Rectifying Incorrect Deduction Setups

Steps on how to rectify incorrect Deduction setups

The introduction of Single Touch Payroll Phase 2 (STP 2) brought changes to how employee payroll deductions must be reported to the Australian Taxation Office (ATO). These changes differed from the reporting requirements under STP 1 and required updates to deduction categorisations.

In some instances, deductions may not have been properly updated during the transition or may have been incorrectly configured from the beginning. 

This article will guide you through identifying and correcting incorrect deduction configurations to ensure accurate end-of-financial-year (EOFY) reporting for both employers and employees.

In this article, we will cover:

• Correcting STP Categories
• Correcting a non-reportable deduction incorrectly set as 'Gross' to recover an overpayment
• Correcting a deduction set up as Gross but should be Net (miscellaneous use)

  You can find more information about Deductions, Deduction Types and STP categorisation here. 

Why is it important that Deductions are reported correctly?

Correctly reporting deductions in STP 2 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. 

Some examples include:

• Tax accuracy: Some deductions reduce taxable gross. 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.

STP Category ONLY is incorrect

EXAMPLE

A 'novated lease' deduction (taken from Gross pay) is set up as a 'non-reportable deduction' instead of a 'Salary Sacrifice'. A Novated lease includes a pre-tax deduction component and selecting the 'non-reportable' option results in the deduction being excluded from STP reporting. This means the ATO is not getting notified about this deduction at all.

  Follow along to see the steps on how to correct an STP Category, or read on below.

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.

Non-reportable deduction incorrectly set as 'Gross' to recover an overpayment

EXAMPLE

A Gross deduction is used on a payslip to recover a prior overpayment, instead of adjusting the original payslip. This reduces the employee’s gross pay for the current period, lowering both PAYG and superannuation calculated for that pay.

 

Why is it a problem?

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 2 data, affecting overall reported earnings and superannuation.

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

 

What is the correct approach?

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

How to recover an overpayment through a Net deduction:

1. Locate the Payslips where an overpayment occurred via Payroll > Pay.
2. Create an Adjustment Payslip to correct the hours or,
3. Edit the payslip to reflect the correct hours.
4. Locate the Payslips with the relevant Overpayment Gross Deductions.
5. Edit the payslip to remove the Gross Deduction and replace it with a Net deduction that equates to the Net value difference from the previous adjustment.
6. 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. 

Deduction set up as Gross but should be Net (miscellaneous use)

EXAMPLE

A uniform deduction was set up to deduct from Gross pay, which incorrectly reduced the employee’s taxable income. It should have been processed as a Net deduction.

 

Why is it a problem?

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.

How 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,
4. You can use the Standard Payroll Activity report and select 'Show Adjustments' to review the edited values.

How to recoup the overpayment:

1. Apply a Net deduction on a future payslip or request repayment from the employee outside the system.

Incorrect Setup of Child Support Garnishee Deductions

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 reduce 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 the gross / pre tax earnings but 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 Phase 2 employer reporting guidelines – Other Components.

Please follow the appropriate steps below based on the current setup of the deduction.

 

If the Deduction has been set up as Fixed ($) Net Deduction & Non Reportable or ‘Net (% from Gross) & Non-Reportable

To correct the STP Category:

1. Navigate to Payroll Settings > Deductions.
2. Search for the relevant Deduction.
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.

 

If the Deduction has been set up as Salary Sacrifice or Pre-tax (Gross) deduction and non-reportable.

To correct the Deduction you will need to:

1. Recreate the Deduction with the correct setups as above (you will not be able to turn the existing Gross deduction into a Net deduction).
2. Locate the Payslips with the incorrect Deductions via Payroll > Pay.
   
     Tip: You can use the Processed Deductions report, filtered to the Deduction and grouped by Payslip ID, Employee and Period End to assist with this step.
3. Edit the payslip to remove the Incorrect Deduction and replace it with the new Deduction.
   
     Please note: This will create an overpayment amount, as you will be increasing the Taxable income, therefore increasing the PAYG. You will need to recoup these funds from the employee.
4. Submit the updated STP packets by navigating to Payroll > Single Touch Payroll > Submit outstanding packets.