ATO Garnishee Notices: The Warning Signs, the Mechanics, and What Happens in Insolvency

For many directors recently, a distressing sign that the ATO has moved from “collection” to “enforcement” is a phone call from their bank or a major customer saying money has been redirected to the Commissioner. That’s a garnishee notice, and by the time it lands, the options available to a business have usually narrowed considerably.

This article covers the basics: what a garnishee notice is, what typically precedes it, how it operates against bank accounts, debtors and wages, and, critically, what happens to a garnishee notice once bankruptcy or liquidation begins.

What is a garnishee notice?

A garnishee notice is a statutory notice, most commonly issued by the ATO under section 260-5 of Schedule 1 to the Taxation Administration Act 1953, requiring a third party who holds money for, or owes money to, a tax debtor to instead pay that money directly to the Commissioner.

It doesn’t require a court order. The ATO can issue a garnishee notice administratively once a tax debt is due and payable, which is what makes it such a fast and effective recovery tool compared with, say, a wind-up application.

Garnishee notices aren’t unique to the ATO (judgment creditors can obtain garnishee orders through the courts on similar principles), but ATO garnishees are by far the most common version accountants and directors encounter.

The warning signs before a garnishee arrives

Garnishee notices rarely appear without warning. In practice, they tend to follow a recognisable sequence:

• Overdue lodgments or a growing running balance account debt
• Standard ATO reminder and demand correspondence
• A firmer “final notice” or phone contact from an ATO debt collection officer
• In many cases, a Director Penalty Notice being issued in parallel, where company tax debts have remained unpaid
• Escalation to garnishee action (or a statutory demand) once the ATO concludes that voluntary engagement isn’t happening

The point at which this escalates is not fixed. It depends heavily on the debtor’s compliance history, the size of the debt, and whether the ATO believes a genuine payment arrangement is achievable. This is why early engagement with the ATO, before enforcement action starts, remains one of the few levers a director can pull to retain some control over timing.

How garnishee notices actually work

Bank accounts

The most common target. The notice is issued to the bank, requiring it to pay funds held in the taxpayer’s account(s), up to the amount specified, directly to the ATO. This can apply to a single sweep of the current balance or, where drafted more broadly, to amounts that flow through the account over a period.

Debtors (accounts receivable)

The ATO can issue a garnishee notice to a business’s own customers, requiring them to pay the ATO instead of the business. This is more disruptive reputationally than a bank garnishee, since customers become directly aware that the ATO is collecting from their supplier.

Merchant facility providers

A less obvious target, but an increasingly common one, is the business’s merchant facility or payment processing provider (the entity that settles EFTPOS, credit card and other electronic payment transactions into the business’s account). Rather than waiting for card takings to land in a bank account and then garnisheeing the bank, the ATO can go one step earlier in the chain and issue the notice directly to the merchant facility provider, requiring it to redirect settlement funds to the Commissioner as they fall due.

For businesses that rely heavily on card payments, particularly retail, hospitality and other cash-flow-sensitive sectors, this can be especially damaging, since it intercepts daily takings before they ever reach the business and can quickly compound into a serious working capital problem if it continues over multiple settlement cycles.

Wages and other payments

Garnishee notices can also be directed at employers or other third parties who owe money to an individual, including wages, although in practice this is more common for individual tax debts than corporate ones.

Company funds held on trust by a lawyer or other party

It’s a common misconception that money held in a solicitor’s trust account, or another third party’s trust or stakeholder account, is automatically out of reach of a garnishee notice. In most cases it isn’t. If the money is being held for the benefit of the company (for example, undisbursed settlement funds, a retainer balance, or bond and escrow amounts), the solicitor or other stakeholder is holding money “for” the taxpayer in the ordinary sense, and a garnishee notice can generally reach it just as it would reach a bank account.

The position is different where the company itself is merely a trustee of a separate trust (for example, acting as trustee of a family or unit trust) and the funds in question belong beneficially to that trust rather than to the company in its own right. In that scenario, the funds aren’t truly the company’s own money, and there’s a stronger argument the garnishee shouldn’t attach to them, though this can still be contested and depends on how clearly the trust structure and the specific funds are documented.

Given how often this issue arises around settlements and property transactions, it’s worth accountants and directors turning their mind to it early rather than assuming that “it’s in a lawyer’s trust account” provides automatic protection.

Settlement proceeds from the sale of real estate or a business

Where a director or company is part-way through selling property or a business, the ATO will sometimes issue a garnishee notice directly to the conveyancer, solicitor or agent handling settlement, requiring some or all of the net proceeds to be paid to the Commissioner rather than to the vendor. This is a common and often unwelcome surprise for directors relying on a sale to fund other obligations, and it’s worth flagging to clients proactively wherever a sale is underway alongside an active ATO debt.

In each case, the third party who receives the notice is legally obliged to comply. Failing to do so can expose that third party to liability for the amount they should have paid the Commissioner.

One-off versus perpetual (continuing) garnishees

Not all garnishee notices operate the same way.

A one-off garnishee captures a specific amount at a point in time, such as the balance sitting in a bank account on the day the notice is received. The notice will typically specify the amount to be paid as either the full amount held, or a percentage of the account balance, whichever is the lower, so the ATO doesn’t necessarily strip an account entirely even where the tax debt exceeds the balance.

A perpetual, or continuing, garnishee instead remains in force over an ongoing period, requiring the third party to remit amounts to the Commissioner as they become payable to the taxpayer, until the notice is varied, revoked or the debt is satisfied. Continuing garnishees are more commonly used against debtors and wages, where a single snapshot wouldn’t capture the full amount owed, and they can have a far greater cumulative impact on a business’s cash flow than a one-off notice.

Issuance before bankruptcy or liquidation

Garnishee notices are typically a pre-insolvency enforcement tool: the ATO uses them while a debtor is still trading and has identifiable funds or debtors to garnishee. Once a formal insolvency appointment is imminent or has occurred, the practical value of a garnishee changes considerably, and the ATO’s own approach shifts accordingly.

This timing matters for directors and their advisers: a garnishee notice landing is often a signal that enforcement has reached its final pre-insolvency stage, and that liquidation, voluntary administration or bankruptcy may follow shortly if the debt isn’t addressed.

Does a garnishee notice survive liquidation or bankruptcy?

This is the area advisers most often get asked about, and it’s worth separating the two regimes.

Companies (liquidation): Once a company enters liquidation, the general moratorium on creditor enforcement applies, and a garnishee notice that hasn’t been fully executed generally cannot continue to operate against the company or its Liquidator.

Individuals (bankruptcy): Similarly, once a debtor becomes bankrupt, enforcement processes generally cease to have effect against after-acquired property and the trustee’s administration takes precedence, subject to the specific provisions of the Bankruptcy Act 1966 dealing with process already underway.

The broader takeaway for accountants and directors is more straightforward: a garnishee notice is not itself a reason to panic-file for liquidation or bankruptcy, but it is a strong indicator that formal insolvency processes may soon be more relevant than informal negotiation with the ATO.

What accountants should do when a client mentions a garnishee notice

• Establish whether it’s a bank, debtor or wage garnishee, and the amount involved
• Check whether a Director Penalty Notice has also been issued, or is likely to follow
• Assess remaining cash flow and trading viability immediately; a garnishee can materially affect liquidity within days
• Consider whether early advice on Safe Harbour or a restructuring option is warranted before the position deteriorates further
• Avoid advising clients to simply move funds to defeat the garnishee; this can create separate legal exposure

The practical lesson

Garnishee notices are one of the clearest signals in the ATO’s enforcement toolkit. They move fast, they’re hard to reverse once executed, and they usually arrive after other warning signs have already been missed. For accountants, recognising the pattern, and encouraging early engagement before enforcement escalates, remains the most effective way to preserve a client’s options.