Phone: (02) 9689 2266 Email  Email Us Search Site:   Search

Australian Taxation Office - Statutory Garnishee Notices

01 Sep 2011

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)

News & Updates

ATO - Change in Debt Collection Approach - Directors Beware! Read all
Director Resignation Changes Read all
Small Business Restructuring Reform Read all
Alert to Advisors - Potential Personal Liability Read all
Covid-19 Safe Harbour Protection for Directors Read all
The Dangers of Lending to Loved Ones Read all
Impending Changes to the DPN and PPSR Update Read all
Recent criminal changes to the Director Penalty Notice Regime Read all
Gaol Time for Delinquent Company Directors / PPSR Update Read all
When is a Guarantee Not a Guarantee? Read all
Illegal Phoenix Operations & Determining Right to Income Read all
New & Proposed Legislative Changes Read all
Voidable Property Transfer & Director Liability Read all
Welcome to New Partner and Reforms to Insolvency Law Read all
ASIC Statistics and Enforcement Read all
Government Targets Foreign Investors with New Tax Legislation Read all
Dodgy Advisers – Watch Out! Read all
Steering the Ship onto Rocks: Directors Flouting Obligations Read all
From the Mining Boom to the Ideas Boom - What it All Means Read all
When is a Debt to the ATO Due and Payable Read all
ATO and Phoenix Activity Read all
Unreasonable Director-related Transactions & PPSA Update Read all
PPS and ASIC Prosecution Read all
Leases and Insolvency Read all
PPS Update Read all
Expansion of Director Liability Provisions (PAYG & SGC) Now Law Read all
Proposed Changes to Corporations Act (Phoenix Activity) and Taxation Act (Director Penalty) Read all
March 2012 PPSA Newsletter Practical Worked Examples Read all
Personal Property Securities Act ("PPSA") Now Law Read all
PPS Reform - Understanding Security Interests: Perfection and Priorities Read all
Tax Changes - Expansion of Director Liability Provisions Read all
Australian Taxation Office - Statutory Garnishee Notices Read all
Major Change to Registering Security Interests – Personal Property Securities Reform Read all
PDF 8 Essential Steps if Your Business is in Distress View
PDF ASIC Information Sheet: Insolvency glossary View
PDF Business for Sale View
PDF Directors Duties in Uncertain Financial Times View
PDF Guidance for Accountants in Public Practice: Helping Clients with Companies in Financial Distress View
PDF Real Estate for Sale - Mascot View
PDF Real Estate for Sale - Vineyard View
PDF Solar Energy Business View

Cover of Excellence
Liability limited by a Scheme approved under Professional Standards Legislation