ATO “sticking the bullet in” small businesses with garnishee notices on the rise
Tuesday, August 25, 2015/
Insolvency practitioners are warning small businesses the Australian Tax Office is ramping up its efforts to recover outstanding debts by issuing a higher number of garnishee notices.
As ATO-initiated applications to wind-up businesses continue to rise, at least three insolvency practices have highlighted the increased use of garnishee notices against Australian firms, with one claiming it is further evidence the ATO is “sticking the bullet in” SMEs.
Jamieson Louttit, partner at Jamieson Louttit & Associates, told SmartCompany this morning the use of garnishee notices, as well as director penalty notices, by the ATO is “significantly on the rise”, particularly over the past three months.
The ATO can issue garnishee notices against businesses as well as individuals. The notice is issued to either a person or business that holds money for that business or individual and it compels them to make payments, either as a percentage of income or as a lump sum, directly to the ATO to reduce the person or business’s debt.
In the case of businesses, garnishee notices can be issued to financial institutions, including banks, trade debtors or suppliers of merchant card facilities.
Louttit says the effect of a garnishee notice on a small business is “instantaneous”, with a business’s bank accounts often frozen as soon as the financial institution receives a fax from the ATO.
However, it can take several days for the business itself to discover a garnishee notice has been issued. In the meantime, the cash that was there to pay employees and suppliers is taken by the taxman.
“They just grab the money out of the bank without telling them [the notice recipient],” he says.
Louttit gives the example of two clients who came to him on Friday with garnishee notices. One construction firm had been issued with a notice for an outstanding debt to the ATO of $14,000, while the other owes $20,000.
“Now they can’t pay wages,” Louttit says of the first client.
“They will have to sit down and have a discussion with their employees to see if they will support the business going forward.”
While Louttit says this particular business does not have many trade suppliers, for small businesses that do have creditors and suppliers, it’s a “revolving door” as garnishee notices have flow-on affects to other small businesses.
As with the case with an increase in ATO-initiated wind-up applications against SMEs, Louttit believes the increase in garnishee notices is due to one reason.
“The government is short of cash,” he says.
“And it’s hitting small businesses.”
“They are not looking forward. They are closing businesses up and not thinking about extracting potential future value. They are just sticking the bullet in them.”
Louttit says this type of enforcement action can also end up costing the government in the long run.
If businesses are unable to pay employee entitlements because they have no cash in the bank, those employees may be forced to apply for their entitlements under the government-backed General Employee Entitlements and Redundancy Scheme (GEERS).
“The ATO might recover $100,000 via a garnishee notices but then $300,000 to $400,000 in employee entitlements may have to be paid by the government,” Louttit says.
“And then those people have to find a job and maybe even spend time on the dole. It all adds up.”
Other insolvency practitioners have also warned about the increased use of garnishee notices, with Jirsch Sutherland publishing a blog post in June noting an increase in the use of garnishee notices, as well as director’s penalty notices, as part of an increased level of enforcement activity from the ATO and alongside a higher level of wind-up applications.
“It seems that the ATO are sending a clear message that they will increase their activities to identify and recover unpaid taxes, improve their internal systems to capture more information on the taxpayer and initiate enforcement activities at an earlier stage,” Sutherland posted.
Accounting firm PKF Lawler issued a similar warning to SMEs in December 2014, revealing that Australian banks have reported an increase in the number of garnishee notices received in relation to small and medium size firms.
“The increase in the number of ATO garnishment notices may either be part of a cycle within the ATO or it may be an indication of a more aggressive stance being taken by the ATO,” PKF Lawler said.
“Given the current economic climate, this is clearly a concern for any business already under pressure.”
Louttit says he has asked the ATO on multiple occasions for statistics but information about how many garnishee and director penalty notices are issued by the ATO is not revealed publicly.
A spokesperson for the ATO told SmartCompany the tax office intends to “be more active to prevent debts, to provide appropriate help and support when people are in debt, to take the right action to prevent debts from escalating, and to take legal action earlier when it is warranted”.
The ATO spokesperson says the tax office “recognise[s] even viable, well-run businesses occasionally experience short-tern cash flow issues” and its “preference is to work with these businesses to help them manage their tax debts”.
However, the spokesperson says the ATO will take “stronger action” in cases where a business chooses not to work with the tax office.
“We will take stronger action to ensure that [the business] does not gain an unfair financial advantage over the majority of businesses who pay their tax bills on time,” the spokesperson says.
“This includes issuing of garnishees, director penalty notices and initiating wind-up action where there is evidence that a company is insolvent.”
“It should be noted that the decision to grant a winding-up order rests with the court.”
The ATO spokesperson the tax office provided more than 500,000 payment arrangements to small businesses in the 2014-15 financial year.
“During the year, there were about 1000 ATO-initiated small business wind-ups, however, we did have a greater focus on legal action in the second half of the 2014-15 year and filed about 1200 wind up actions in this period,” the spokesperson says.