Repayment of income - overpayment of salary or a benefit
Repayment of income - overpayment of salary or a benefit
Overview
If you have to repay an amount that you included in your assessable income in an earlier income year, you can seek a reduction of that amount.
Under the law there are different processes to reduce your assessable income depending on whether or not you were entitled to the payment when you received it.
You need to determine if you were:
- entitled to the income - you can generally request a reduction in your assessable income at any time after you have repaid the amount.
- not entitled to the income - you can request a reduction even if you have not repaid the amount.
You were entitled to the income if you were correctly paid an amount but later events meant that you were required to repay that amount. For example, you receive a payment on the condition that you will remain with an employer for a specified period but you don't meet the condition and you are required to repay the employer.
You were not entitled to the income if you were paid that amount due to an error or mistake. For example:
- You receive an overpayment mistakenly paid to you of a taxable government pension, allowance or payment that you subsequently have to repay.
- You receive an overpayment of salary mistakenly paid to you by your employer and your employer has advised you that you must repay it.
Receipt of lump sum compensation or damages
Sometimes you may be required to repay an amount of a benefit or regularly paid compensation you received because you later received a lump sum compensation payment or a lump sum payment for damages for a wrong or injury suffered in your occupation.
You will not be able to reduce your assessable income for these amounts because the tax law does not allow this.
You can request an amendment to your assessment if you are required to repay an amount you were entitled to but you need to meet all of these conditions first:
- you must have repaid the amount
- you cannot claim a deduction for the repayment in any year
- the payment is not from a lump sum settlement.
Amendments can be made to assessments for the 1996-97 and later income years at any time. You should include a copy of any documents provided by your employer with any amendment or objection request.
Statutory time limits for amendments and objections apply for assessments made before the 1996-97 income year. You will need to lodge an objection against the assessment and request an extension of time to lodge the objection.
Example
Charlotte was a member of the Australian Defence Force (ADF). On 1 March 2003, she was offered $50,000 (referred to as a retention bonus) to sign on for another five years of service. Under the terms of the contract, she was required to repay the bonus, on a pro rata basis if she failed to serve for five years. She signed up for the retention bonus on 20 March 2003 and included the $50,000 as part of her assessable income in her 2003 tax return.
Three years into the contract she resigned from the ADF, and was required to repay two-fifths of the retention bonus. She has now repaid the amount required. As Charlotte has repaid the $20,000 she can amend her assessment for the 2003 income year. In her amendment she would request that her income be decreased by $20,000 for the 2003 year.
You can request an amendment to your assessment if you are required to repay an amount you were not entitled to. The normal time limits on lodging an amendment request or objection apply, generally two years (four years in some cases, see statutory time periods).
The amount does not have to be repaid before an amendment can be made.
Your employer or payer should supply either an amended payment summary or a letter correcting the previously issued payment summary. You should provide a copy of this with any amendment or objection request.
If the repayment relates to an income year more than two years earlier (or four years in some cases - see statutory time periods), you will need to lodge an objection against the assessment and request an extension of time to lodge the objection.
Example
Hannah is in regular receipt of a social security payment. A review of her circumstances established that she had been mistakenly paid amounts totalling $825 during the 2006-07 income year, due to an incorrect income declaration by Hannah. The circumstances are such that Hannah has an obligation to repay the amounts paid by mistake. As Hannah was not entitled to the $825, her assessment can be amended to reduce her assessable income.
If the overpayment was made in the 2001-02 income year, outside of the amendment and objection periods, Hannah would need to lodge an objection along with a request for an extension of time to object. We could then process the objection and amend the 2001-02 assessment.
Last Modified: Thursday, 17 June 2010
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