ATO Garnishee Notices
Section 260-5 of Schedule 1 to the Taxation Administration Act 1953 (Cth) gives the Commissioner of Taxation a powerful, self-executing tool: a written notice requiring anyone who owes or may owe money to a tax debtor to pay the Commissioner directly instead.
No court order is required; it can be issued at any time a tax debt is outstanding, and non-compliance by the recipient is a criminal offence.
For a company in financial distress, this can exacerbate matters, where the notice can attach to many potential income streams, such as receivables, rental income, payments due for services rendered, and insurance payouts.
How the notice works
The relevant provision is found in Subdivision 260-A of Schedule 1 to the Taxation Administration Act. In substance, it operates as a statutory garnishee: it does not require the Commissioner to prove anything in court, and it binds the third party the moment it is served, regardless of whether the underlying debt to the taxpayer is presently due.
Any third party that pays in accordance with the notice is taken to have been authorised by the debtor entitled to that amount. The third party is indemnified for any money paid to the ATO.
Two consequences follow. First, because the notice creates an automatic charge over the relevant debt as it arises, it can operate even where the debtor company later enters external administration. Second, because compliance is criminally enforced against the third party rather than the company, an administrator generally has no leverage over a third party’s decision on whether to comply with the notice.
As confirmed in Commissioner of Taxation v Donnelly (1989) 25 FCR 432, s 260-5 notice creates a statutory charge over the relevant debt as and when it comes into existence. That charge is enough to make the Commissioner a “secured party” the moment the notice is served.
Case Study: Commissioner of Taxation v Park
In the context of a real property sale, the application of the garnishee notice operating as a statutory charge is illustrated in Commissioner of Taxation v Park [2012] FCAFC 122.
In that case, the taxpayer, Mr Park, was the registered proprietor of a Queensland Property subject to two registered mortgages (first to NAB and a second mortgage to Instyle). Mr Park owed the Commonwealth approximately $75,000 in unpaid tax. In February 2010, the Commissioner served notices under s 260-5 of Schedule 1 to the Taxation Administration Act 1953 (Cth) on the purchasers of the Property and their solicitor, requiring payment of the tax debt out of the settlement proceeds. The purchase price of $1.675 million was insufficient to discharge both mortgages in full, and a dispute arose over how the proceeds should be apportioned. The first mortgagee released its mortgage in exchange for payment in full; the second mortgagee, Instyle, also agreed to release its mortgage, on the expectation that it would receive the balance of the proceeds, with the balance proceeds of sale to be held in its trust account pending resolution of the disagreement.
The central question was whether the Commissioner’s garnishee notice, which attached to money owed by the purchasers to the taxpayer, took priority over Instyle’s rights as a registered mortgagee once its mortgage was released to permit settlement. At first instance, the Federal Magistrate had approached the matter by analogy with a floating charge, reasoning that the mortgagee’s interest crystallised ahead of the Commissioner’s notice. By majority, the Full Federal Court held that this analogy was mistaken. Once Instyle released its mortgage to allow settlement to proceed, its secured interest in the land was extinguished, and the purchasers’ obligation to pay the balance of the price became an unencumbered debt owed to the taxpayer. The majority rejected Instyle’s argument that some residual equitable interest survived the discharge of its mortgage and carried through into the proceeds of sale.
The practical significance of the decision is that a mortgagee’s decision to release its security to facilitate settlement meant that the sale proceeds were susceptible to being caught by thethe ATO garnishee notice, even where the mortgagee’s original registered interest predated the notice. The key error for the mortgagee was the release of its mortgage. The case stands as a cautionary example for secured creditors releasing security to enable a sale to complete, without first resolving or negotiating around an outstanding garnishee notice, carries a real risk of losing priority to the Commissioner over the resulting proceeds.
It is worth noting that the ATO garnishee notice may be issued to a receiver appointed by a secured creditor in order to attached to the balance of any proceeds that would otherwise be payable to the secured creditor.
Voluntary Administration context
Where a company subject to a s 260-5 notice enters voluntary administration, several provisions of Pt 5.3A of the Corporations Act 2001 (Cth) are engaged.
Section 440B – moratorium
Section 440B of the Corporations Act imposes restrictions on the ability to enforce certain rights against a company whilst in administration. This includes a restriction on security creditors enforcing the security (other than in the case of a creditor with security over all or substantially all of the property of the company).
The ATO becomes a secured creditor upon issuing a section 260-5 notice. However, section 440B does not have the effect of neutralising the notice.
Section 440B does not suspend a person’s status as a secured creditor. It only restricts a person them from enforcing the security.. The term “enforcing” has been interpreted to include acts such as actively seizing control of the asset, appointing a receiver, or taking possession of property.
Simply collecting money from a person served wth the section 260-5 notice does not constitute “enforcement”.
Section 447A – Court’s discretion
Section 447A confers on the Court a broad discretionary power to make “such order as it thinks appropriate about how Pt 5.3A is to operate in relation to a particular company.” It is, in effect, a power available throughout an administration, permitting the Court to modify, supplement, or displace the operation of specific provisions within Pt 5.3A as circumstances require.
That discretion is not unconfined. As the authorities make clear that the power is anchored to the object of Pt 5.3A as expressed in s 435A, namely, to:
- maximises the chances of the company, or as much as possible of its business, continuing in existence; or
- if it is not possible for the company or its business to continue in existence, the administration results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.
In the context of the operation of a garnishee notice, this leaves open the possibility of applying to Court to effectively suspend the practical operation of a garnishee notice during the administration.
Case Study: Livingstone v Deputy Commissioner of Taxation
Hudson Global Resources (Aust) Pty Ltd was a national labour hire company which entered voluntary administration on 22 April 2026 with only approximately $948,000 in cash. Its invoice financier, ScotPac, had been served with a s 260-5 notice on 30 March 2026 requiring it to divert 20% of every drawdown under Hudson’s funding facility to the Commissioner, up to roughly $19.6 million. The Commissioner declined to withdraw the notice after administrators had been appointed. With weekly outgoings of around $3.2 million in wages alone, and no alternative source of funding, the administrators were forced to bring urgent proceedings to suspend the operation of the notice.
Brereton J held, consistently with the general principles above, that the notice did create a statutory charge and a security interest in Hudson’s property, but that the Commissioner had not “enforced” that interest merely by receiving remittances or declining to withdraw the notice. Section 440B therefore did not assist the company.
However, his Honour granted relief under s 447A, holding that the notice’s continued operation undermined the object in s 435A by starving the administration of cash needed to explore the options available in an administration.
As an aside, it is worth noting that the Commissioner will not issue a garnishee notice for a debt owed to a company after the commencement of the winding up of the company.[1]
Key takeaway
The case law demonstrates the importance of being aware of the presence and operation of notices issued by the ATO under s 260-5 that may be impacting a party with whom you are dealing. Such statutory garnishee notices can be a powerful means by which the ATO is effectively elevated in priority ahead of other creditors in respect of an outstanding tax liability.
Despite their effectiveness, there are ways in which parties can protect themselves from being impacted.
In the case of an existing security creditor, ensuring that its security position is not compromised until such time as the secured creditor has certainty on how secured proceeds will be dealt with is crucial.
In circumstances where a company is in voluntary administration, relief can be sought from the Court to modify the operation of the Corporations Act to suspend the ATO’s garnishee notice, and avoid the company being starved of funds.
If you would like to discuss this article with us, please contact Ibrahim Khalil, Graduate Lawyer, or Emanuel Poulos, partner, on (02) 9261 5900.
[1] This is consistent with the reasoning in Bruton Holdings Pty Limited (in liquidation) v Commissioner of Taxation [2009] HCA 32.