notice is commonly issued in the following circumstances:

• To a tax payer’s bankers requiring the bank to pay to the Commissioner any credit balances in bank accounts in the name of the corporate tax payer¹;
• To a tax payer’s solicitors or accountants, where monies are held in trust for the tax payer ;
• To a tax payer’s debtors.

The service of a Garnishee Notice by the Commissioner has the effect of creating a statutory fixed charge in favour of the Commissioner to the extent of monies that are payable by the entity to the tax payer, up to the value of the debt stated in the Garnishee Notice. The charge does not require registration with the Australian Securities & Investments Commission and if served prior to the appointment of an Administrator or Liquidator, is generally not void against the external administrator. Further, a Liquidator is unable to recover the monies received by the Commissioner, pursuant to a Garnishee Notice, as an unfair preference payment².

For further understanding of the possible implications (particularly to the directors’ personal estate), please consider the following example:

• ABC Pty. Limited (“ABC”) is a debtor of the Commissioner;
• Bank Limited holds a registered fixed and floating charge over all the assets and undertakings of ABC;
• The directors of ABC have personally guaranteed the repayment of ABC’s debt to the Bank;
• As a result of ABC’s poor compliance with its taxation obligations, the Commissioner issues Garnishee Notices to several of ABC’s largest debtors.

Whilst the issuing of the Garnishee Notices does not provide the Commissioner with an absolute priority, it may in the above example if the Bank’s charge over debtors is a floating charge. That is, the Commissioner will be entitled to the amounts due from debtors before employees and the Bank!

The directors in the above example may become somewhat nervous if ABC does not have the ability to discharge the debt owed to the Bank and the Bank subsequently seeks to enforce the directors’ personal guarantees for any shortfall owed to the Bank.

It is important for directors of companies with outstanding debts owed to the Commissioner to determine if the company is in a position to discharge its debts as and when they fall due (ie. solvent).

Whilst the issuing of a Director Penalty Notice by the Commissioner may result in personal liability of directors, directors that have provided a financier with security should promptly consider the company’s position if the company begins to fall behind with its taxation obligations, as the issuing of a Garnishee Notice on the company’s debtors may increase the risk of banks seeking to rely on director guarantees.

In too many cases, the partners of Smith Hancock have met with directors for the first time only after the Commissioner has commenced enforcement action. Encourage your clients to seek prompt advice if they fall behind in their obligations to the Australian Taxation Office, as the earlier we get involved the greater the range of options that are available to deal with a company experiencing cashflow issues.

¹ Refer to decision in Bruton Holdings Pty Ltd (in Liquidation) v Commissioner of Taxation (2009) HCA 32 (26 August 2009)

² See Macquarie Health Corp Ltd v Commissioner of Taxation (1999) FCA 1819 (23 December 1999)