Garnishee Notice upheld: Payment to the ATO in priority to the mortgagee’s rights

Justin Bates, Partner, Sydney

In brief

On 31 August 2012, the Full Court of the Federal Court found that a garnishee notice requiring proceeds from the sale of a property the subject of two registered mortgages, be first used to discharge the mortgagor’s tax debt, in priority to the mortgagee’s rights.

The case illustrates that mortgagees who leave distressed mortgagors to sell may be faced with an additional obstacle at settlement – particularly when the mortgagor has outstanding tax debts.

However, the obstacle should only arise where the ATO has issued a garnishee notice on the purchaser under s 260-5 of the Tax Administration Act.

Mortgagees remain free to choose not to proceed to settlement. However if the property is put back on the market, it may sell for less.


The mortgagor entered into a contract for the sale of land. The land was the subject of two registered mortgages. The sale price of the land was insufficient to discharge the respective debts owed to the mortgagees.

After exchange of contracts but before settlement, the Commissioner served upon the purchasers of the land, a garnishee notice issued under s 260-5 of Sch 1 of the Taxation Administration Act 1953 (Cth).  The garnishee notice required the purchasers to pay part of the purchase price to the Commissioner in discharge of the mortgagor’s tax debt.

The difficulty arose when the Commissioner claimed that at settlement he was entitled to sufficient sale proceeds to discharge the tax debt in priority to the mortgagee’s right to recover the money secured by the mortgage. Failure on the part of the purchasers to comply with the notice would have been a criminal offence.

The second mortgagee chose to proceed to settlement on the basis that the sale proceeds after payment of the debt owing to the first mortgagee, were paid into its solicitor’s trust account.  The Commissioner agreed to settle on this basis whilst reserving his rights under the notice.


The Court found that the existence of a mortgage on title and the requirement that the mortgagor had to provide clear title did not alter the fact that the mortgagor had a debt owing to it under the sale contract.

Accordingly the garnishee notice attached to the debt and obliged the purchaser to pay the debt to the Commissioner.

How can I avoid this situation arising?

Mortgagees may wish to give consideration to the following as a condition of any forbearance arrangement with the mortgagor.

  • The inclusion of a term in the mortgagor’s sale contract whereby the purchaser is directed to pay the net sale proceeds to the mortgagee.


  • Confidentially clauses in both the selling agency agreement and in the sale contract.


  • Shortest possible time between exchange and settlement.


In our experience it is uncommon for the ATO to garnish purchasers. In the unlikely event that a garnishee notice is issued, the mortgagee may be better off refusing to discharge and carrying out its own sale.