I’m often asked about the treatment of overpayments made to employees and if an amended payment summary should be issued.
Here are a few things to keep in mind should this situation arise:
If overpayment occurred in a prior financial year
If the overpayment occurred in a prior financial year, the employer is required to give an amended payment summary to the employee.
It should detail the amounts that the employee should have received in the relevant income year. Don’t adjust the amount of tax withheld on the amended payment summary. When the employee does their tax return the ATO will see they have paid too much tax and will refund them accordingly.
If overpayment occurred in current financial year
If an overpayment is identified in the same financial year as it is paid the employee will only need to repay the net amount of the overpayment, that is the amount actually received by the employee in addition to what they should have received. The employee should repay the net overpaid amount from after-tax income.
As the employer, you need to adjust the PAYG amount to be remitted to the ATO accordingly.
Do not include details of the overpayment on the employee’s payment summary.
The overpaid amount may be repaid in the same financial year or a subsequent financial year.
How to identify which method to use
The key identifiers in the treatment of overpayments are whether the employee will be required to repay the overpayment and when the overpayment was identified.
It doesn’t matter when the repayments are made – it is more about the period in which the overpayment occurred relative to the period in which the overpayment is identified.
If it is identified in the same financial year, then only the net pay needs to be recouped from the employee. This is because you can adjust your PAYG withheld payments to the ATO until such time as you submit your annual report.
The employee will not require an amended payment summary as the overpayment has been corrected in the same financial year and you (the employer) have not sent the ATO the additional PAYG withholding, so you have nothing to recoup from the ATO and neither does the employee.
If, however, the end of the financial year has passed and the payment summaries have been issued and PAYG has been sent to the ATO, then you need to recoup the gross from the employee and the employee then recoups the PAYG from the tax office via their tax return.
They will be issued with an amended payment summary which will show a lower gross but no change to the tax, resulting in the employee having paid too much tax in the eyes of the ATO, so they will receive a refund accordingly.
Now, depending on how long you allow the employee to repay the overpaid amount, a Loan Benefit FBT liability may arise. Alternatively, if you choose to waive the debt, a Debt Waiver FBT liability may arise.
Either way, an amended payment summary needs be issued as soon as the overpayment is identified (if in a subsequent financial year) – as well as an amended Annual Report/ EMPDUPE file (if already lodged).
That way, the employee can receive a tax refund, which means they have now received the gross amount of the overpayment (the net amount via the employer when the overpayment occurred + the PAYG via the tax refund = gross amount of the overpayment).
More details are at www.austpayroll.com.au
If you have any topics you’d like me to cover in future blog posts, please get in touch with me at tracy@austpayroll.com.au
Tracy Angwin is executive director of the Australian Payroll Association, an independent organisation for payroll professionals. She’s launched diploma-level payroll qualifications and wrote the book The Payroll Revolution: How to Identify and Leverage the Value of Your Payroll Operation.
