I am often asked what is the most common event or "red flag" that prompts a phone call from our Accounting and Business Advisory clients.
Undoubtedly, the common denominator over the past twelve months has been issues related to ATO indebtedness.
Whilst the Commissioner has a variety of recovery tools available, it would be the issuing of a "garnishee notice" that has caused the most angst amongst clients of the Accounting Business Advisory Practitioners we assist.
We wrote some time ago about the garnishee notice provisions, however the recent spike in requests for assistance following receipts of a notice, suggests an update upon this often misunderstood power of the Commissioner is appropriate.
For those unfamiliar with the garnishee notice regime, the Commissioner is afforded the powers to garnishee (or redirect) monies owing to any taxpayer (individual or corporate) from third parties in reduction of outstanding taxation liabilities.
Whilst these powers have long been available to the Commissioner, we are currently witnessing unprecedented numbers of such notices being issued, primarily in the SME sector.
Common examples of garnishees included:
The requirement of a business's debtors to direct payment to the ATO, instead of the business itself;
The requirement of a financial institution to forward available credit funds of a tax payer (both individual and corporate) to the ATO;
An individual's employer required to forward a portion of their salary to the ATO;
A garnishee notice being served upon any Solicitor/Accountant who is holding funds on trust for a taxpayer. However this notice may not be effective if those monies are charged by way if a lien; and
A garnishee notice being served upon a company in which the taxpayer holds shares, requiring future dividends to be redirected to the Commissioner.
The fact such notices are an efficient and cost effective form of enforcement for the ATO has undoubtedly lead to the current reliance upon them, and the regularity upon which they are encountered when assisting our Business Advisory and Financier clients, once their clients receive such an order.
The ATO's receivables policy deals with the Commissioners approach to the usage of garnishee notices, and discusses a number of self-imposed limitations that will be observed by the Commissioner.
Namely, the Commissioner will exercise some degree of discretion, and in some cases limit the quantum of a garnishee notice, including:
Salary and wages (may limit garnishee to 30 cents in the dollar);
Centrelink/Veterans Affairs benefits (will not normally be garnished);
Superannuation Funds (garnishee to coincide with benefits becoming payable);
Life Insurance policies (garnishee to coincide with death of taxpayer and/or benefits becoming payable);
Interestingly, the ATO will not ordinarily withdraw a garnishee notice upon the appointment of an external administrator; however will consider not issuing an order should such an appointment be imminent; and
Whilst a degree of discretion does exist, we are seeing firsthand the rate at which such notices are being issued, and the financial impacts upon the business/individual recipients.
The issuing of a garnishee notice in any business can have a catastrophic effect upon cash-flow and working capital requirements- with the result impact upon the entity's solvency position a greater cause for concern.
Therefore, it has never been as important for business advisors and financiers alike to monitor their client's statutory compliance, and educate relevant clients in the impacts of non-compliance.
Should you, or any client's, have any concerns regarding the matter above please do not hesitate to contact me directly on jhowlett@smvic.com.au.