It relates to the Australian Taxation Office (ATO).
The ATO can issue garnishee notices under section 260-5 of Schedule 1 of the Taxation Administration Act 1953 (TAA). Under the notices, the Commissioner is empowered to recover tax and related liabilities, including judgment debts and certain other debts from third parties who owe money to or who are holding money for a tax debtor.
The powers extend to the various Commissioners of State Revenue seeking to recover stamp duty.
For example, section 50 of the Queensland Taxation Administration Act 2001 (Qld), gives the Queensland Commissioner power to recover outstanding payroll tax payable to the Commissioner by a taxpayer, by issuing a garnishee notice to a person who “is liable or may become liable to pay an amount to the taxpayer”.
The Queensland Commissioner recently targeted a self-managed superannuation fund. In the recent Queensland case of Can Barz Pty Limited V Commissioner Of State Revenue  QSC 59, a self- managed superannuation fund (the fund) was selling business real property which it held in accordance with the provisions of section 66(2)(b) of the Superannuation Industry (Supervision) Act 1993.
The trustees of the fund were Ms Bird and Mr Scott. They were both personally liable to pay the Commissioner an amount under the Queensland payroll tax legislation for outstanding payroll taxes.
Just before settlement of the sale, the Commissioner served a garnishee notice on the real estate agent for the fund, on the purchaser and also on the custodian (bare) trustee of the fund. The custodian bare trustee held the property on trust for the trustees of the fund – as required by the applicable superannuation laws.
Were the garnishee notices valid? The Court said “No”.
The judge said [at 39]: ‘Where section 50 refers to ” liable to pay an amount to the taxpayer”, I would construe that phrase as encompassing only circumstances in which the right to payment from the garnishee [being the entity served with the garnishee notice] was legally and beneficially held by the taxpayer’.
At  his Honour went on to say ‘None of the garnishee notices can be regarded as garnishee notices in respect of which the Commissioner had a reasonable belief that the garnishee was “liable or may become liable to pay an amount to the taxpayer”, because in each case the Commissioner must be taken to have reasonably known that at the time of the notices, the taxpayer to whom the debt was owed did not have full legal and beneficial interest in the debt.’
In other words, if a trustee of a trust owes money to the Commissioner in its own right (and not as trustee of the trust) then if a third party is to pay money for any reason to the trustee in its capacity as trustee, a garnishee notice served on that third party does not operate to oblige the third party to pay that money to the Commissioner. Trust moneys are not caught by a statutory garnishee notice.
The Federal Commissioner of Taxation tried and failed in another case involving a self-managed superannuation fund. It was Denlay v Commissioner of Taxation 2013 TC 20-382.
In that case, both taxpayers had substantial debts owing to the Commissioner. The taxpayers challenged their assessments by appealing to the Federal Court but before the appeal had been heard, the Commissioner pursued them and obtained judgment for the tax debts in the Supreme Court of Queensland. The taxpayers obtained a freezing order, preventing further recovery proceedings, until the results of the Federal Court challenge were known. After some time however, the freezing order lapsed and the taxpayers unsuccessfully sought an extension of the freezing order.
The Commissioner had become aware that the self-managed super fund was receiving money from overseas. It issued garnishee notices under section 260-5 of Schedule 1 of the TAA and served them on the fund. The fund reluctantly paid the moneys. However, the taxpayers had been drawing down on their super fund balances to meet the costs of their Federal Court appeal.
Shortly after the payments had been made by the fund to the Commissioner, the taxpayers went into voluntary bankruptcy. Sadly, they were therefore unable to complete the Federal Court appeal.
They applied under the Administrative Decisions (Judicial Review) Act 1977, for a review by the Federal Court of the Commissioner’s decision to issue the garnishee notices.
The Federal Court was scathing of the Commissioner’s behaviour.
It concluded that the Commissioner had failed to take into account the following relevant considerations in exercising his power under section 260-5 of Schedule 1 of the TAA:
- The effect of payment under the notices on the ability of Mr & Mrs Denlay to further prosecute the taxation appeals.
- The merits of the taxation appeals
- The provenance of the freezing orders.
The Federal Court ordered that the money paid to the Commissioner be repaid to the super fund.
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