Five reasons why a sale from a share registry is exempt.
The Australian Taxation Office's (ATO) approach on garnishee notices is regularly discussed in the public domain. Often not in the positive. And while it's a useful and potentially rightful tool of recovery, its validity in some circumstances should be challenged from an insolvency practitioner's perspective.
To recap on what a garnishee notice is and how it's used, readers can look to section 260-5 in schedule 1 of the Taxation Administration Act 1953 (TAA). Basically, it says that the ATO can recover tax-related liabilities and certain other debts payable to the Commonwealth from third parties owing money to, or holding money for, a tax debtor.
A routine example of how it is applied is when the ATO garnishees a person's employer, by directing a portion of that person's salary to be paid directly to the ATO.
Recently, we had to assess the validity of a garnishee notice as part of a bankruptcy.
Our investigations found the bankrupt owned shares in a listed company. Regardless of the disclosure, or non-disclosure in this case, those shares were considered an asset of the bankrupt estate and therefore vest in the bankruptcy trustee for the benefit of creditors. Accordingly, we took the necessary steps to sell the shares. Those shares came to the value of around $36,000.00.
The ATO as a creditor to this bankrupt estate was owed over $13 million. Before the bankruptcy, the ATO issued a garnishee notice on the share registry and subsequently provided us a copy. The notice's intended effect was that any dividend or sale of the shares would be for the benefit of the ATO only.
We refuted the ATO's assertion that the sale proceeds were subject to the garnishee notice on the following basis:
- The sale transaction was between the bankruptcy trustee, and the purchaser, who is entirely separate to the share registry.
- The share registry was not a party to the transaction, or otherwise involved in the transaction; save for their obligation to update the share registry once the sale was settled.
- The share registry was not due any monies from the sale transaction.
- The share registry did not hold any monies on account for the bankrupt as a result of the transaction.
- The share registry did not have the authority to claim monies from the purchaser on account of the bankrupt.
The crux of our argument was that the monies from the shares' sale flowed directly from the purchaser to the bankrupt estate as vendor and were never held by the share registry. In this case, we asserted our position to the ATO and the sale proceeds were subsequently received for the benefit of creditors.
However, separate to the issue of the share's sales proceeds, the dividends flowing from the shares were in fact paid through the share registry and therefore validly paid to the ATO under the garnishee notice. Only the sale proceeds of the shares were not covered under the garnishee notice.
If your client receives a garnishee notice, your local Worrells partner is available to discuss what this means for your client and any options to remedy.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
