Pay the ATO or other creditors first? The order that protects you when cash is tight

It’s the last week of the month. Wages go out Thursday, the stock supplier wants its invoice cleared before it will release the next order, and the BAS is due. You can fully cover two of the three. Which one gets short-changed?

The short answer: protect wages and the money that isn’t really yours first. That means PAYG withholding, GST you’ve collected and super, because those debts can land on you personally. Ordinary supplier invoices come later. They’re painful, but they’re negotiable, and they don’t carry a director’s personal liability. The one thing to avoid is quietly clearing a single creditor in full while the business is wobbling, because a liquidator can later demand it back.

Which debts can follow you personally?

Not all debts are equal, and the ATO ones are different for a reason. When you withhold PAYG from wages or collect GST from customers, you’re holding money on the government’s behalf.

The ATO’s director penalty notice regime makes directors personally liable for three kinds of company debt: PAYG withholding, net GST, and the super guarantee. A supplier owed $40k can sue the company. It can’t send you a director penalty notice for it.

There’s a timing rule worth knowing. According to adviser commentary, a penalty can be remitted if the company reports the PAYG or GST within three months of the due date, so it was never “locked down”. Report later than that, and it’s a lockdown penalty that generally only full payment clears. So even when you can’t pay, lodging on time keeps the better option open. Our guide to director penalty notices walks through each stage.

Super has changed. From 1 July 2026, Payday Super means contributions are due within a short window of each payday, not once a quarter. Commentary from Worrells says the due date for director penalty purposes is now the earlier of 60 days after payday or the ATO’s assessment day, so exposure builds payday by payday. Our page on Payday Super director risk covers this in more detail.

What’s a sensible order when you can’t pay everyone?

Here’s the sequence we’d work through, from most to least urgent:

1. Net wages. Staff are first in the queue, legally and practically, and Fair Work obligations don’t pause.
2. Super and PAYG withholding. Personal exposure plus the ATO’s firmest powers.
3. GST in the current BAS. Same trust-type logic as PAYG.
4. Secured lenders and leases. Missing these can cost you the vehicle, the equipment or the property they’re secured against.
5. Critical suppliers. Those you can’t trade without. Negotiate a part-payment and a date.
6. Everyone else, including older ATO balances. Income tax and old BAS can go on a plan.

The order isn’t a legal ranking. It’s a risk ranking. The further down the list, the more time and flexibility you usually have, as long as you talk to people before the due date, not after it.

What happens in liquidation, and why does it matter now?

Even if you never plan to go near insolvency, the liquidation order shows where the law sees priority, and a liquidator will judge your past payments against it.

Under the Corporations Act, secured creditors are paid from their security, and the costs of the liquidation come off the top. Employee wages and super then rank ahead of ordinary unsecured creditors, then leave and other entitlements, as Worrells sets out. The ATO, trade suppliers and most others share what’s left, and ASIC notes unsecured creditors often recover only a small portion of what they’re owed.

So in a bad outcome, staff come out better than suppliers, and the ATO isn’t ahead of suppliers. But personal exposure is a separate layer that sits on top of it: the director penalty regime applies to you whether or not the company recovers anything.

What is the unfair preference trap?

This is the mistake that costs owners real money later. Imagine the stock supplier threatens to stop supply, so you pay its $30k in full and leave the ATO and others waiting. If the company becomes insolvent and goes into liquidation, the liquidator can ask whether that payment let one creditor do better than it would have in the liquidation.

If so, it may be an unfair preference, and the liquidator can claim the money back from the supplier. Reported look-back periods are generally six months before the winding-up for unrelated creditors, and up to four years where the payee is related to the company, such as a director’s family entity. A good-faith defence and a “running account” principle can protect suppliers who traded continuously, but the arguments are expensive.

Three practical points:

• Paying creditors in the ordinary course of trading on normal terms is not the problem. The risk grows when the company is already insolvent and one creditor is singled out.
• Repaying a director’s loan or a related party’s invoice is the highest-risk payment of all, because of the four-year window.
• Paying wages and super on time is not a preference problem. It’s something you must do anyway.

If you’re worried that the company is already insolvent, the right move is advice before the next payment, not after.

Can you simply pay everyone but the ATO?

Some owners do, reasoning that the ATO “can wait”. It can, up to a point. It’s a fairer description to say the ATO is the creditor most likely to accept a structured arrangement and the one most likely to escalate if it’s ignored.

What the ATO tolerates: an overdue balance with lodgements up to date and an agreed payment plan being kept. Online plans are generally available where the debt is under $200,000 and the account hasn’t defaulted on a plan more than twice in two years, per the ATO’s payment plan guidance. Larger debts need a call and more evidence. Our page on the ATO payment plan covers the detail.

What the ATO doesn’t tolerate for long: silence, unlodged BAS and repeated broken plans. That’s when garnishee notices, director penalty notices and eventually legal action come into play, as our ATO escalation ladder maps out.

There’s a cost to the choice too. General interest charge keeps running on an unpaid ATO balance and, from 1 July 2025, isn’t tax-deductible. A supplier who is paid late may simply stop your account. Neither is free, so compare the real cost of each.

A worked example: the commercial cleaner with $90k to find

This is an illustrative scenario, not a real client.

A commercial cleaning company has 14 casual staff and one large contract that pays 60 days late. At the end of a quarter it holds $18k in the bank. It owes $26k in wages and super this fortnight, $31k to the ATO for the quarter’s BAS, $22k to a chemicals supplier and $17k to a vehicle lease. That’s $96k against $18k plus an invoice due in three weeks.

The director’s first instinct is to pay the supplier, who is chasing hardest. Her accountant stops her. The sequence she chooses instead:

1. Pay wages and super in full, from the bank and the director’s own loan back into the company, documented properly.
2. Lodge the BAS on time, even though it can’t be paid, so the amounts aren’t locked down.
3. Call the ATO before the due date and agree a short plan for the BAS.
4. Offer the supplier a part-payment and a date, keeping supply on a cash-on-delivery basis.
5. Keep the lease current, because the vans are the business.

That works, but only just. If the late-paying client slips another month, one instalment fails. So she also asks about a short-term loan to cover the gap until the contract invoice lands. The loan clears the BAS at once, which stops the ATO clock and lets the supplier be paid on its original terms. Everyone ends up paid, and nobody is paid “first” at someone else’s expense.

When is a loan the better answer than choosing who loses?

A funding solution makes sense when the shortfall is temporary or the debt is sizeable, and the business is viable. Typical cases:

• A short, fixable gap. A big invoice is due in 30 to 60 days and you only need a bridge.
• An ATO balance that a plan can’t stretch to. The repayments the ATO wants are more than the business can carry alongside normal costs.
• A looming notice. A director penalty notice or a garnishee gives you days, not weeks.

We arrange property-secured business loans from $20,000 to $5,000,000 and unsecured or cash-flow options, typically $5,000 to $500,000, sized on turnover and bank statements. Where it’s arranged at settlement, funds can be paid straight to the ATO. Our guide on the loan to pay ATO debt explains how funding is sized, and clearing ATO debt: every option ranked compares it fairly with the free options.

If the business can’t carry any extra repayment, a loan isn’t the answer, and we’ll say so. That’s the point where safe harbour or formal advice is the honest next conversation.

If you’d like a real person to look at your numbers, you can see if you qualify in about a minute.

Choosing who gets paid shouldn’t mean choosing who you let down

Every owner who has run a tight month knows the feeling of putting one bill ahead of another and hoping. The better position is one where you don’t have to choose, because the ATO is on an arrangement you can hold, suppliers are paid on terms, and staff and super go out on time.

We help business owners with tax debt all the time, and we don’t shy away from it. If the ATO balance is the thing forcing the choice, getting it funded may free up the cash for everyone else.

Enquiring takes about 60 seconds, and it won’t affect your credit score. We only look at your credit file if you decide to go ahead. We don’t send your details to a pile of lenders, so there’s no flood of calls from brokers you’ve never heard of. A real person who understands ATO debt looks at your situation and phones you.

Please fill the form in accurately: the ATO balance, which accounts it sits on, any notices you’ve received, and whether you own property. That way we can match you to the right option first time, whether that’s a loan, a plan or a conversation with the ATO.

Check your options before the next pay run →