Employee Overpayments: What To Do
Once the end of financial year workload abates and payroll staff have time to have a closer look at what occurred in the previous income year, it’s not unusual for unintended overpayments to employees to come to light. If this happens for your business, it’s important to follow ATO guidance and consider all parties’ rights and obligations when deciding what to do next.
Critically, the first step is to confirm whether the business will seek to recover the overpayment. This should be decided by business management in consultation with human resources, not by payroll staff. If no recovery will be sought then the original payment processing remains as is. Keep a clear record of the decision not to recover the overpaid amount.
If the business will seek recovery, you need to consider whether the overpayment relates to a previous income year, the current income year or both. Remember to communicate clearly with the employee about any adjustments made to their Single Touch Payroll (STP) record as part of recovering overpayments.
For an income year that’s been finalised, the business will need to seek repayment of the gross overpaid amount directly from the employee. The STP record must be amended to reduce the gross by the amount of the overpayment. No tax adjustment should be made.
When the employee later lodges their tax return, the overpayment will no longer be taxable because it’s no longer shown in STP, so they should get back any tax previously withheld on it.
Where an overpayment affects a current income year, the process is to reduce the gross and the tax in STP by the original overpayment. The business then only needs to recover the net amount from the employee.
If the business paid superannuation on the original overpayment, the overpaid super can be used to offset future obligations for the same employee for up to 12 months.
Important: Clients should not act solely on the basis of the material contained here. Items herein are general comments only and do not constitute or convey advice per se. Also, changes in legislation may occur quickly. We, therefore, recommend that our formal advice be sought before acting in any of the areas.
