What is a tax office garnishee and how does it work?
If your company is struggling and has a tax office debt, the Australian Taxation Office (ATO) has the power, pursuant to Section 260-5 of the Taxation Administration Act, to collect an outstanding tax debt by attaching to or seizing monies held in the insolvent company's bank accounts by way of a garnishee order.
The ATO can also attach to monies owed by debtors to the insolvent company.
In short, the tax office can direct the bank of the insolvent company with a tax debt, to pay monies from the company's bank account directly to the ATO. Similarly, the tax office can direct a debtor of the insolvent company to pay monies directly to the ATO.
If a notice is issued by the tax office to a third party such as the bank, the effect is that a Statutory charge is created in favour of the ATO. This does not provide the tax department with an absolute priority against other competing charges however, the funds seized from the company's bank account are gone and no longer available for use by the company.
Having funds seized for the repayment of a tax debt that would otherwise be used in the operation of the business may have a dramatic impact on the viability, and cause enormous financial stress on a company and may lead to insolvency and the appointment of a Voluntary Administrator or Liquidators.
It is noted that once the company is in Voluntary Administration or Liquidation, the courts have held that the tax office cannot attach to debts due to the company or monies held in the insolvent company's bank account.
It is important to have choice in business and if you have an outstanding tax debt, you need to know this is one of the weapons available to the tax office that could limit your ability to determine the future of your company.
