Repayment of overpaid salary – can the minor benefit exemption apply?

It is not uncommon for an employee to be overpaid salary and subsequently enter into a repayment arrangement with their employer whereby post-tax deductions are made from fortnightly/monthly salary payments until the amount is repaid.

In many of these arrangements, no interest is charged by the employer.

In this article we look at whether a fringe benefit arises and whether the minor benefit exemption may apply.

Does a loan fringe benefit arise?

Section 16 of the FBT Act provides that a loan benefit arises where you provide a loan to an employee.

A loan includes any advance of money, the provision of credit or the payment of an amount where there is an obligation to repay.

In Taxation Determination TD 2008/10 the ATO take the view that where a repayment arrangement such as the one considered in this article is put in place, by allowing time for the repayment the employer is making a loan to the employee.

What is the taxable value?

The taxable value of a loan fringe benefit provided in respect of a year of tax is the loan amount multiplied by the difference between the rate of interest charged by the employer and the statutory rate of interest. The interest is to be calculated on the outstanding daily balance of the loan.

As such, where the employer charges no interest, the taxable value will equate to the relevant FBT year benchmark interest rate (currently 4.52% for the FBT year ending 31 March 2022).

Can the minor benefit exemption apply?

Yes, it is possible for the minor benefit exemption to apply.

The ATO will generally accept the minor benefit is available where:

  • the taxable value of the loan fringe benefit in relation to the current year of tax is less than $300;
  • a loan benefit has not previously/frequently been provided due to the overpayment of salary, therefore the benefit is provided infrequently and irregularly;
  • no identical or similar benefits have been provided;
  • the overpayment of salary was an error and allowing the employee to repay the overpayment by instalments is not a reward for services;  and
  • although there is no difficulty in determining the taxable value of the benefit, this factor, in light of the consideration of the other factors, would not alter the conclusion that the minor benefits exemption should be applied.

The conclusion is that an interest-free repayment plan for an employee relating to salary that has mistakenly been overpaid can qualify for minor benefit exemption where the taxable value is below $300 for the FBT year.

This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. It is not intended to be, nor should it be relied upon as, a substitute for professional advice. TaxEd Pty Ltd and any person connected with its production disclaim any liability in connection with any use.