Company directors and accountants often ask us how the Australian Taxation Office (ATO) applies payments it receives and whether it’s possible to have those payments applied in a particular order.

Why it makes sense to change the order of payments

The way the ATO applies payments can be important, especially when a company is paying its tax debt either partially or via a payment arrangement because it can’t pay its debt in full.

For example, a director may wish to prioritise the company’s unpaid Pay As You Go (PAYG) tax over other tax debts to avoid the risk of getting a Director Penalty Notice (DPN). A director who has received a DPN may want future payments to be applied against the company’s DPN amounts rather than other tax debts.

The good news is a company director can ask the ATO to apply payments in a particular manner. If the company has a payment arrangement in place, they can try to get the ATO to acknowledge how it will apply those payments. If a payment is being made outside of a payment arrangement, they can either:

• try to get a written verbal acknowledgment from the ATO about how it will apply the payment before making it or
• forward their payment to the ATO, along with a letter requesting it be applied in a particular way.

How the ATO applies payments

Unfortunately, the ATO is under no obligation to agree to a request to apply payments in a particular way. It is perfectly entitled to apply payments in line with policy statement PS LA 2011/20, which deals with a large number of specific tax debts. However, here’s how payments are allocated to the common types of tax debts:

1. Unpaid superannuation, payable as a Superannuation Guarantee Charge (SGC);

2. Business Activity Statement amounts, allocated from oldest to newest. Where amounts have the same date for payment, GST is paid before PAYG tax;

3. Fringe Benefits Tax;

4. Income tax debts.

Our suggested order for ATO payments

Here’s the order we suggest you ask for ATO payments to be applied in:

1. Any amounts outstanding under DPNs that have been issued.

2. Any amounts of SGC or PAYG tax that have been reported more than three months late (to avoid the possibility of the ATO issuing a “lock down” DPN).

3. Unpaid SGC.

4. Unpaid PAYG Tax.

5. Other amounts owed to the ATO.

As we said earlier, there’s no guarantee the ATO will accept such a proposal. But if you don’t ask, you have no chance at all.

The way payments are applied by the ATO can make a big difference to the future of a business and there’s no harm in asking for them to be applied differently.

If you’d like us to give you a hand in dealing with the ATO, don’t hesitate to get in touch with us. We have vast experience communicating with and reaching agreements with the ATO.