In a recent corporate insolvency matter that we have been involved in, the director of the client company had sought advice from the company’s external accountant at a time when, the company was struggling with cash flow difficulties and was arguably insolvent. The director was concerned about his exposure to personal liability, particularly in relation to unpaid PAYG withholding. The accountant, eager to assist gave advice that the director should, when remitting amounts to the Australian Taxation Office (ATO) send the remittance with a covering letter, directing that they were to be allocated to PAYG withholding amounts.

We understand that the accountant eagerly explained to the director that by instructing the ATO to apply the payments to outstanding PAYG withholding this would ensure that no personal liability would fall upon the director as the PAYG withholding would have be paid. Some months later, a Director Penalty Notice was issued, which came as a considerable surprise to the director, who thought the ATO were bound to allocate the payments to PAYG withholding as he had directed.

I have had a number of discussions with advisors who have told me that the taxpayer can direct the ATO to where they must allocate the amounts paid. This is not the case, and it often means that I become involved in lengthy debates with client advisors regarding the issue. Both Section 8 AAZLE of the Taxation Administration Act of 1953 and the ATO payment allocation policy are contrary to the position espoused by the accountant in this case in that they allow the ATO to direct the payment to which ever debt it likes. Hence the ATO is not required to take account of instructions of any entity when payments are made.

In the above instance, the ATO applied the payments to a longstanding outstanding superannuation liability. As a result, the director was faced with a position of either promptly placing the company into administration or liquidation, or being personally liable for the balance of a large debt owed to the ATO.