Updated: Jul 22
This month’s case study looks at the ATO’s ability to issue Garnishee Notices. Garnishees can be powerful and should be taken very seriously. Don’t underestimate the power of the ATO’s garnishee capabilities, even if their initial actions are unsuccessful. In this case the ATO continued to escalate their recovery actions by the use of Garnishees. So, something that was not that big a deal to the client soon turned into a massive problem. Background Our client operated an engineering company that specialised in the maintenance of major product facilities. The company only had a few clients, but these were Australian household names and all ASX listed. The company suffered a downturn in sales. The client eventually realised he was in trouble, but unfortunately had chosen to stick his head in the sand and ignore the issues, hoping things would pick up. By the time he met with us he was in serious arrears with several creditors, including the ATO who the company owed around $300,000. The ATO had not really said anything about the debt. Sometimes a quiet ATO is a scary ATO. At our first meeting the client advised his bank had already received a Garnishee Notice, but it was no big deal and nothing happened. We will explain why a little later. Now, it is important to note that the ATO can issue different types of Garnishee Notices. Often, if the first notice is ineffective the ATO will move on and issue the next type of notice and see if that gets them the result they were looking for. The key take home message here is – if your client gets a Garnishee Notice from the ATO they need help and advice FAST! Just because the ATO did not get a return from their effort this does not mean the issue is necessarily going to go away. What it really means is that your client is on the ATO’s radar and further action should be expected. Now, what our client had received is referred to as a “once off notice”. These are often referred to as a “one hit garnishee” or “point in time garnishee”. This usually instructs the bank to remit the full amount of the tax debt or 30% of the balance of the account, whichever is the lesser. You can tell it is a once off notice garnishee as it will usually include the following sentence; “Please note that this notice only seeks to operate with respect to available money now owed by you and will immediately thereafter cease to have any force”. So, the bank checks the balance of the account on the day it receives the notice and remits the required amount to the ATO. Once this has been done, the notice has no further impact. In this case, our client’s account was overdrawn under an approved limit on the day of receipt. While the notice requires the bank to remit money it holds for the company it does not enable the bank to increase the debt owing, even if the tax debt could be paid by using the approved overdraft limit on the account. In this case the client did not immediately engage de Jonge Read. He was in a bad place personally and was struggling with the stress and depression related to all his financial problems. He basically went to ground again but resurfaced when he got a second Garnishee Notice from the ATO. Having failed to recover any funds with the standard garnishee the ATO then issued an “ongoing notice” or “standard” garnishee. This type of notice requires the bank to remit all monies it holds for the client at that time. Not 30% of the balance – 100% of the balance. So, no big deal, right? The client has an overdraft and is in debit, so the bank is not holding any money. Wrong! You can identify an ongoing garnishee as it will include the following sentence; “If you do not owe the available money to the debtor but you will later owe it to the debtor, the payment to the Commissioner of Taxation is to be made immediately once the money becomes owing to the debtor”. So, what does this mean? It means that any money received to the credit of the account, such as monies paid in by a debtor, do not go to reduce the overdraft. This means that 100% of debtor collections by the company, up to the maximum amount of the debt owed, will be captured by the garnishee. Nasty document! Still the client did not engage de Jonge Read. Rather, he chose to open an account with a different bank and advised his clients, of which there were only a few, to make deposits to his new account instead. Problem solved! Garnishee Notices defeated! Not so fast….. The client had previously attempted to negotiate a payment plan with the ATO. As part of this process he was required to provide an aged listing of trade debtors and creditors, so the ATO could assess his capacity to make payments under any plan. What this also did though was identify who his trade debtors were and how much they owed him. The key take home here is – be aware of what information you are suppling to the ATO with payment plan requests. Sometimes this information can not only be used for the purposes of assessing a payment plan, but it can also give the ATO an insight into what other action it may be able to take. The next time we heard from the client was when the ATO garnisheed his largest debtor. A major Australian company. This garnishee document instructed the debtor to make payment to the ATO rather than to the company. Now, the debtor didn’t like this and knew exactly what it meant – our client had not been paying the ATO. So, they made the payment to the ATO rather than the company, effectively crippling the cashflow of the business. Even worse though, this critically damaged our client’s relationship with his customer. The contract was lost soon after. At the end of the day we did not assist with the restructure of the business. Due to a number of issues, but primarily due to the garnishee on debtors and the loss of contracts, there was effectively no business left to restructure. The Outcome In this case, the client did finally engage de Jonge Read, many months and two meetings after our initial consultation – but this time to assist with his bankruptcy. Our client had personally guaranteed several creditors that he was unable to pay. If he had engaged earlier the business could have been restructured before the ATO went though the series of garnishee notices it has at its disposal. ATO garnishee notices are not to be taken lightly, and if your client gets one the best thing, they can do is seek advice before the situation escalates. Even if the garnishee is ineffective it can be a sign of things to come.
Should you have clients or associates that you know are struggling with financial issues, our team of Strategists would be pleased to discuss options that are available on how to best design and implement insolvency strategies. Call us now on: 1300 765 080.