The small business ombudsman has called for reform in the way the Australian Taxation Office issues garnishee notices.

The ATO must immediately stop debt recovery action against any small business with a dispute before the Administrative Appeals Tribunal (AAT).

That’s the demand from small business ombudsman Kate Carnell, following a report on early debt recovery action by the ATO, which found garnishee notices were issued in numerous cases where tax disputes were before the AAT.

“We found ATO debt recovery action occurred in at least 12% of cases before the AAT, severely impacting a small business’s resources to prosecute its case and carry on its business,” she said.

“Strong forms of debt recovery action by the ATO, such as garnishee notices, can destroy a small business because it effectively strips funds from a small business’ bank account.

“Consequently, the small business is not able to pay wages, rent, suppliers or bank loans and the follow-on effects of this – bad reputation, no credibility and potential bankruptcy – is significant.”

Ms Carnell said that despite the “devastating impact” on small businesses, the ATO can produce garnishee notices without any external oversight.

She has called for the system to be reformed, so that ATO garnishee notices can be produced only after being approved by a third party, such as a court.

“The asymmetry in power between this large and powerful organisation and the small business sector has left these particular small businesses in a vulnerable position and with diminished access to justice,” she said.

“They simply don’t have the same resources to fight where there is a legitimate dispute.”