Adrian Abbott, of Sydney Tax Advisory, and Gregory Ross, of Eakin McCaffery Cox, discuss the ATO’s garnishee powers in light of recent allegations that the ATO controversially abused such powers, which prompted the Inspector General of Taxation to announce a review.
A Dynamic Life for ATO Garnishees
The New Dynamic
The ATO has long had statutory garnishee powers. However, “garnishees” have taken on a new dynamic under current ATO procedures.
Under this statutory garnishee power, ATO can resort to the power without having to obtain a judgement debt before doing so.
Such was the use of ATO’s garnishee powers that, earlier this year, there were media reports suggesting the ATO was being unduly heavy handed in use of its garnishee power.
In its use of the power, some small business taxpayers were reported to have been driven to the wall.
The complaint was the ATO can take the bank funds of a business taxpayer on a Thursday and leave nothing left for the payment of employee wages on Friday and do it without notice to the taxpayer. All that is needed is a notice to the third party.
“Garnishees” which date from the 17th century are a legal mechanism to allow recovery of money owed by a debtor to a creditor, when the money is held by a third party. Put in the taxation context, a garnishee allows the ATO to take a taxpayers’ bank deposit funds held by the taxpayers’ bank.
In the commercial field, the most common situation of a garnishee is where a creditor, say a bank, is to enforce its judgement debt against a debtor, say an employee, and obtains a garnishee order to require the employer, a third party, to pay a proportion of an employee’s salary to the bank.
A garnishee is simply a conduit pipe for flowing money of one party, to another party, from a third party. The ATO statutory garnishee is a special animal.
Confusing? So be it.
Effect of Insolvency
One would have thought that a bankruptcy, administration and/or liquidation, would bring the garnishee to an end. But that does not appear to be the case. If the garnishee notice was issued prior to the bankruptcy, administration and/or liquidation then the Commissioner:
“will not ordinarily withdraw that notice. In such circumstances, the notice will continue to operate on the relevant amount. For example, a notice served prior to the tax debtors’s bankruptcy would continue to operate on amounts that were due to the bankrupt prior to the date of the bankruptcy even if they remain unpaid at that date”. (PSLA 2011/18 Paragraph 124).
It actually goes deeper than that, but the operation of the provisions are not without limit.
It is clear that the statutory garnishee power is not intended to subvert the operation of the Laws usually applying in insolvency and bankruptcy situations, though much therefore depends on exact timing – Bruton Holdings Pty Limited (in liquidation) v. Federal Commissioner of Taxation & Anor (2009) 239 CLR 346; 2009 ATC 20-125 as is now expressly acknowledged in PSLA 2011/18 at 118 where, reflective of that case, it is stated:
“the Commissioner will not issue a garnishee notice in respect of a debt owed to a company after an order has been made, or a resolution has been passed, for the winding up of the company”.
The Commissioner has the power to issue garnishee notices after the bankruptcy, administration and/or liquidation commencement, so long as the Commissioner has regard to a number of factors set out in paragraph 125 of the PSLA:
– need to protect the revenue
– expected impact on arm’s-length creditors
– and, the likelihood receipts from the insolvency administration
The End Result
Just imagine the plight of the taxpayer if, subject to errant detail of timing, the trustee in bankruptcy may be able to take the income of the bankrupt over and above the $80,000 limit, while the ATO under their garnishee notice can take the lot.
In Paragraph 108 of the PSLA it is acknowledged that the ATO:
“will not usually seek to garnishee more than 30 cents in the dollar of the amount of salary and wages payable”.
The PSLA makes no comment about other forms of income, such as business income, or subcontract fees.
As mentioned, “garnishees” have taken on new dynamic under current ATO procedures.
The ATO’s garnishee powers flow from sections 260-5 to 20 of the Taxation Administration Act 1953 Schedule 1.
“260-5 Commissioner may collect amounts from third party
Amount recoverable under this Subdivision
(1) This Subdivision applies if any of the following amounts (the debt) is payable to the Commonwealth by an entity (the debtor) (whether or not the debt has become due and payable):
(a) an amount of a *tax-related liability;
(b) a judgment debt for a *tax-related liability;”.
From section 260-5 (1) the taxpayer debt does not need to have become due and payable. The Commissioner can recover under the garnishee, even if the debt is not due and payable.
The ATO policies are set out in PSLA 2011/18: Paragraph 102:
“In considering whether to issue a garnishee notice, the Commissioner will have regard to:
– the financial position of the tax debtor and the steps taken to make payment in the shortest possible timeframe having regard to the particular circumstances of the tax debtor
– the extent of any other debts owed by the tax debtor
– whether the revenue is placed at risk because of the actions of the tax debtor, such as the tax debtor making payment to other creditors in preference to paying the Commissioner
– the likely implications of issuing a notice on a tax debtor’s ability to provide for a family or to maintain the viability of a business”.
By far the most significant is the last dot point. Maintaining business viability should be a mandatory code of conduct and a garnishee should not be a remedy used if an alternative exists.
Following, earlier this year, media reports suggesting the ATO was being unduly heavy handed in use of its garnishee power, the Inspector General of Taxation has initiated an enquiry into garnishee practice and is seeking submissions.
In 2013 there was a Court decision in which the use of the garnishee power was struck down as the Court saw it as “so unreasonable that no decision-maker, acting reasonably, could have arrived at such a decision” in the circumstances. Denlay v Commissioner of Taxation  FCA 307 (5 April 2013). One trusts the Inspector General will consider that in his enquiry
Quirks in Action Under ATO Garnishees
A question presently being looked at in a real client situation is whether and to what extent, subject to the detail of dates, the exercise of the ATO garnishee power may clash with the generally understood operation of laws to do with garnishees and bankrupt persons. This flows from the wording of paragraph 124 of the PSLA (mentioned above).
As that matter progresses and is resolved, a further article will appear in Legalwise News.
If you need assistance in respect of a garnishee, both Adrian and Greg are available. The text of the paper is only a summary and discussion of particular facts and principles. It is not to be taken as legal or commercial advice as to any particular factual circumstances.
LLB, BEc, FCIS, FGIA, FCA, CTA
Chartered Tax Advisor
Sydney Tax Advisory
LLB Accredited Specialist
Government and Administrative Law
Eakin McCaffery Cox