Under the Tax Administration Act 1953 (Cth), the Deputy Commissioner of Taxation has wide ranging power to assist it in collecting tax debts. One of these powers is the ability to issue a garnishee notice.

A garnishee notice is served on a third party who either holds money on behalf of a tax payer (i.e. a bank) or a party that owes money to the taxpayer.

Often, when the notice is issued, the taxpayer is already in financial difficulty and is likely to be in breach of its loan arrangement with its bank / lender.

In the ordinary course, if the lender was served with a garnishee notice by the Commissioner, then it must comply. The garnishee notice would ordinarily be issued in respect of savings, transaction or term deposit accounts held by the taxpayer. Upon receipt of the notice, the Bank is required to transfer the money in the taxpayer's account to the Commissioner.

However, this is not always the case. If the taxpayer is already in default to the lender at the time the garnishee notice is received then, depending on the type of security which the lender has, it may rank ahead of the Commissioner.

The prime example of this is when the lender holds a registered security interest over the circulating assets of the taxpayer (a floating charge in old terminology). If the charge/security interest has crystallized prior to receipt of the garnishee notice, then the lender may have priority over the Commissioner.

For lenders who receive a garnishee notice from the Commissioner in respect of a customer in default they should, before transferring any money, assure themselves whether the Commissioner does in fact have priority over those funds.