ATO Payments in and out

A common question that arises in client dealings with the ATO, and one which has particular relevance in the increasingly proactive ATO recovery environment facing companies and their directors, is: “How does the ATO allocate money it receives?”

Practice Statement “PS LA 2011/20 Payment and Credit Allocation” (click here for the link) outlines how the ATO allocates payments and available credits to debts owed by taxpayers.

Generally, payments and credits are allocated based on the type of tax debt outstanding. The attachments to the Practice Statement provide further guidance on how the ATO allocates specific payments and credits to taxation liabilities.

The ATO will usually apply a payment to a particular account based on the payment reference number (PRN) or the direction of the taxpayer. Where a payment matches a specific liability amount, the ATO will use that as the basis for directing the payment to the liability. The majority of payments and credits are allocated in this way. When the ATO receives unidentified payments or credits arise, it will follow the allocation rules outlined in the Practice Statement’s attachments.

However, it is possible for the ATO to allocate a payment differently from the direction indicated by the PRN or specific instructions. Taxpayers can also request that a payment be allocated in a manner that is inconsistent with the general allocation policy.

In an insolvency context, a payment may be made by a director upon receipt of what is known as a Director Penalty Notice (DPN). Where a payment is received from a director (in full or in part) in relation to a DPN, the payment will reduce the penalty on the director’s account and the corresponding parallel liability on the company’s account. If the payment is for less than the full amount, the payment will be allocated against the earliest penalty on the director’s account and will offset the company’s parallel liability.

In general, the ATO will allocate payments of dividends of less than 100 cents in the dollar (which are common in both Deeds of Company Arrangement (DOCA) and liquidation) according to the account hierarchy rules (Attachment C of the Practice Statement) to each tax debt and other debts, such as judgment interest, that formed the ATO’s claim in the external administration.

A director penalty notice may sometimes be sent after a proposal for company restructuring is put forward and accepted by way of a DOCA but before the DOCA effectuates (and creditors are paid). This can have a material impact on the process and the availability of funds.

In such cases, it may be necessary and appropriate to engage with the ATO on the likelihood of future DPN activity in relation to company debts. Doing so can reduce the risk profile for directors exiting a DOCA process, often as they regain control of a restructured corporate entity and ensure that control of the business can be successfully handed back to key personnel.

If you require any advice about communicating with the ATO on this or other matters, please contact Dan Butler at (08) 9221 0033 or dbutler@mphlawyers.com.au.