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:
If a payment 'dollar matches' either a single or group debt it will be allocated it to that debt.
If a payment matches the total amount of a period (for example, a quarterly reporting period) it will be allocated it to the total amount of the period.
Where a payment is made to the ICA, and
does not dollar match any debts, and
there are outstanding lodgments
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:
i. GST ii. GST conversion role iii. GST instalment iv. wine equalisation tax v. luxury car tax vi. fuel tax credit vii. fringe benefits tax viii. PAYG – withholding ix. PAYG – large x. PAYG – conversion xi. PAYG – instalments xii. PAYG – trust xiii. activity statement former account | xiv. administrative penalties xv. GST Annual Information Report xvi. Single Touch Payroll Reporting xvii. PAYGW Annual Reporting xviii PAYG(W) Payment Summary Report xix. Report – PAYGW No ABN xx Report – PAYG Withhold Dep Super xxi Report – PAYGW Non Resident xxii Report PAYG Withhold Int N-Res xxiii. PAYGI Annual Reporting xxiv. franking tax xxv. NZ franking entity xxvi. GIC. |
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:
To any super guarantee charge (SGC) debts, commencing with the debts that have the earliest due date, applying the payments in the following order:
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.
Payments received in respect of a director penalty relating to a SGC liability are to be credited towards the earliest SGC director penalty debt in the following order:
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.
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