Rectifying incorrect deduction setups

Correctly reporting deductions in STP ensures you, as the employer, are meeting your reporting obligations and the employee's income statement is accurately reported for lodgement of their income tax return. 

This is important because it helps ensure:

• Tax accuracy - Some deductions reduce taxable gross. An incorrect setup can cause employees to under- or overpay PAYG tax.
• Government reporting - Deductions like Child Support must be reported to the ATO for onward reporting to Services Australia. Errors can affect employee obligations and services.
• Entitlements - Inaccurate data can impact income-tested benefits such as Family Tax Benefit and Medicare exemptions.
• Compliance risk - Incorrect reporting may trigger ATO audits or penalties.

An accurate set-up ensures clean EOFY reporting and avoids issues for both employers and employees.

A deduction may be configured correctly in payroll, but assigned the wrong STP reporting category. When this occurs, the deduction is reported incorrectly to the ATO, which can result in discrepancies during your EOFY reconciliation.

To resolve this, update the deduction's STP category and resubmit the affected STP data so the deduction is reported under the correct classification.

To correct the STP Category:

1. Navigate to Payroll Settings > Deductions.
2. Search for the relevant Deduction (e.g. 'Novated Lease').
3. Select the Pencil icon to edit the deduction, then select 'Change STP Category'.
4. Choose the correct STP category and effective date (likely at the commencement of the financial year).
5. Submit the updated STP packets by navigating to Payroll > Single Touch Payroll > Submit outstanding packets. 

PAYG is assessed on a per-period basis. Reducing current gross pay to fix a past error can distort PAYG and result in incorrect tax withheld.

Non-Reportable Gross deductions aren’t reported to the ATO and won’t be reflected in STP data, affecting overall reported earnings and superannuation.

It may lead to underpaid super or inaccurate reporting for both the business and the employee.

Overpayments in the current Financial Year should be recovered through Net deductions, ideally by adjusting the original pay event or through proper EOFY corrections.

  Hot tip: Our Early Release Adjustments process includes a system-generated deduction for recovering overpayments. We recommend archiving any existing overpayment deductions and using this deduction for all future repayments.

To recover an overpayment through a Net deduction:

1. From Payroll > Pay, locate the 2 payslips that need updating:
   • The original payslip with the overpayment (incorrect hours).
   • The payslip with the gross deduction.
2. Edit each generated payslip to apply your updates:
   • On the original payslip - Correct the hours as required. Alternatively, you can create an adjustment against the original payslip to update the hours.
   • On the payslip, with the Gross deduction - Remove the Gross deduction and replace it with a Net deduction that equals the net value difference from the previous adjustment.
     
       Please note: Deductions can only be updated using a payslip edit. However, if you are an early-release customer, both the hours and the deduction must be updated via an adjustment. 
3. Submit the updated STP packets by navigating to Payroll > Single Touch Payroll > Submit outstanding packets.

  Please note: Swapping a Gross Deduction for a Net Deduction will result in a higher taxable income, hence more PAYG will apply, and the overall net pay will decrease, resulting in an overpayment that you may need to recoup from the employee. 

Gross deductions reduce taxable income and superannuation, whereas most miscellaneous deductions (e.g. uniforms, staff purchases) should not affect these amounts. 

Incorrect configuration may lead to under-withholding of tax and short payment of superannuation.

To remove the incorrect Gross deduction and apply a Net deduction:

1. Locate the affected payslip via Payroll > Pay.
2. Edit and remove the incorrect Gross deduction and apply a Net deduction for the same value.
   
     Please note: This change will result in an overpayment to the employee. The system will calculate the difference and display it in a pop-up when you save the payslip.
3. To view Net differences between the original and updated payslip, refer to Payslip History, or you can use the Standard Payroll Activity report and select 'Show Adjustments' to review the edited values.

Recoup the overpayment

After correcting payroll and creating the overpayment, you will need to recover the outstanding amount from the employee.

This can be done in one of 2 ways:

• Recover the amount through payroll by applying a Net deduction to a future payslip.
• Recover the amount outside of foundU by arranging direct repayment from the employee.

Child Support Deductions and Garnishee Deductions are a unique deduction type with strict setup requirements. If not configured correctly, they may:

• Fail to report correctly to Services Australia.
• Incorrectly reduced Gross Pay, affecting PAYG tax and superannuation calculations.

Child support is commonly a net deduction, but always ensure to review this with Services Australia/ATO. There are a couple of different ways that it may be calculated. This includes:

• A fixed amount - A set dollar value (fixed amount, post-tax deduction).
• A percentage - Of gross taxable income (percentage, post-tax deduction based on pre-tax earnings).
• Cents in the dollar - Of gross taxable income (percentage, post-tax deduction based on pre-tax earnings).

This ensures the employee’s full gross income is taxed correctly, while the deduction amount reflects gross/pre-tax earnings that are taken post-tax. Misconfiguring this deduction (e.g. reducing gross pay directly) can result in incorrect tax and reporting outcomes for both the business and the employee.

  Please note: The above information is based on Service Australia's guidance available at the time of writing. Requirements may change. For the most up-to-date information, refer to the ATO’s STP employer reporting guidelines – Other Components.

Please follow the relevant process below, depending on the current setup.