Scenarios which may result in insufficient tax being withheld
- Scheduled system updates to increase tax rates do not take effect resulting in under-withholding of tax.
- Withholding on super death benefits may be calculated incorrectly resulting in the tax on the payment being understated and the beneficiary receiving more than entitled.
- You may be holding an incorrect date of birth resulting in an incorrect payment to a member.
If you under-withhold:
- you are not entitled to seek repayment of the amount from the member
- on recognising the error within the same financial year, you may suggest that the member agree to a higher level of withholding from later payments to make up the tax shortfall, but cannot insist upon this
- you may be subject to a penalty, but that would generally be waived for honest errors and cases that are disclosed voluntarily.
Example: under-withholding – same financial year
On 1 September 2022, a super fund was advised of the death of a member and calculated a non-dependant superannuation lump sum benefit payment. The payment consisted entirely of a taxable component – taxed element.
In October 2022, the fund became aware that it had withheld insufficient tax resulting in an increased net payment to the non-dependant beneficiary.
The fund will need to ensure that the correct amounts and codes are shown on the PAYG payment summary issued to the member for the income year, to reflect the gross payments made and tax amounts withheld, without adjustment.
End of exampleScenarios which may result in too much tax being withheld
- The member accesses their super due to a terminal medical condition where no tax is applicable. Errors may occur during processing of the claim resulting in tax being withheld in error.
- Super accounts with a balance of less than $200 may be taxed when no tax applies resulting in the member receiving less benefit than entitled and tax withheld in error.
- Withholding on super death benefits may be calculated incorrectly.
The action you need to take will be determined by when the over-withholding is identified – in the same financial year or a later financial year.
Over-withholding – same financial year
Example 1: over-withholding – same financial year
On 1 September 2022, a super fund was advised of the death of a member and calculated a non-dependant superannuation lump sum benefit payment totalling $4,200. The payment consisted entirely of a taxable component – taxed element. An amount of $714 was withheld from the benefit payment and the fund provided a PAYG payment summary – superannuation lump sum to the beneficiary.
In October 2022, the fund found out the beneficiary to whom the payment was made was a dependant of the member. Consequently, the applicable rate of withholding for the payment was nil and the beneficiary's entitlement had been reduced by an amount of $714. The fund needs to refund the amount of $714 to the beneficiary.
The refunded amount can be recovered from us by reducing a future withholding payment.
The fund will also need to:
- prepare a new PAYG payment summary – superannuation lump sum
- mark the 'amending a payment summary' box
- show the beneficiary and payer information as it was on the original payment summary
- enter the new dollar amount or payment type code
- send a copy of the payment summary amendment to the payee
- lodge the payment summary and annual report amendments to us.
Example 2: over-withholding – same financial year
A super fund received an application for a departing Australia Superannuation Payment (DASP) for a member via the DASP online application system on 20 September 2022. The DASP was paid to the member on 17 October 2022 and was accompanied with a DASP payment summary. The appropriate tax rate, and amount of tax withheld from the DASP, was worked out by the fund having regard to the visa information that was provided to us by the Department of Home Affairs and included in the application.
The member contacted the fund on 12 December 2022 as they thought the amount of tax withheld from their DASP was too high. The tax withheld was 65% of the total payment, which indicated that the DASP working holiday maker (WHM) tax rate was applied. The member advised the fund that the DASP WHM tax rate should not have been applied to the payment as they had never held a WHM visa. It was discovered that the Department of Home Affairs had, as the result of a system issue, inadvertently advised us that the member had held a WHM visa.
The error was identified by the member during the DASP online application process, and the member had contacted the Department of Home Affairs for a Certificate of Immigration Status to correct the error. In this case, the member should not have submitted the application via DASP online as per the on-screen information; however, they did so by mistake, and forgot to keep the super fund informed.
The fund checked its records and established that it had received the Certification of Immigration Status after receiving the application, confirming that the member had not held a WHM visa.
In this case, there was an amount of tax withheld in error, as the incorrect DASP tax rate was used.
As the fund became aware of the error before the end of the financial year in which the amount of tax was withheld, the fund must refund the amount that was incorrectly withheld (that is, the over-withholding amount) to the member.
Once the correction and refund has been made, the fund will need to:
- advise the member by letter of the correct information
- keep a copy of the letter for their records.
The refunded amount can be recovered by reducing a future withholding payment to us. The fund reports the correct details in the payment summary annual report as an original payment summary, if an amendment was made to the payment summary before the annual report was sent to us.
End of exampleOver-withholding – previous financial year
Example: over-withholding – previous financial year
On 1 May 2022, a member advised their super fund that they had just ceased employment with an employer that had made contributions to the fund. A review of the member’s account showed total preserved benefits of $199. The member requested this amount be paid to them directly, and on 6 May 2022 the fund made a lump sum payment to the member totalling $155.22.
On 20 July 2022, the fund was alerted to a system issue that had resulted in the incorrect rate of withholding being applied against the member's preserved benefits where the total is less than $200. The system issue caused the member's payment to be reduced by an amount of $43.78 in the 2022 financial year.
The over-withheld amounts for the 2022 financial year cannot be refunded to the member. Instead, the member will be entitled to a credit for the amounts withheld in their income tax return.
As a PAYG payment summary has been issued to the member in respect of the payment, the fund needs to prepare a new payment summary.
The fund will also need to:
- show the beneficiary and payer information as it was on the original payment summary
- enter the new dollar amount or payment type code
- mark the ‘amending a payment summary statement’ box
- not change the tax withheld amount
- lodge the completed payment summary
- give a copy to the payee.
If the error occurred in more than one financial year, amended payment summaries are required for each year.
End of example