Consider the following scenario:
- An organisation has made an overpayment of salary/wages in FY 2017-18 in error.
- The organisation has remitted the relevant PAYG instalments to the ATO in connection with the mistaken calculation of wages/salary.
- The total of the amount actually paid to the employee and the amount of PAYG instalments remitted to the ATO is estimated to be (say) $12,000.
- The employee acknowledges the error has occurred and will refund the requisite amount.
- The organisation anticipates that the employee may not be able to refund the full overpayment prior to 30 June 2018 and will want to make the refund by instalments, with the result that part of the refund will occur in FY 2018-19.
The issue is whether the employee should repay the gross amount (i.e. inclusive of PAYG) of $12,000 or the net amount (i.e. amount exclusive of PAYG).
Irrespective of whether the repayment is made in a single lump sum in the FY 2017-18 or over the two financial years, the short answer is:
- the employee should repay the net amount;
- the organisation should amend the activity statements in which the overpayment of PAYG was recorded by (i) reducing the wage figure to exclude the overpayment and (ii) reducing the withholding amount by the PAYG mistakenly remitted to the ATO; and
- the overpayment should not be reflected in the employee’s PAYG summary for FY2017-18 or FY 2018-19.
The overpayment to the employee is not assessable income of the employee – TD 2008/9. See especially paragraphs 14 and 15, where the Commissioner notes:
‘14. The decisions in these cases demonstrate that a taxpayer must be beneficially entitled to an amount for the amount to be derived by the taxpayer as ordinary income. [The case of Reiter v Commissioner of Taxation] … illustrates the application of this proposition in a situation where the taxpayer’s lack of beneficial entitlement coincided with the taxpayer not being legally entitled to the amounts they had received. It was not a case where the court found that the taxpayer had in any sense become a trustee in relation to these amounts … .
- Amounts mistakenly paid as salary or wages to employees …, to which they are not beneficially entitled, but are obliged to repay, are not derived by these persons as ordinary income. Accordingly, such mistakenly paid amounts are not assessable income of these persons under section 6-5.’
The ATO website helpfully observes:
‘If an overpayment is identified in the same financial year it is paid, the employee will only need to repay the net amount of the overpaid amount. The net amount is the amount received by the payee.
Details of the overpayment should not be included on the employee’s PAYG payment summary. The overpaid amount can be repaid in the same financial year or a subsequent financial year.
…
If you identify the overpayment amount in the same financial year, you will need to ensure that the correct amounts are shown on the PAYG payment summary issued to the employee for the income year – do not include details of the overpayment.
You will need to revise any affected activity statements to reduce the withholding and wage figures.
If you are a large withholder reporting electronically, you reduce your next payment by the relevant withholding amount.’ (emphasis/bold added)
The website gives a couple of useful examples, but Example 3 is especially relevant:
‘Example 3 – Repayment in a subsequent financial year
An employee normally receives wages of $3,200 per month but you incorrectly paid them an amount of $4,200 in March 2014, which is an overpayment of $1,000. An amount of $200 was withheld from the overpayment amount with the employee receiving the remaining $800. You and the employee agreed that the amount was to be repaid over two instalments, being June 2014 and September 2014. The employee is only required to repay $800. The 2014 and 2015 financial year payment summaries do not reflect the overpaid or repaid amounts.’
As a final observation, bear in mind that due to allowing the employee time to pay there may be FBT implications – e.g. see TD 2008/10. For instance, the TD notes that, prima facie, ‘[b]y allowing time for the repayment of the mistakenly paid amount the employer is making a ‘loan’ (as that term is inclusively defined in subsection 136(1)) to the employee’.