The recent decision of Parker J of the NSW Supreme Court in FCT v Waitara Linx Pty Ltd [2025] NSWSC 581 (Waitara), serves as a timely reminder of the risks mortgagees may face when a garnishee notice is issued to a purchaser under a sale contract, potentially delaying settlement, or causing the vendor to default on its mortgage payments.
With the Government having recently announced an additional $1 billion injection into the ATO’s operating budget to tackle its $105 billion debt book, the ATO is actively ramping up its enforcement efforts. The ATO is currently revising its internal policies and procedures, is undertaking staff training, and has improved data matching capabilities to implement a renewed garnishee notice program. As a result, a significant surge in the issuance of garnishee notices from 1 July 2025, particularly targeting purchasers under contracts for the sale of land, is anticipated.
As is well known, the Commissioner’s power to issue a garnishee notice (or third-party notice) is found in s 260-5 of Schedule 1 to the Taxation Administration Act 1953.
The decision in Waitara
Waitara, as trustee of a trust, offered trust property to secure a $116 million loan from the lender to a related company. Waitara contracted to sell the trust property to Anglican Community Services (Anglican) for $56 million and intended to discharge the lender’s mortgage taken over the trust property at settlement (although there would be a substantial shortfall). Settlement was to take place on PEXA.
Waitara owed $27 million to the Commissioner and the Commissioner placed a caveat over the trust property.
Waitara argued that no payments were owed by Anglican to it, but instead to the lender, and, as a consequence of PEXA’s instantaneous mechanism for transfer and payment, there was never a point at which any debt was owed by Anglican to Waitara that the garnishee notice could attach to. Alternatively, Waitara argued that the lender had an equitable interest in the purchase monies that prevailed over the garnishee notice. The second argument ran head on into the decision of the Full Federal Court in FCT v Park [2012] FCAFC 122 and was rejected by Parker J.
Strangely, the Commissioner contended that the garnishee notice attached to Anglican’s contingent debt owed under the sale contract, which could be enforced against Anglican prior to settlement, despite the warning by Gibbs CJ in Clyne v DCT (1981) 150 CLR 1 about the constitutional validity of the Commissioner pursuing money owned, but not presently payable.
This resulted in a stalemate while the garnishee notice was in effect as: the lender would not discharge the mortgage as it was not confident that it would receive the entire purchase price from Anglican; and Anglican was not prepared to authorise payment of the purchase price if Anglican would still be contractually bound to pay the full purchase price to Waitara (ie have to pay the purchase price a second time).
Following service of a lapsing notice for the Commissioner’s caveat, the Commissioner commenced proceedings against Waitara for the recovery of the tax debt. Waitara then cross-claimed against the Commissioner and Anglicare seeking declarations for the contract to be completed without being required to account to the Commissioner for its debts under the garnishee notice.
Parker J, considering the High Court’s Decision in Clyne, reaffirmed that the Commissioner’s garnishee notice would burden Anglican, but not in the way argued by the Commissioner above. The obligation on Anglican to pay the Commissioner did not arise before settlement. Also, the “available money” for the purposes of s 260-5(3) needed to be fixed and certain, which could only be crystalised after settlement adjustments, and the amount owed by Anglican only then became due and payable to the Commissioner upon settlement.
Parker J seemingly did not buy into Waitara’s argument about the mechanics of PEXA (including whether settlement occurred instantaneously or sequentially) as having any bearing on the outcome as, under a contract for sale, the purchase money is owed by the purchaser to the vendor and the purchaser will never be indebted to the outgoing mortgagee.
Accordingly, although a garnishee notice does not create any obligation on the recipient purchaser to pay before its debt arising under the sale contract to the taxpayer vendor becomes due and payable on settlement, it does impose an obligation on the recipient purchaser to pay that money to the Commissioner in the future when the time for settlement arrives, even where fulfilment of such an obligation causes prejudice to the mortgagee.
The legislation is designed to ensure that a recipient vendor is prevented from making any payment that is inconsistent with the terms of the garnishee notice, such as a payment to the mortgagee.
In light of this, Parker J did not grant the relief sought by Waitara and declined to make the declarations that would have allowed Waitara to complete the contract without Anglican complying with the garnishee notice. This has left the lender in limbo.
Options for mortgagees
So where does this leave a mortgagee when the Commissioner serves a purchaser with a garnishee notice in respect of the tax debts of the vendor?
To outmanoeuvre the Commissioner’s garnishee, it is suggested that a mortgagee could consider taking possession and selling the property as mortgagee in possession, especially in cases where the sale stalls or the vendor ceases making mortgage payments.
The problem facing the lender in Waitara is that the Commissioner has taken out a caveat over the property and its validity is not set to be determined by the Court until August 2025.
Happily, there are usually mechanisms for dealing with caveats by mortgagees when exercising a power of sale and the appointment of a receiver should also be an option promptly considered if a purchaser receives a garnishee notice before settlement.
For further guidance on managing the risks associated with garnishee notices and protecting mortgagee interests, please contact John Miller, Associate at Madgwicks Lawyers. John advises clients on a broad range of commercial and property disputes, with particular expertise in debt recovery, insolvency and mortgage enforcement matters.
The information provided in this article is general in nature and cannot be relied on as legal advice, nor does it create an engagement. Please contact one of our lawyers for advice about your specific situation.
