A recent court case has demonstrated the limitations of the Tax Office’s power to collect tax.
The case dealt with one of the Tax Commissioner’s many tax collection powers, the use of what are known as “garnishee” notices.
If a taxpayer has an unpaid tax liability, the commissioner can issue a notice to compel a third party that owes money to a taxpayer, or who holds a taxpayer’s funds (e.g. a bank or a super fund), to pay that money to the Tax Office in satisfaction of the tax debts of the taxpayer.
This is a strong power, but there are limits on when and how the notices can be issued.
$7 million in garnishee notices
A recent decision by the Federal Court was very critical of the commissioner for issuing two garnishee notices and it quashed them.
The Federal Court granted the application of husband and wife taxpayers to quash the commissioner’s decision to issue garnishee notices to their superannuation fund. It did so on the grounds that the “decision was so unreasonable that no decision-maker, acting reasonably, could have arrived at such a decision” in the circumstances.
In particular, the court found the commissioner had failed to take into account that the taxpayers had obtained a stay of enforcement of the judgment debt to allow them to fund their appeals against the amended assessments that gave rise to the debt.
The commissioner issued amended assessments to the taxpayers in respect of the 2002 to 2007 income years on the basis of information obtained from a former employee of a Liechtenstein bank under the Tax Office’s Wickenby project.
The taxpayers had previously been unsuccessful before the Federal Court in arguing that the amended assessments were invalid on the grounds that the information on which they were based had been illegally obtained. Nevertheless, the taxpayers obtained a stay of the execution of the judgment debt to enable them to fund their appeals against the assessments.
However, after receiving information that the taxpayers’ self-managed superannuation account had been closed and that a new superannuation account had been opened into which an amount of $262,000 had been deposited, but that the balance in the account had reduced to $62,200, the commissioner issued garnishee notices to the taxpayers’ new superannuation fund. (Around the same period, the husband refinanced his mortgage over his NSW property and increased it from approximately $100,000 to $445,000).
At the time of issue of the garnishee notices, the taxpayers were indebted to the commissioner in total for over $7 million, including interest and penalties.
The taxpayers’ argument
The taxpayers subsequently applied to have the decision to issue the garnishee notices quashed on the grounds that the commissioner had failed to take relevant considerations into account in the exercise of the power to issue the notices.
In particular, the taxpayers claimed the decision to issue the notices in circumstances where there was a stay of the enforcement of the judgment debt and while the tax appeals were part-heard, was so unreasonable that no reasonable decision-maker could have exercised the power. It was also noted that the taxpayers were subject to Departure Prohibition Orders, which prevented the husband from travelling overseas where he derived his income from sea diving operations.
On the other hand, in issuing the notices, the commissioner indicated that he took into account that the husband’s net assets within the jurisdiction had reduced by approximately $545,000 (in view of the mortgage over his property) and that only $62,200 remained in the taxpayer’s superannuation account, and that therefore the risk to the revenue arising from not issuing the notice was substantial in view of the significant size of the tax liabilities.
The court’s decision
In granting the taxpayers’ application to quash the garnishee notices, the Federal Court found that the issue of the notices had involved a gross improper exercise of power in the circumstances – namely, that the commissioner had failed to take into account the stay of the enforcement of the judgment debt and that appeals against the relevant amended assessments had only been partly heard (and in doing so, the commissioner had also failed to take into account the merits of the appeals and the impact of issuing the notices on the appeals). This was despite the fact that by the time of the court’s decision to quash the notices, the taxpayers had gone into voluntary bankruptcy and their trustee in bankruptcy had decided to discontinue the appeals.
Among other things, the Federal Court noted that the “risk to the revenue” referred to by the commissioner was undoubtedly a relevant consideration in the making of a decision to issue the garnishee notices, but it was “not a panacea” for a failure to take into account other considerations (such the merits of the appeal).
Accordingly, the court ruled that the decision to issue the notices must be quashed as it was so unreasonable in the circumstances that no decision-maker, acting reasonably, could have arrived at such a decision.
This decision is both an important reminder of the power of garnishee notices and also of a taxpayer’s rights in resisting the notices.
Terry Hayes is the Editor-in-Chief of tax news reporting at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.