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Ruling
Subject: Partial refund of PAYG-Withholding and ineffective salary sacrifice
Question:
Can the employer refund partial PAYG tax instalments to an employee for prior tax years?
Answer:
No.
This ruling applies for the following period
For the years ended 30 June 2009 to 30 June 2012
The scheme commenced on
1 July 2008
Relevant facts
The employee elected to make pre-tax salary sacrifice contributions into their chosen superannuation fund.
Upon the employee separating from the organisation, it was discovered that their request for pre-tax salary sacrifice contributions was not enacted. An error was made by the employer and the deductions were paid into their superannuation fund as post-tax personal contributions. This resulted in PAYG tax instalments being deducted from their pay and remitted to the ATO prior to these payments being forwarded to the superannuation fund.
The employee has left the organisation, and the superannuation fund has finalised the employee's account and no adjustments can be made in the fund.
Relevant legislative provisions
Taxation Administration Act 1953 Schedule 1 Section 12-35
Reasons for decision
There has not been an effective salary sacrifice due to an error the employer made with processing fortnightly superannuation contributions into the chosen superannuation fund of the employee.
The contributions were treated as post-tax personal contributions. Therefore they would not have been taxed in the superannuation fund at 15%, but were subject to PAYG-Withholding (PAYG-W) based on the marginal tax rates for the employee. The tax is withheld by the employer and remitted to the Australian Taxation Office. The tax is deducted from the gross salary of the employee. It is this gross amount that the employee has to declare as income.
When the employee lodges their income tax return to determine their tax liability for the particular income year, they are allowed a credit for the amount of tax that has been withheld. You cannot give a partial refund of the PAYG-W deducted from the employee's salary as a credit has been or will be given when the income tax return is or was lodged. In effect the correct amount of PAYG-W has been deducted based on how the payments were treated. You can't change the assessable income that has been paid as salary. The payments to the fund cannot be treated as employer contributions as the superannuation account has been closed.
The error in not processing the salary sacrifice arrangement increases the employee's taxable income, as the amount was not taken out of salary. This position cannot be reversed after the event as there was no effective salary sacrifice in relation to these amounts, for the years concerned.