A person who owes a tax debt they cannot pay is probably under a lot of financial stress. They may even be insolvent and should be considering bankruptcy, but they often hold off going bankrupt, which sometimes can cause further problems.
This is because ATO can and do take action to recover debts which people owe, including obtaining court judgments and taking legal action to make a person bankrupt.
The ATO can also issue a Garnishee Notice to a third party that holds money for or owes money to a person requiring the recipient of the Notice to pay funds directly to the ATO. It has been very common for some time for the ATO to issue Garnishee Notices to a taxpayer’s bank or to a company’s debtors requiring those parties to pay the ATO directly.
What we have seen recently however is the ATO issuing a large number of Garnishee Notices for a person’s tax debts to their employer which requires the employer to pay a percentage of gross (before tax) wages to the ATO. We have even seen the ATO issue a Garnishee Notice to an insurer which was making income protection insurance payments to a person who could not work. The Garnishee Notice can be issued for any type of tax debt, but commonly it would be issued for income tax debts or debts owed under Director Penalty Notices.
What are the problems with these types of Garnishee Notices
Obviously the ATO garnisheeing a person’s wages is going to be a problem for that person. It can lead to the person having insufficient funds available to pay other debts owed and ordinary living expenses.
However, another major problem with this type of Garnishee Notice is that if the Notice has been issued and then the person subsequently goes bankrupt the ATO can continue to enforce the Garnishee Notice during the period of bankruptcy. It in effect becomes a secured debt. The obligation under the Notice only comes to an end upon the person’s discharge from bankruptcy, which at the moment is a minimum of three years from the date they lodge a Statement of Affairs.
This can mean that a person can be declared bankrupt but are still paying the ATO from their wages.
What can be done
If you have an ATO debt which you cannot pay there are 5 things you can do to avoid or reduce the impact of this type of Garnishee Notice:
- You should obtain advice from a qualified professional.
- If you can pay the ATO debt over time you should negotiate a payment arrangement with the ATO, or engage someone to assist you negotiate a payment arrangement. The ATO won’t issue a Garnishee Notice or take any other form of recovery action against you if you have entered into and are complying with a payment arrangement.
- If you cannot pay the ATO debt even by instalments over time, it is best to promptly file for bankruptcy. Once a person is bankrupt the ATO will not issue a Garnishee Notice to their employer or any other party for pre-bankruptcy tax debts.
- If the ATO has issued a Garnishee Notice to your employer, you can resign your employment and the Garnishee Notice will not follow you to your next employer. However, if you are not bankrupt the ATO can issue a further Garnishee Notice to your new employer.
- You can make submissions to the ATO on financial hardship grounds to reduce the amount which they claim each pay period under the Garnishee Notice. The ATO will take various factors into account in deciding whether or not to agree to reduce the amount which they claim.
How we Can Assist
We can assist withnegotiating payment arrangements with the ATO or arranging for them to reduce amounts claimed under a Garnishee Notice if one has already been issued. If you need help dealing with the ATO, coming up with appropriate strategies or advice as to whether you should declare bankruptcy, don’t hesitate toget in touch with us.
If you are an accountant and any of your clients have large personal tax debts, they should be proactive in obtaining professional advice quickly.