Recent media reports indicate that the Australian Taxation Office (ATO) is to take tougher action on recovery of taxation debts. Consistent with such reports, in recent years the ATO has displayed an increased willingness to use, at the earliest stage, the full extent of its recovery powers to collect taxation debts.
One of the more effective of the ATO's recovery powers are what is referred to Garnishee Notices, which are issued under section 260-5 of Schedule 1 to the Taxation Administration Act 1953 (Cth) (TAA). Through a Garnishee Notice, for example, the ATO can compel your bank to pay to it the balance of your bank account. Or, where you are selling your house, the ATO can issue a Garnishee Notice to the purchaser requiring it to pay to the ATO an amount of the purchase price that would be paid to you.
In recent years a growing practice of the ATO has been for it to issue a Garnishee Notice to a taxpayer on the very same day or, perhaps, the day after, it issues a tax assessment. Whilst Garnishee Notices are an effective recovery method for the ATO, they do have their limitations. Understanding the limitations is critical, both from the perspective of advising the taxpayer to whom a Garnishee Notice relates and advising the recipient of the Garnishee Notice.
Garnishee Notices operate as follows:
- where a person has a tax liability (the taxpayer), the ATO can issue a Garnishee Notice where a person or entity “owes or may later owe” money to the taxpayer (such amount is referred to as the "available money");
- upon receiving a Garnishee Notice, the recipient is legally obliged to pay the amount specified in the Garnishee Notice to the ATO;
- the failure to give money over to the ATO in accordance with a valid Garnishee Notice is a criminal offence and the recipient may be held personally liable to the ATO for the full amount claimed under the Garnishee Notice;
- where an amount is paid to the ATO under a valid Garnishee Notice, the recipient is taken to have been authorised by the taxpayer such that the payment discharges the recipient's liability to the taxpayer.
From the perspective of the taxpayer, there may be reasons why they do not want an amount to be paid to the ATO under a Garnishee Notice. Some examples are as follows:
- the Garnishee Notice may have been issued on a loan account which, should an amount be paid to the ATO under the Garnishee Notice, would cause the taxpayer to be in default of its loan covenants;
- the amount paid under a Garnishee Notice may prevent the taxpayer from being able to meet its other financial obligations and it would prefer to find other ways to discharge its tax liabilities;
- the taxpayer may consider it should not have a liability to the ATO and wants the opportunity to object against, or take other action to challenge, the liability. To the extent that a Garnishee Notice would exhaust all its resources, it may prevent the taxpayer from taking such action in a proper manner.
As such, a taxpayer may wish to query whether a Garnishee Notice has been validly issued.
From the perspective of the recipient of a Garnishee Notice, they want to be satisfied that they need to pay an amount to the ATO under the Garnishee Notice. If they do need to pay an amount to the ATO, and do not, they will have committed a criminal offence and will be personally liable for the amount they should have paid. If they do not need to pay an amount under the Garnishee Notice, but do, they will not have discharged the liability to the taxpayer for the amount they owed to them.
This means that there are two considerations for the taxpayer and the recipient of a Garnishee Notice.
- Firstly, has the Garnishee Notice been validly issued?
- Secondly, does the Garnishee Notice operate to require an amount to be paid to the ATO by the recipient in the circumstances? That is, is there any available money?
1. Validity of Garnishee Notice
A recipient of a purported Garnishee Notice is not under any obligation to comply with an invalid notice. There are a number of reasons why a Garnishee Notice may be invalid including the following:
- the Garnishee Notice is issued prior to the tax liability arising. An example of this may be that the Garnishee Notice is issued prior to the service of the tax assessment that creates the tax liability. Where the Garnishee Notice is served before the assessment is served, even if by one day, it is invalid;
- that the amount stipulated to be paid to the ATO is sufficiently certain. An example of where a Garnishee Notice is uncertain is where it contains conflicting statements as to when payment is required;
- that the Garnishee Notice has been issued in bad faith or for an improper purpose. An example of a Garnishee Notice being issued in bad faith or for an improper purpose is where the Garnishee Notice has been issued for the specific purpose of preventing the taxpayer from contesting the tax liability. Challenging a Garnishee Notice on the basis that it has been issued in bad faith or for an improper purpose is extremely difficult and compelling evidence would be required as courts will, understandably, be reluctant to find that the ATO acted for such reasons.
2. Available Money?
There are a number of reasons why an amount may not be Available Money such that the recipient of a Garnishee Notice is not required to pay an amount to the ATO. A simple example would be where the taxpayer paid an amount to the recipient as a gift and therefore with no expectation of being repaid. This may commonly occur between family members. Or, where the recipient is a trustee of a discretionary trust and does not owe an amount to the taxpayer until a future exercise of discretion to pay an amount to the taxpayer. In both case, there is no Available Money in respect of the taxpayer.
There are other less obvious reasons. For example, foreign currency does not constitute "money" for the purposes of a Garnishee Notice and, accordingly, a bank is not required to pay an amount to the ATO from a foreign currency bank account held by a taxpayer.
Importantly, the taxpayer must be solely entitled to money for it to be available money. This means that money held in a joint bank account, even where all the joint owners of the account have tax liabilities, is not required to be paid to the ATO under a Garnishee Notice. This exception comes from the decision of the Federal Court in Deputy Federal Commissioner of Taxation v. Westpac Savings Bank Ltd. & Ors (1987) 87 FLR 130.
The reason for the exception is that "[w]here money is due on a covenant made with two persons jointly by which it is to be paid to such two jointly, no one of those two has any right to that money without the other of them." That is, money owing to persons jointly, is not owing to one of them and therefore is not available money of that person for the purpose of a Garnishee Notice.
Importantly, the exception for joint money is not limited to a joint bank account. Whilst it has not been tested in court, there is no reason that the principle would not apply equally to the purchase price for the sale of real property that is owned by two persons as joint tenants. This is significant because it has been an increasing practice of the ATO to issue Garnishee Notices to purchasers of real property in relation to a vendor's tax debts. This can have the effect, where the property is jointly owned and the parties are unaware that the Garnishee Notice cannot operate in such circumstances, that one owner ends up subsidising the payment of the other owner's tax debts. A Garnishee Notice is not intended to operate in such a manner.
The key takeaways are as follows:
- considering whether a Garnishee Notice is valid or properly operates in the circumstances is necessary for the taxpayer to whom the Notice relates and the recipient;
- if a recipient improperly pays an amount the ATO under a Garnishee Notice, they may remain liable to the taxpayer for such amount; and
- there will not always be "available money" when a Garnishee Notice is issued. As noted above, money owing jointly to the taxpayer and another person will not be available money and is not required to be paid to the ATO in response to a Garnishee Notice.