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Payroll Management : Newsbite

Deducting pay & overpayments

There are limited situations when an employer can make a deduction from an employee’s pay or require an employee to pay money (for example, to fix an overpayment).

Taking money out of an employee’s pay

Taking money out of an employee’s pay before it is paid to them is called a deduction.

An employer can only deduct money if:

• the employee agrees in writing and it’s principally for their benefit
• it’s allowed by a law, a court order, or by the Fair Work Commission, or
• it’s allowed under the employee’s award, or
• it’s allowed under the employee’s?registered agreement?and the employee agrees to it.

Examples include salary sacrifice arrangements or additional payments into an employee’s super fund.

An employee’s written agreement must be genuine. They can’t be forced to agree to a deduction.

Deductions have to be shown on the employee’s pay slip and time and wages records.

Deductions under an award or agreement

Some awards have a clause that allows an employer to deduct money from an employee’s pay without their agreement.

If a registered agreement allows the deduction, the employee must still agree to the deduction.

Deductions that aren’t allowed

An employer can’t deduct money if:

• it benefits the employer directly or indirectly and is unreasonable in the circumstances, or
• the employee is under 18 years of age and their parent or guardian hasn’t agreed in writing.

This is the case even if the deduction is made in accordance with an award, registered agreement or contract.

Reasonable deductions that benefit employers

A deduction that benefits an employer and is made in accordance with an award, registered agreement or contract is reasonable in limited situations.

Notice of termination not given

Most awards say that an employer can deduct up to one week’s wages from an employee’s pay if:

• the employee is over 18
• the employee hasn’t given the right amount of notice under their award
• the deduction isn’t unreasonable.

However, employers can only deduct from wages owed under the award. They can’t deduct from other entitlements owed to the employee, such as accumulated leave or other overaward payments.

Business goods and services deductions

A deduction is reasonable if an employer provides goods or services to an employee as part of their ordinary business. For example, deductions for health insurance fees made by an employer that operates as a health fund.

If the employee has to pay more than the general public for the goods or services, then the deduction isn’t reasonable.

Private use of property deductions

It’s reasonable for an employer to make a deduction to recover costs directly incurred from an employee’s private use of the employer’s property. For example, the cost of:

• personal items bought by an employee with a work credit card
• personal calls on a work mobile phone
• petrol for the private use of a work car by an employee.

Overpayments

Overpayments can happen when an employer mistakenly believes an employee is entitled to the pay or because of a payroll error.

Employers can’t take money out of an employee’s pay to fix up a mistake or overpayment. Instead, the employer and employee should discuss and agree on a repayment arrangement. If the employee agrees to repay the money, a written agreement has to be made and has to set out:

• the reason for the overpayment
• the amount of money overpaid
• the way repayments will be made (for example, cash, cheque or electronic transfer) and how often (this has to be reasonable).

If the repayment can’t be agreed on, an employer should get legal advice.

A deduction can be made to get back an overpayment if it’s allowed under a registered agreement (and the employee agrees to it), award, legislation or a court or Fair Work Commission order.

Requirements to spend or pay back money

An employer isn’t allowed to make an employee or prospective employee, spend their own money, or pay the employer (or someone else) money if:

• it’s unreasonable
• the payment is for the employer’s benefit, or the benefit of someone related to the employer.

This applies to any of the employee’s or prospective employee’s money, not just the pay they get for working.

This means that an employer can’t:

• ask a prospective employee to pay money just to receive a job offer
• ask employees to pay money to keep their job
• pay the employee the correct pay rate and then make them give some of it back
• apply unfair pressure to employees to spend their pay or own money.

Cashback schemes

Making an employee give back some of their wages is sometimes referred to as a cashback scheme. If an employer breaches this workplace law, the money spent or paid by an employee will be treated like a deduction. The employee will be entitled to back pay from their employer, equal to the amount spent or paid. Amounts paid by prospective employees can also be recovered, whether or not they start work with the employer.

STP 2 : Newsbite

How to report employment and taxation information through STP Phase 2

There are many factors to help you work out the correct amount to withhold from your employees’ pay. These may be based on information they provide in their TFN declaration or withholding declaration, or their employment information.

You must now report this information in each STP report, reflecting any changes to their employment basis.

You already provide some of this employment information to the ATO via STP, such as employees’ commencement and cessation dates.

By including this information in your STP report, in most cases you will no longer need to send TFN declarations to the ATO or provide employment separation certificates when your employees leave.

You do not need to get new TFN declarations from your current employees to start reporting through STP Phase 2. Any new employees still need to provide you with their TFN declaration that you need to keep for your records.

Identifying employees in

your STP report

You must provide either a TFN or Australian business number (ABN) for each payee included in your STP report. If you have not been provided with the employee’s TFN you must use the TFN exemption codes.

When you report a payment and withholding for a contractor under the voluntary agreement (VOL) income type, you must provide the contractor’s ABN. The contractor’s TFN is not required.

If a payee is a contractor and employee with the same Payroll ID within the same financial year you must report both their ABN and TFN.

Commencement date

You must report your employees’ commencement date. If you do not know their commencement date, you can report a default date of 01/01/1800.

Employment basis

You must report information about your employees’ employment basis according to their work type:

Full time (F) – a person who is engaged for the full ordinary hours of work as agreed between the payer and the payee or set by an award (or both), registered agreement or other engagement arrangement. A full-time payee has an expectation of continuity of the employment or engagement on either an ongoing or fixed term basis.

Part time (P) – a person who is engaged for less than the full ordinary hours of work, as agreed between the payer and the payee or set by an award (or both), registered agreement or other engagement arrangement. A part time payee has an expectation of continuity of the employment or engagement on either an ongoing or fixed term basis.

Casual (C) – a person who does not have a firm commitment in advance from a payer about how long they will be employed or engaged, or for the days or hours they will work. A casual payee also does not commit to all work a payer may offer. A casual payee has no expectation of continuity of the employment or engagement.

Labour hire (L) – a contractor who has been engaged by a payer to work for their client. Income for contractors only, does not include employees.

Voluntary agreement (V) – a contractor with their own ABN who has entered into a voluntary agreement with a business to bring work payments into the PAYG withholding system. To do this a contractor would normally complete a Voluntary agreement for PAYG withholding (NAT 2772) form.

Death beneficiary (D) – the recipient of an employment termination payment (ETP) death beneficiary payment who is either a dependant, non-dependant or trustee of the estate of the deceased payee.

Non-employee (N) – a payee, such as a contractor, who is not in scope of STP for payments but may be included in STP for voluntary reporting of super liabilities only.

An employee may have one Payroll ID, but more than one employment basis.

Your STP Phase 2 report will include a 6-character tax treatment code for each employee. The tax treatment code is an abbreviated way of telling us about factors that can influence the amount you withhold from payments to your employees

Reporting this information through your STP report means that when your employees give you a TFN declaration you no longer need to send a copy to the ATO. It will also allow the ATO to notify your employee if they have provided you with incorrect information which may lead to them getting a tax bill at the end of the year.

Your STP solution will automate the reporting of these codes and ensure that the tax treatment code you report is valid. Even though the creation of this code will be automated for you, it is still part of your STP report. It is important for you to understand what it means.

The following table shows the components of the tax treatment code.

Click Here to View.

Questions & Answers

Todays Question: Do post-tax deductions need to be reported in STP Phase 2?

Answer: The reporting of deductions doesn’t change for STP Phase 2, with the exception of Child Support deductions, which can be voluntarily reported if your payroll solution is configured to do so. You can find further information here - Click.

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