ATO’s right to garnishee – a “privileged position … likely to result in failed corporate rescue attempts”?

A recent article Getting the priorities right: ATO garnishee notices in times of corporate distress by Sylvia Villios and David Brown[1] has highlighted what is said to be the unsatisfactory priority that the ATO retains in insolvency through its continued use of garnishee notices,[2] which the authors claim gives the ATO a “privileged position” and “is likely to result in failed corporate rescue attempts”.

As at the date of the article, May 2020, the authors say that

“More than ever, in the current economic climate, corporate rescue needs to take priority over the Commissioner’s debt collection activities and the law needs to protect corporate tax debtors in distress, which will also protect the businesses of unsecured creditors of those tax debtors”.

After examining the law and case law concerning garnishee notices in detail, the authors then explain how they see current tax law as being in conflict with and undermining the insolvency process, particularly corporate rescue efforts, “creating considerable tension at the intersection of both of these areas of law”.

They note that whether tax debts should be given priority in insolvency has been debated extensively over the years, although settled for some time now since the 1988 Harmer Report.  The sorts of reasons given for removing the priority at that time were that the Commissioner’s priority lessened the pressure to take proactive action to recover debts and this allows tax debts to accumulate without the knowledge of, and to the disadvantage of, other unsecured creditors.

The authors’ main concern is that any ATO priority can discourage attempts to rehabilitate companies in financial distress. Perhaps with some optimism, they say that

“the successful rehabilitation of a business will benefit the Commissioner, as the surviving business will pay tax on its taxable income, providing a regular cash flow to government to conduct its spending programs”.

And further that the company’s creditors will “thereby be assisted to continue to be viable and will pay tax on their taxable income”, and likewise the employees, shareholders, customers and so on.

The breathing space often needed by a company in distress in order to implement a successful corporate rescue is negated by the issue of a garnishee notice. While government policy has been to encourage corporate rescue, the Commissioner’s practice in relation to garnishee notices “pulls in the opposite direction”, in a manner not intended when the tax priority was removed in 1993.

The authors then look at various reform options that would limit the use of garnishee notices in an insolvency context.

The authors see the tension between the Commissioner’s focus on revenue protection and the legitimate objectives of corporate insolvency law as “escalating”, particularly in light of what the article explains is “a breadth of case law entrenching the wide reach of the Commissioner’s powers”.  That tension would continue to escalate in the current COIVD-19 economic climate, and it was “imperative that the Commissioner’s de facto priority be removed”.

Some comments

The authors are correct in seeing the garnishee notice as an intrusive and sometimes destructive device in insolvency, perhaps with legislative intent.  But there is the reality that tax debts are pervasive and often high and accumulated over some period of time, in total in the tens of billions, and increasing.  Small business in particular continues to account for the majority of collectable debt, and is a key focus of the ATO.[3]

That is not only an issue of loss or revenue, but of adverse impact of what are insolvent businesses operating with anti-competitive impact, with new entrants ‘having to’ likewise not pay or delay tax payments to survive.

That reality and those billions suggest that the ATO needs better and more powers to ensure payment, but garnishee notices are not the best way to go, if they ever were.

Other options

Artificial intelligence, data tracking and analysis, ‘single touch payroll’, director identity and other such techno and ‘infrastructure’ processes are more sophisticated and real-time and are more effective than ex post garnishees trying to recover accumulated debt.

But then there are the politics.  The original single touch payroll proposal was for a mechanism whereby employers would pay their employees’ wages and related PAYG(W) remittances and superannuation contributions in a ‘single touch’. But this was watered down to reporting only, at the behest of CAANZ for one, and others, because of the loss of unpaid tax fueled cash flow, going back decades, thereby showing

“the extent to which businesses rely on employee-related sums – ‘their money’ until it is legally payable – to finance their businesses, and also [showing] the hesitation of the government to interfere with this practice”.[4]

That quote came from a law reform submission offering 8 well-argued ways to address the recovery of tax in the context of illegal phoenix activity, “without damaging legitimate business activities to the detriment of the economy”, among other articles of the authors.[5]

We have to look at this with some design in mind.  Dr Catherine Brown has effectively argued – see my comment on her thesis at Australia’s inconsistent tax and insolvency laws – for a process to be settled whereby tax law changes that propose an intrusion upon the pari passu principle of insolvency have to be justified by the legislature; rather than being simply legislated by default.

The Villios and Brown article offers some welcome focus on tax recoveries, a valid pursuit of any society in itself, but one that has to fit in with other priorities.  It comes at a time when there is debate as to the proposed SME insolvency reforms for Australia, with the draft Corporations Amendment (Corporate Insolvency Reforms) Bill 2020, the successful implementation of which, some submissions suggest, lies (too much) in the hands of the ATO.



[1] ATF 35(3) Villios & Brown

[2] Section 260-5 of Schedule 1 to the TAA 1953

[3] ATO Annual Report 2019-20, Appendix 6.

[4] Inspector-General of Taxation Review into the ATO’s fraud control management; submission by Professor Helen Anderson, Professor Ian Ramsay and Jasper Hedges, Melbourne Law School, and Professor Michelle Welsh, Monash Business School, Monash University. 13 July 2017.


[5] See also Illegal Phoenix Activity: Practical Ways to Improve the Recovery of Tax (2018) 40(2) Sydney Law Review 255, Helen Anderson.

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