The Australian Taxation Office (ATO) has ramped up its efforts to recover unpaid tax debts, employing mechanisms like reporting unpaid business tax debts to credit reporting agencies. Another increasingly common tool in the ATO’s arsenal is Garnishee Notices.
In FY2023/2024 alone, the ATO issued 6,150 Garnishee Notices, creating significant challenges for businesses across Australia.
What is a Garnishee Notice?
Put simply, a garnishee notice allows a creditor to demand a third party, to redirect funds owed to a company or individual directly to the creditor. While most creditors require a court order to issue such a notice, the ATO does not.
The ATO garnishee notices create a statutory charge, granting the ATO priority over other unsecured creditors. This sets them apart from garnishee notices issued by other creditors, which are treated as unsecured debts.
The Impact on Businesses and Individuals
The effects of an ATO Garnishee Notice can be devastating, particularly for trading businesses. Most commonly, the ATO garnish funds from a company’s bank account. However, in some cases, the ATO has also garnished funds from EFTPOS facilities, further compounding the disruption.
At the personal level, garnishee notices can also wreak havoc for individuals. For those facing bankruptcy, the timing of a garnishee notice is crucial. Filing for bankruptcy usually stops creditors from garnishing wages for a debt, provided the garnishee notice is included in the bankruptcy filing. However, if the ATO issues a Garnishee Notice before bankruptcy is filed, the notice can remain enforceable throughout the bankruptcy term (which lasts a minimum of three years) and beyond if the debt is not yet fully repaid.
This limits the available options for individuals to regain financial stability once a garnishee notice has been issued. It is worth noting that the ATO will not issue a Garnishee Notice after someone goes into bankruptcy. Therefore, the only way to avoid an ATO Garnishee Notice in such situations is to quit their job and find new employment – a harsh and disruptive solution.
Over the last 18 months, we’ve seen many directors delay action on the Director Penalty Notices (DPNs) that they have been issued. Hence, significantly increasing their personal risk. Acting proactively can make all the difference, as demonstrated in the case of one of our recent clients.
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Our client, a large landscaping company, was issued a Garnishee Notice by the ATO for an outstanding tax debt of $140K. The notice led to the freezing of the company’s bank account, plunging the business into an immediate cash flow crisis. Unable to pay employees or suppliers, they faced mounting pressure and were on the brink of insolvency.
Recognising the urgency of the situation, my team and I recommended Small Business Restructuring (SBR) to help the company regain financial stability and avoid liquidation. Working closely with the appointed Small Business Restructuring Practitioner (SBRP), we:
- Negotiated with the ATO to develop a comprehensive payment plan.
- Presented the plan well within the 20-business-day deadline, demonstrating the company’s capacity to meet repayments through improved cash flow management.
- Leveraged ATO Practice Statement Law Administration 2011/18, which allows the Commissioner to withdraw or vary garnishee notices if suitable alternative payment arrangements are made.
Through our proactive negotiation, the ATO agreed to withdraw the Garnishee Notice in exchange for a structured payment plan. With their accounts unfrozen, the company resumed normal operations, ensuring wages were paid on time and supplier relationships remained intact. With our tailored strategy, our client successfully maintained business continuity while settling their tax debt.
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As advisors, we must remain vigilant and proactive when guiding our clients. To navigate ATO actions effectively, clients should:
- Act swiftly and engage proactively with the ATO when faced with any enforcement action or financial challenges.
- Seek expert advice to develop tailored solutions, such as payment arrangements, business restructures and cash flow improvements.
If you have clients struggling with tax debts, ATO actions like garnishee notices or facing a bankruptcy due to lockdown DPNs, the timing and approach are critical. The right strategy, project managed by the right team of highly skilled people, makes all the difference.
Take action now – contact me or my team at de Jonge Read today to discuss the best course of action and protect your client’s financial future.
Should you have clients or associates that you know are struggling with financial issues or need assistance in reviewing their business affairs in preparation for what’s around the corner, our team of Strategists would be pleased to discuss options that are available on how to best design and implement insolvency strategies. Contact us now on p. 1300 765 080 | ua.mo1738769234c.arj1738769234d@ofn1738769234i1738769234
Did you know?
Phoenixing is another name of business restructure. Read more about business restructures and when this can be an option for you.
