The Australian Taxation Office’s powers to access taxpayers’ bank accounts have been thrown into the spotlight this week, after a whistleblower told a joint Four Corners and Fairfax investigation that tax office staff were instructed last year to ramp up the number of garnishee notices issued to businesses and individuals.
The whistleblower said staff were told “to start issuing standard garnishees on every case”, meaning small businesses were to be hit with notifications that the ATO would be automatically deducting money from their bank accounts to cover tax liabilities.
The revelations have raised concerns that there is a lack of procedural fairness in the way the tax office deals with smaller operators over their tax bills. The ATO denies this, outlining in a document published yesterday that it only issued 14,000 garnishee notices for small businesses in the past financial year, accounting for 0.5% of “collectible debt cases”.
However, Jamieson Louttit, an insolvency expert at Jamieson Louttit and Associates, tells SmartCompany he has observed both director penalty notices and garnishee notices have been on the up.
“It tends to go in spurts,” he says of the notices, observing that activity in this area is ramping up at present. He says small business tax debts, of around $100,000, tend to be the amounts the tax office is chasing.
But no matter how a garnishee notice eventuates, accountants say when a business is given the final warning that their accounts will be docked, it can be an intimidating experience. Here’s what SMEs need to know about the process.
How do you know whether a garnishee notice will be issued?
The tax office says it only issues garnishee notices in instances where a business has shown itself “unwilling to work with us”, has repeatedly defaulted on payment plans, or is believed to be avoiding tax.
The ATO can then decide to issue a notice to your bank, trade debtors or suppliers of merchant facilities, instructing funds to be paid directly to the tax office to cover the debt.
Founder of Healthy Business Finances Stacey Price says many business owners are floored when they receive a letter warning that their accounts will be hit, often because the communications will bypass their accountant completely.
“Quite often it goes straight to the taxpayer, not accountant, which is when they tend to panic. They start to go, ‘oh, well, what do I do?'” she says.
These notices come as print letters through the post, meaning it’s critical business owners don’t just simply place the letter on the recycling pile.
What information is the taxpayer given before the funds are taken?
Typically a warning notice about a garnishee arrangement will include details of the tax liability and which accounts will be hit if the business owner doesn’t act within a specified time period, such as 14 days.
Price says that typically, these notices come after a business has failed to pay what the tax office has determined they owe after the lodgement of tax returns, says Price.
“As soon as things are lodged, the ATO expects payment according to their terms,” she says.
A business is then required to adhere to the terms outlined in the notice, or funds will start to be transferred from the designated bank account to the tax office.
What should you do after receiving a letter from the ATO?
Lisa Greig, founder of Perigee Advisers, says the worst thing you can do is ignore a garnishee notice once you’ve received one.
The tax office will ask you to contact them to discuss payment of the tax debt, so it’s critical you contact your adviser at the tax office directly, she says.
“You would have received a number of [communications] from them before you get to this point, so get on the front foot,” Greig says.
Often a taxpayer is sent a garnishee notice directly, meaning a company’s accountant may not know what is happening, so it’s important businesses make contact with their advisers.
What happens if you ignore it?
If a business ignores the notice, the garnishee notice will be executed at the time the tax office has outlined.
Ignoring a letter can put a business in an incredibly challenging position, says Price, because it could result in all funds being drained from their accounts.
“They typically go for the everyday bank account that the business owner uses. The ATO says, ‘we will take control of that bank account and any funds will be used to pay the debt. It can completely empty that bank account, and two weeks down the track, payments to your suppliers start to bounce because of it,” she says.
How do you challenge it?
The ATO says it is incredibly rare that it will issue “debt recovery action” in cases where the taxpayer has disputed their liability.
“We have 4,300 active disputes currently on hand (a tiny 0.0003% of all taxpayers) and less than five percent of these have recovery action underway,” the office said in a publication released yesterday.
Price says if a taxpayer receives a garnishee notice and has questions, they should contact their adviser and the ATO as soon as possible. However, it’s often tricky to challenge the tax debt at this point, as the taxpayer has already been sent a notice of assessment by the office.
“There are not too many options to challenge it as this stage, I feel, because at the end of the day, they have said what you owe,” she says.
However, the ATO does allow a business to dispute a decision the tax office has made about how much tax is owed: details of the facilitation process can be found here.