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Earlier this month, the Commissioner of Taxation ("the Commissioner") issued his Report for 2007-2008 and stated:
"In taking firmer action to maintain a level playing field, we use the full range of available legislative and administrative options, including garnishee notices, director penalty notices and statutory demands, and in some instances, bankruptcy or liquidation proceedings."
What is a Tax Garnishee Notice?
A garnishee notice is a Notice issued pursuant to sections 260-265 of the Taxation Administration Act. A Notice is not a demand issued on the taxpayer, but is served on a third party. In summary, the relevant section provides that where a "tax related liability" is payable, the Commissioner may issue a Notice to a third party who "owes or may later owe money" to the taxpayer, for example, a debtor of the taxpayer.
The Notice requires the third party to pay, direct to the Commissioner, a specified amount or an amount up to the amount of the outstanding tax related liability. A third party who pays monies to the Commissioner in accordance with the tax garnishee notice is taken to be acting with the authority of the taxpayer and has the protection of a statutory indemnity. There are significant penalties if the third party does not comply with the garnishee notice.
The effect of a Tax Garnishee Notice
Service of a valid tax garnishee notice has the effect of making the Commissioner a secured creditor over the debts or monies due to the taxpayer. The garnishee notice creates a statutory charge which ranks as a fixed charge and in priority to any previously created floating charges which have not crystallised prior to service of the garnishee notice.
In a nutshell, the Commissioner achieves priority over certain existing secured creditors and priority over unsecured creditors for payment of what is, in effect, an unsecured debt.
What to do when you receive Notice of a Garnishee
It is important to act immediately to establish both the validity of the Notice and compliance with the policy considerations and limitations outlined in the ATO's Receivables Policy. The Commissioner's power to issue a Notice under sections 260-265 is an administrative discretion and there may be circumstances which may cause the Commissioner to review his decision.
Proactive action is necessary as, in practise, the service of a garnishee notice may have an extremely detrimental impact on the cash flow of a business.
Please note that the advice in this communication is general advice only and you should not rely on this advice unless you obtain legal advice specific to your own requirements. Should you have any questions in this regard please feel free to contact Trevor Rosenthal on (03) 8320 2954.
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