How the ATO allocates payments and credits

The ATO's processes for allocating your payments and credits explained!

Given the increase in enforcement action undertaken under the Director Penalty Notice (DPN) regime by the Australian Taxation Office (ATO), we’re going to explore how the ATO allocates payments and credits.

To assist taxpayers in understanding how certain payments and credits are processed, the ATO has released the Law Administration Practice Statement (PS LA 2011/20). This is particularly for circumstances where:

• that payment is a made pursuant to a payment plan, or

• cannot be reconciled to a specific tax debt (for example, a pay-as-you-go (PAYG), or

• goods and services tax (GST) liability.

Before considering the allocation of payments, let’s revisit the definition of ‘payments' or ‘credits’.

According to PS LA 2011/20:

• A payment is an amount that the ATO receives from a taxpayer in respect of a current or anticipated tax debt.

• A credit is an amount to which a taxpayer is entitled (such as an amount resulting from an assessment) that the ATO must pay to a taxpayer under a tax law.

Typically, a taxpayer directs the payment to an account by making a payment through the approved process. This includes using a payment reference number (PRN), which allocates the payment to a specific account (i.e.. Superannuation Guarantee Charge, Integrated Client Account, Income Tax Account or Fringe Benefit Tax Account). There may be some circumstances where the ATO will determine how the payment or credit will be applied, which are discussed below:

Allocation of payments (Integrated Client Account)

When a taxpayer makes payments to the ATO where the payment cannot be matched to a specific tax liability or period, a payment or credit to the activity statement account will be allocated in the following way:

the payment will await allocation for up to 90 days.

After 90 days, the ATO will allocate the payment proportionally to the earliest activity statement period within the Integrated Client Account (ICA). Once all activity statement debts within that period are satisfied, any remaining amount will be proportionally allocated to non-activity statement debts, such as penalties and GIC within the same period.

The same order is to be followed in applying payments to each subsequent period until all outstanding debts are finalised:

Allocation of payments (Superannuation Guarantee Charges)

When a taxpayer makes payments to the ATO where the payment cannot be matched to a specific tax liability or period, the ATO allocates the payments to super account liabilities using the following hierarchy:

             i.        nominal interest

             ii.        shortfall

            iii.        shortfall GIC

            iv.        administration fee

             v.        Part 7

            vi.        Part 7 GIC

           vii.        shortfall penalty

          viii.        shortfall penalty GIC

The same order is to be followed in applying payments to each subsequent period debt until all outstanding SGC debts are finalised.

Where there has been a late payment offset and a further payment is made to be applied for the benefit of multiple employees, the proportional entitlement for each employee must first be calculated then applied to pay nominal interest pro rata across all employees.

              i.        nominal interest

             ii.        shortfall

            iii.        administration fee

            iv.        estimated liability.

The same order is to be followed in applying payments to each subsequent period until all outstanding director penalty debts are finalised.

Payments received in respect of an estimate of SGC under Division 268 of Schedule 1 to the TAA are to be credited first towards the estimate relating to the earliest period.

Impact on director liability

The allocation of payments and credits can significantly impact a taxpayer’s personal liability where certain tax debts may be subject to a Director Penalty Notice (DPN). Given these allocation principles, a taxpayer who has a potential exposure to a DPN should consider the following:

• Prioritise tax liabilities which may become subject to a DPN: Focus on paying liabilities that are subject to DPNs to reduce personal liability risk.

• Communicate with the ATO: Engage with the ATO to discuss payment plans and allocation preferences, especially for larger or complex debts.

•  Maintain accurate records: Keep detailed records of all payments and communications with the ATO to ensure proper allocation and to support any future disputes.

Understanding how the Australian Taxation Office (ATO) allocates payments and credits is critical for taxpayers, particularly in the circumstances where some, or all, of a company’s tax debt may be subject to a DPN. As always, we encourage directors and individuals who have received a DPN to reach out to a local Worrells Principal who can assist are ready and willing to assist.