Introduction – PAYG Withholding and Employer Obligations
How Much to Withhold
Taxation Office PAYG Withholding Variations
Other PAYG Withholding Events
Payments on Termination
Superannuation Guarantee Charge
Member Choice Superannuation
There are numerous issues with which a church must deal when it has employees. These include determining the treatment of salaries, allowance and other remuneration payments, PAYG withholding, superannuation and Work Cover. You also need to consider the implications of making payments to volunteers.
You may have fringe benefits tax (FBT) and salary packaging considerations. Churches may be able to access various FBT concessions and exemptions as part of the salary package for its ministers. Due to the extent of these issues, we have included a separate chapter on Salary Packaging.
There is also specific legislation dealing with the treatment of religious practitioners for tax purposes. These rules affect GST, FBT, PAYG withholding and ABN rules. Again we have incorporated these rules into a separate chapter (see Religious Practitioners). However, the normal rules for employing staff as outlined in this chapter still apply to religious practitioners in most circumstances. You may need to refer to the specific religious practitioner rules in Religious Practitioners in the following situations:
- You make payments to religious practitioners that are not employees (for example a visiting speaker who is also a religious practitioner);
- Your minister is not a common law employee (some religious practitioners are not employees at common law, but rather are considered to be holders of an office or undertaking activities in the pursuit of a vocation); and
- Locum payments.
One of the important issues regarding payroll is ensuring the correct amount of tax is withheld from payments made to employees. Payments on which withholding is required include:
- Salaries and wages to employees;
- Salary and wages to an officeholder;
- Certain payments to religious practitioners;
- Return to work payments to individuals;
- Eligible termination payments; and
- Payments for unused leave on an individual’s retirement or on termination of employment.
Salaries and wages include allowances, commissions and bonuses. Note that no PAYG withholding is required on fringe benefits. Therefore it is important to distinguish between salaries, allowances and fringe benefits. Fringe benefits are generally the payment or reimbursement of specific expenses whereas salaries and allowances are definite predetermined amounts. Allowances are paid even if the employee does not choose to spend the full amount. Further discussion on the types and treatment of fringe benefits and the advantages of including fringe benefits in salary packages can be found in Salary Packaging.
Declarations and Variations
The amount to be withheld depends on the type of payment, whether the payee has provided a TFN or withholding declaration, and whether the Taxation Office has issued a withholding variation in respect of the payment.
TFN and Withholding Declarations
Your employee may give you, the employer, a TFN declaration. It is not compulsory to provide such a declaration. However, if no declaration is given and the Taxation Office has not issued a withholding variation in respect of the payment, you must withhold tax at the top marginal rate, currently 47% including Medicare. Note that no TFN declaration is required from individuals under 16 years of age and not earning enough to pay tax (currently $18,200 per annum).
The TFN declaration requires the employee to answer questions about residency status, whether they are claiming the tax free threshold from you, entitlement to rebates and details of any outstanding HECS debt. You must forward the completed declaration to the Taxation Office within 14 days of receiving it from the employee. The declaration can be found on the Taxation Office website.
If the employee wishes to adjust the information previously provided in their TFN declaration, for example they have repaid their HECS debt, they should complete a withholding declaration. This can be found at:
Remember that TFNs are subject to privacy laws and unauthorised use or disclosure is a serious offence and can result in substantial penalties. Therefore you should be careful how you store TFNs and have a clear policy on who has access to these details.
Your employee may give permission on the TFN declaration for the TFN to be provided to their superannuation fund. You must pass on the TFN with your next payment to the superannuation fund unless you receive the TFN less than 14 days before the payment. In this case, you have 14 days from when you receive the TFN to pass it on to the superannuation fund.
Medicare Levy Variation Declaration
Some religious practitioners are entitled to a Medicare levy reduction based on family income levels. They can choose to complete a Medicare levy variation declaration to prevent the need for the employer to deduct amounts for Medicare for which the employee will not ultimately be liable.
This variation can also be used to increase the amount of tax being withheld for those employees who are subject to the Medicare levy surcharge. This occurs where the employee’s income or family income is above certain thresholds and no or insufficient private hospital health insurance is held.
The variation can be found at:
PAYG Withholding Variations
Individuals can apply to the Taxation Office for a reduction in the amount of tax to be withheld from their salaries, allowances and bonuses. Applications can be found on the Taxation Office website. Common reasons for completing such a variation include:
- Allowances will be fully expended;
- Employee has a negatively geared rental property; and
- Employee has substantial deductions to claim.
If the variation is approved the Taxation Office will advise the employer of the amount of tax to be withheld for the remainder of that financial year. You will then use this rate provided by the Taxation Office to withhold tax from payments to the employee and not the usual tax withholding tables.
It is important to remember that most variations expire at the end of the financial year. If you have not received a new variation notice from the Taxation Office at the start of a new financial year, you must revert to the published withholding tables to calculate the PAYG withholding.
How much to Withhold
The amount to be withheld on payments to employees is generally worked out under the withholding schedules or tables published by the Taxation Office and these are discussed below. However, an individual can apply to the Taxation Office for a varied withholding tax rate. If this application is approved, the employer should withhold tax in accordance with this variation for the period specified by the Taxation Office. All such variations will cease at the end of each financial year. The Taxation Office can also provide withholding variations for particular types of payments. These variations apply to all or a class of employees.
Salaries and Wages
There are various withholding schedules published by the Taxation Office and you should ensure that you use the correct one. Factors that determine the required schedule are:
- Timing of payments – quarterly, monthly, fortnightly or weekly;
- Whether the employee has a HECS debt;
- Whether the employee has completed a Medicare levy variation; and
- Whether you pay annual leave loading.
The schedules can be downloaded from the Taxation Office website. The Taxation Office also provides a Tax Withheld Calculator, which can be found at: https://www.ato.gov.au/Calculators-and-tools/Tax-withheld-calculator/
What is the Tax Withheld Calculator (TWC)?
The schedules should also be used for payments of allowances unless a specific variation exists. The allowance is added to the salary paid to determine the total payment for the period. Variations for allowances are discussed later.
The Taxation Office publishes a schedule to assist in determining the tax to be withheld from bonuses. As the bonus may relate to more than one pay period, it is necessary to adjust the tax to be withheld. The schedule can be found at:
Employment Termination Payments
The taxation of termination payments was altered effective 1 July 2007. For more information refer to ATO: https://www.ato.gov.au/Business/Your-workers/In-detail/Taxation-of-termination-payments/
Unused Leave Payments on Termination of Employment
This covers accrued annual and long service leave owed to the employee at the time their employment ceases. The amount of tax to withhold depends on the period to which the leave relates and whether the employment has ceased because of redundancy or an approved early retirement scheme. The PAYG withholding schedule can be found at: https://www.ato.gov.au/rates/tax-tables/
Payments in Arrears
Occasionally employers make payments that relate to significant periods of time. This usually occurs where there has been a mistake in the amount of salary and wages paid in earlier periods and a once off lump sum is paid to correct the error. Circumstances where the lump sum payment in arrears withholding schedule should be used include where the payment accrued during a previous year of income and one of the following applies:
- The salary and wages accrued more than twelve months before the date you pay it; and
- The salary and wages are paid to the person after reinstatement to duty following a period of suspension and the amount accrued during the period of suspension.
Lump sum payments in arrears should be shown separately on the employee’s PAYG payment summary (formerly called a group certificate). The payment in arrears withholding schedule can be found at: https://www.ato.gov.au/assets/0/104/1328/1465/6841dca5-2ac8-4047-a98d-42fa7dcb38dd.pdf
Taxation Office PAYG Withholding Variations
The Taxation Office can approve PAYG withholding variations for various types of payments. Relevant variations are discussed below.
Allowances are payments made in addition to normal salary and wages and are designed to compensate the employee for additional costs incurred in undertaking their duties. They are definite predetermined amounts and are paid even if the employee does not choose to spend the full amount. If you do reimburse the employee for specific expenses and specific amounts, the payment will be a fringe benefit and not an allowance.
Allowances are usually paid for:
- working conditions, such as danger;
- qualification or special duties, such as safety officer;
- expenses that cannot be claimed as a tax deduction by the employee, such as normal travel between home and work; and
- work related expenses that may be able to be claimed as a tax deduction by the employee, such as car travel, uniform costs, books and overseas travel.
Allowances in the first three categories are subject to the normal PAYG withholding tables and are included on the employee’s PAYG payment summary (group certificate) as an addition to salary and wages. Allowances in the last category (for work related expenses) are also subject to the normal PAYG withholding rules unless the Taxation Office has issued a PAYG variation. However, they must be shown separately as allowances on the employee’s PAYG payment summary.
The Taxation Office has approved PAYG withholding variations for certain specific work related expense allowances. However, before you can use the variations, you must meet both of the following requirements:
- the employee is expected to incur expenses that may be able to be claimed as a tax deduction at least equal to the amount of the allowance; and
- the amount and nature of the allowance is shown separately in your accounting records
The following variations for allowances are relevant to churches.
Are you required to withhold from allowances?
Is the allowance to be included on payment summary ? If so, how is it to be shown?
Cents per kilometre car expense payments using ATO rates (1)
For payments made by applying the ATO rate to the number of
kilometres travelled where the usage is up to 5,000 business kilometres.
(show total allowance separately in allowance box with an explanation)
|For payments made in excess of 5,000 business kilometres by
applying the ATO rate to the number of kilometres travelled.
(from the payment for the excess over 5,000 km)
(show total allowance separately in allowance box with an explanation)
Domestic or overseas travel allowance involving an overnight
absence from payee’s ordinary place of residence (2)
Up to reasonable allowances amount
|Over reasonable allowances amount
An allowance for overseas accommodation must be subject to
PAYG withholding and be shown in the allowance box on
the payment summary.
(from excess over reasonable allowances amount)
(show total allowance separately in allowance box with an explanation)
The Taxation Office publishes an annual ruling setting out the reasonable allowance amounts for travel expenses. This ruling can be downloaded from the Taxation Office website.
Payments to Locums
The Taxation Office has varied the withholding rate on certain payments to locums to nil. The payment must be made by a religious institution to a religious practitioner. The rules do not apply to payments made by non-religious institutions.
The nil withholding tax rate applies to payments for the provision of locum services performed for a period that does not exceed 2 days in a quarter. However, the church must still issue a PAYG payment summary at year-end. Further information can be found in Zero PAYG Withholding Rate on who is a locum and how the 2 day test is applied.
The Taxation Office does not believe locum includes visiting speakers. If your visiting speaker is a religious practitioner, you must withhold tax under the normal PAYG withholding rules. However, the Taxation Office has agreed that individual churches or denominations can apply for the nil withholding rate to be extended to payments made to religious practitioners for activities including the delivery of services, sermons and participating in other aspects of services. You should contact your denomination to determine whether your church is covered by such a nil withholding variation. If it is not, your church may want to apply separately. Any variation is likely to apply for a two year period only.
You must provide every employee with a completed PAYG payment summary – individual non-business after the end of the financial year. You will also need to provide a summary to certain religious practitioners that received amounts from you. The requirements for religious practitioners are outlined in more detail in Religious Practitioners. You should ensure that your employees receive their payments summaries, being the Payee’s Tax Return Copy and the Payee’s Personal Records Copy, by 14 July. Blank payment summaries will be forwarded to you in June each year. However, the blank forms are not year specific and therefore summaries issued in prior years can still be used.
The main items to be shown as a payment summary are:
- church’s name and employee’s name;
- employee’s TFN (if previously provided);
- total gross payments;
- allowances that are required to be shown separately;
- total tax withheld;
- reportable fringe benefits; and
- certain lump sum payments on termination of employment.
Reportable Fringe Benefits
Reportable fringe benefits should be shown for the year 1 April to 31 March. However, exempt benefits provided to religious practitioners are excluded from this reporting requirement. Therefore you should only include fringe benefits provided to staff who are not religious practitioners. Even for these staff, disclosure is only required if the total taxable value of fringe benefits for the employee exceeds $2,000.
It is the grossed up taxable value of the benefit that is shown on the payment summary. Benefits are grossed up at the 1.8862 rate (for the years ending 31 March 2018, 2019, 2020 and 2021), meaning that the reportable fringe benefit shown on the payment summary must exceed $1,886.20 (grossed up value of $1,000 of benefits.) Reportable fringe benefits exclude car parking and entertainment benefits.
You must forward to the Taxation Office all TFN and other withholding declarations received from employees within 14 days of receipt. You must notify the Taxation Office on your Business Activity Statement or Instalment Activity Statement of the amount of gross payments and PAYG tax withhold for the period.
Gross payments include:
- salaries and wages;
- allowances other than for work related expenses that may be able to be claimed as a tax deduction by the employee;
- holiday pay or bonuses; and
- amounts paid for unused long service leave and annual that accrued after 17 August 1993, except if paid in respect of redundancy, invalidity or an approved early retirement scheme.
You must also complete an annual report, known as a PAYG payment summary statement, for the relevant financial year. This report, together with the ATO Original of the PAYG payment summaries – individual non-business, must be lodged by 14 August following the end of the financial year. The Taxation Office should send you a pre-printed summary statement in June each year.
Other PAYG Withholding Events
Supplies of Goods or Services
Where you make payments to individuals or entities that are not employees, you will still need to deduct PAYG withholding unless an exemption applies. The most commonly used exemption is the provision of an ABN. If the supplier quotes ABN and you have no reason to believe the ABN is incorrectly quoted, you do not need to deduct any tax. Other exemptions to the requirement to withhold tax include:
- The payment excluding GST does not exceed $75;
- The supply is wholly input taxed (for example residential rent, financial services, most school tuckshops); and
- The payee is an individual and the supply is made in the course of a private recreational pursuit or hobby, or is wholly of a private or domestic nature for the payee. The payee should give you a written statement to that effect and you should have no reasonable grounds to believe the statement is false or misleading.
You can enter into a voluntary agreement with an individual who is not an employee to withhold tax. The individual must have an ABN. A voluntary agreement can apply to a specific task or apply to successive arrangement between you and the payee. Either you or the payee can end a voluntary agreement at any time by notifying the other in writing. A voluntary agreement can be downloaded from the Taxation Office website: https://www.ato.gov.au/Forms/Voluntary-agreement-for-PAYG-withholding/.
Payments on Termination
When an employee leaves, you will usually make a final payment to them. These final payments often receive special tax treatment. Therefore you need to determine how much tax to deduct. There may also be specific employer reporting obligations.
Employment Termination Payments (ETPs)
An employment termination payment is a lump sum payment made by an employer to an employee in consequence of the termination of employment or paid to another person because of the death of the employee. It includes payments in lieu of notice and golden handshakes. It does not include unused annual leave and long service leave and the tax free components of a genuine redundancy payment or an early retirement scheme payment.
Any part of an employment termination payment that relates to pre 1 July 1983 service is tax free. From 1 July 2012, the concessional tax treatment for ETPs has changed that two caps may apply:
- ETP cap ($205,000 in 2018-19 income year)
- Whole-of-income cap ($180,000). This cap was introduced from 1 July 2012. The cap amount is reduced by all taxable income the employee earned during the income year in which the ETP was paid.
Which caps are relevant depend on whether an ETP payment is excluded or non-excluded. If an ETP payment is an excluded ETP payment, then only the ETP cap applies. If an ETP payment is a non-excluded ETP payment then both caps have to be considered (see below).
Excluded ETP payments are:
- Genuine redundancy payments (see below);
- Early retirement scheme payments (see below);
- Payments made to employees who lose their job due to invalidity (see below);
- Compensation payments for disputes relating to personal injury, harassment, discrimination or unfair dismissal; and
- Death benefits payment (see below)
All other ETP payments are non-excluded.
The taxable component of excluded ETP payments are taxed concessionally up to the ETP cap provided it is received within 12 months of the termination of employment. For the year ended 30 June 2019, the ETP cap is $205,000. For employees on or over preservation age (depends on date of birth, see bottom of page), payments up to the ETP cap is taxed at 17%* with any excess being taxed at the top marginal rate of 47%*. If the employee is under preservation age, payments up to the ETP cap is taxed at 32%*with the balance taxed at 47%*.
All other payments are non-excluded payments. Non-excluded payments are taxed at the lower of the ETP cap, $205,000 and the 2018-19 whole-of-income cap, $180,000. The whole-of-income cap is reduced by any taxable income the employee receives in the income year in which the employee receives the ETP payment. (For example, if an employee receives salary of $30,000 in the 2018-19 tax year, before receiving an ETP payment in that year, their whole-of-income cap will be reduced to $150,000).
Non-excluded ETP payments are taxed concessionally up to the relevant cap (lower of ETP cap or whole-of-income cap) provided it is received within 12 months of the termination of employment. For employees on or over preservation age (depends on date of birth, see bottom of page), payments up to the relevant cap is taxed at 17% with any excess being taxed at the top marginal rate of 47%*. If the employee is under preservation age, payments up to the relevant cap is taxed at 32%* with the balance taxed at 47%*.
Where an ETP payment is composed of both excluded and non-excluded components, the excluded component is used first to reduce the ETP cap. Then, for the non-excluded payments, you must determine which is the lower of the (reduced) ETP cap and whole-of-income cap. For a detailed example please refer to:
*Note that this includes 2% medicare levy.
Any part of an employment termination payment that relates to pre 1 July 1983 service is again tax free. The remaining component of a death benefit termination payment is concessionally taxed up to the ETP cap provided it is received within 12 months of death. The ETP cap for death benefits is also $205,000 for the 2018-19 year. If the death benefit is paid to a dependent, then it is tax free up to the cap. Any excess is taxed at 47%*. If the death benefit is not paid to a dependent, it is taxed at 32%* up to the ETP cap with the balance taxed at 47%*.
A dependent is:
- A surviving spouse or defacto spouse;
- An ex-spouse;
- Any child of the deceased under 18; and
- Any person who is financially dependent (receives all or a major amount of necessary financial support) on the deceased at the time of death or at the time the payment is made.
The Government has extended the meaning of dependent to include interdependent relationships. An interdependent relationship is one of continuing mutual commitment to financial and emotional support between two people who reside together. The definition will also include a person with a disability who may live in an institution but is nevertheless interdependent with the deceased. Examples provided by the Government include:
- Two elderly sisters who reside together;
- An adult child who resides with and cares for an elderly parent; and
- Same sex couples who reside together.
Transitional rules apply if a person was entitled at 9 May 2006 to a payment made on the termination of employment under a written contract, an Australian or foreign law or certain workplace agreements. Apart from ETPs under the transitional arrangement, ETPs can no longer be rolled over into superannuation.
*Note that this includes 2% medicare levy.
Churches are unlikely to be able to offer early retirement schemes. Such schemes must be:
- Offered to all employees within a class (For example, all employees of a particular age);
- Entered into with a view to rationalising or reorganising your operations with specific objectives; and
- Be approved by the Commissioner of Taxation.
Where an employee ceases employment under an early retirement scheme, part of the termination payment will be tax free. For the 2019-20 income year, the tax free amount is $10,638 plus a further $5,320 for every completed year of service. Early retirement applies to those seeking retirement before the age of 65. The non-tax free component is treated as a taxable employment termination payment.
To be an invalidity payment, the employee must terminate employment because of their disability. You require two legally qualified medical practitioners to certify that the disability is likely to result in the taxpayer being unable ever to be employed in a capacity for which they are reasonably qualified because of education, training or experience. Disability can be physical or mental. Termination of employment must occur before the last retirement date relating to the employment. This will be 65 unless there is some other date specified in the conditions of employment or an award.
Where an employee ceases employment due to invalidity, part of the termination payment is tax free. The tax free component is calculated as AB/C where:
A is the amount of the termination payment
B is the number of whole days in the period from the date when the employment terminated until the last retirement day (usually age 65)
C is the sum of the number of whole days in the eligible service period plus the number of days in item B
The non-tax free component is treated as a taxable employment termination payment.
Redundancy applies where the employer no longer requires employees to carry out work of a particular kind. It generally arises where dismissal is not caused by any consideration peculiar to the employee. Bona fide redundancy might arise where a church is closed down or reduces the number of employees. Termination must occur before the employee’s 65th pr 67th birthday depending on their year of birth (see dates here).
A payment made in lieu of notice on termination of employment for redundancy is treated as bona fide redundancy provided it is additional to what the person would have received from voluntary retirement.
Where an employee ceases employment due to bona fide redundancy, part of the termination payment will be tax free. For the 2019-20 income year, the tax free amount is $10,638 plus a further $5,320 for every completed year of service. The non-tax free component is treated as a taxable employment termination payment.
If you are paying a death benefit to a dependent, no tax should be deducted. There are no specific reporting requirements unless the payment exceeds $5,000, in which case you must notify the Taxation Office of the payment. You should contact the Taxation Office to obtain this form.
Payments to non-dependents are treated as untaxed eligible termination payments. However, special tax rates apply. If the non-dependent has provided a tax file number, tax at 31.5% should be deducted from the post 1 July 1983 component. No tax should be withheld from the pre 1 July 1983 component. If no tax file number is provided, you must withhold tax at 46.5% from both components.
Death benefit payments must be made in cash and cannot be rolled over to a superannuation fund.
If the employee is leaving for reasons of bona fide redundancy, approved early retirement or invalidity, then tax should be deducted from the payment for unused annual leave at the rate of 32%. Note that if the employee uses up all their annual leave before they cease employment, annual leave will be treated as ordinary salary and taxed accordingly.
If the employee is leaving for other reasons, you need to split the unused annual leave between leave that accrued prior to 18 August 1993 and leave that accrued after that time. As an employee is considered to have used their oldest leave entitlements first each time they take holidays, very few employees will still have leave accrued from before 18 August 1993. However, if there is leave (including leave loading) accrued prior to this date, deduct tax on this component at 32%.
For leave accrued post 18 August 1993, you should deduct tax using the marginal rates. How to calculate the relevant marginal rates, and a worked example, can be found here: https://www.ato.gov.au/Rates/Schedule-7—Tax-table-for-unused-leave-payments-on-termination-of-employment/
Note that all payments for unused annual leave made after the death of an employee are tax-free. Therefore, you should deduct no tax in this situation. The payment should still be disclosed on the employee’s PAYG payment summary.
Long Service Leave
If the employee’s eligible service period commenced before 16 August 1978, you will need to divide the long service leave payout into the pre and post 16 August 1978 components. You should deduct tax on only 5% of the pre 16 August 1978 component at normal salary rates.
Tax on the post 16 August 1978 component depends on the reason for termination of employment. If the employee is leaving for reasons of bona fide redundancy, approved early retirement or invalidity, then tax should be deducted at the rate of 31.5%. If the employee is leaving for other reasons, leave accrued between 16 August 1978 and 18 August 1993 is taxed at 31.5%. Leave accrued after 18 August 1993 is added to salary income and taxed at normal rates.
To calculate the tax on the 5% of leave accrued pre 16 August 1978 and the total leave accrued post 18 August 1993, you should divide this total amount by 52 and add to normal weekly gross earnings. Use the Taxation Office tax instalment schedules to calculate the difference between tax deducted from normal weekly earnings and the tax deducted from the new earnings amount. Multiply the result by 52.
Note that all payments for unused long service leave made after the death of an employee are tax-free. Therefore, you should deduct no tax in this situation. The payment should still be disclosed on the employee’s PAYG payment summary.
Preservation Age Table
Date of Birth
Before 1 July 1960
1 July 1960 – 30 June 1961
|1 July 1961 – 30 June 1962
|1 July 1962 – 30 June 1963
|1 July 1963 – 30 June 1964
|From 1 July 1964
There is no legal definition of volunteer. If you make payments to people who do work for you, you need to determine whether the person is a volunteer, an employee or independent contractor.
Factors that may indicate an individual is an employee include:
- paid for time worked;
- receive paid leave;
- agree to provide their personal services;
- work set hours; and
- are recognised as part of parcel of the church’s organisation.
Independent contractors differ from employees in that:
- they are contracted for a given result (For example, paint the church hall);
- they can determine how the work is performed and can delegate tasks to others;
- they bear the commercial risk and can make a profit or a loss;
- they generally provide all their own materials, tools and equipment;
- they do not receive paid leave; and
- they offer their services to the public at large.
Volunteers do not fit into either of the above categories. They do not work under a contractual obligation for remuneration. They enter into any service of their own free will and do not usually expect to make a profit from the arrangement.
Having determined that you do have volunteers, you need to consider the treatment of any payments made to your volunteers. The Taxation Office includes the following general rule.
- Volunteers do not have to pay tax on payments or benefits they receive in their capacity as volunteers, and
- Non-profit organisations are not liable for PAYG withholding on payments they make or FBT on benefits they provide to volunteers.
However, as always, there are exceptions and these are discussed below.
Payments to volunteers may have many different names, including honoraria, reimbursements and allowances. However, how the payment is described will not necessarily determine its tax treatment. You need to look at the facts in each case, particularly the circumstances of the volunteer. If the activity for the volunteer is largely a pastime or a hobby it is unlikely the payment will be assessable income to them. Characteristics of a non-assessable payment include:
- Covers expenses incurred or to be incurred;
- Has no connection to the volunteer’s usual income producing activities;
- Is not received as remuneration or as a consequence of employment;
- Is not relied on or expected by the volunteer to meet daily living expenses
- Is not legally required;
- Is a token amount compared to the services provided or expenses incurred; and
- Honoraria and Allowances.
The Taxation Office describes an honorarium as an honorary reward for voluntary services or a fee for professional services voluntarily rendered. Allowances are a predetermined amount to cover estimated expenses. They are paid even if the volunteer does not fully expend the amount.
You need to look at the factors listed above to determine whether honoraria and allowances are assessable. If a payment is not taxable to the volunteer, neither are any expenses they incur deductible to them.
Jane, a church member, helps out in the church office on an irregular basis. You pay her a token amount as appreciation for her efforts. This amount is unlikely to be assessable income to Jane. However, Susan runs a legal practice and offers to assist on a voluntary basis in drawing up legal documents for the purchase of a church property. Any payment to Susan is likely to be assessable. The payment would be a reward for services connected to her usual income producing activities
If the church concludes that the recipient is not an employee or a religious practitioner but is unsure whether the payment is assessable income to the volunteer, it may be possible to leave the decision to the recipient. If the volunteer believes the payment is not assessable, they can complete the form “Statement by a supplier (Reason for not quoting an ABN to an enterprise)”.
With regard to honorariums paid to visiting speakers, it may be possible to avoid the need to consider whether to deduct tax by paying the honorarium directly to the visiting speaker’s home church or governing body. However, GST will then need to be considered if the recipient is registered for GST. If the two churches are part of the same GST religious group, no GST liability arises. If the visiting speaker is participating in the service and the payment is to another church, the payment is likely to be a GST free religious service. If there is no GST exemption, you will need to obtain a tax invoice in order to claim back the GST input tax credit.
A reimbursement arises when the volunteer is reimbursed exactly for an expense incurred. Factors that also indicate a reimbursement include the requirement for the volunteer to provide documentation of the expenses and that any unexpended amounts must be returned.
Reimbursements will not be assessable if:
- The payment does no more than reimburse the volunteer for expenses actually incurred, and
- The payment is not for a supply made in the course of an enterprise of the volunteer.
Dan, who runs a plumbing business, uses some of his materials to repair leaking pipes at the church hall. Any reimbursement by the church for costs incurred will be assessable to Dan as they relate to his plumbing business.
Implications for the Church
Claiming Input Tax Credits
Churches can claim the GST included in the cost of items it buys for its volunteers or expenses it reimburses to volunteers provided the activity is not input taxed. If the expense relates to an input taxed fundraising event or a non-profit sub-entity, the GST cannot be claimed.
Remember that tax invoices must be held if the GST inclusive expense is more than $82.50. You should ensure that you obtain the necessary paperwork from volunteers before reimbursing their expenses.
You cannot claim input tax credits for the GST included in the cost of entertainment. However, light meals, such as hot or cold sandwiches, morning and afternoon tea or non-alcoholic refreshments, are not entertainment and the GST can be claimed.
Food or drink provided in a social setting such as dinners, parties and social functions are entertainment.
FBT may be payable on benefits provided to employees or their associates in respect of their employment. Generally benefits provided to volunteers do not meet these requirements.
Payments to volunteers are not usually subject to PAYG withholding. However, if the payment is made to a volunteer who is carrying on an enterprise (eg the plumber who helps out fixing the damaged pipes), you will need to withhold tax if the payment is more than $75 and no ABN is provided.
WorkCover is insurance against injury in the workplace and covers the employer for the cost of wage replacement, medical and legal costs for any of its workers injured at work. It is a state levy and therefore the definition of religious practitioner for tax purposes does not apply. Only payments you make to common law employees or certain contractors are included rateable remuneration for WorkCover purposes.
In Victoria, WorkCover is compulsory for employers paying more than $7,500 per year in wages, salaries, superannuation, taxable fringe benefits and certain other payments. The fringe benefits amount to use is the grossed up figure.
In Victoria, WorkCover is not paid on exempt benefits. However, if there is a workplace accident, you will still be insured for the exempt benefits component of the employee’s wages.
Victorian WorkCover is currently levied at an average of 1.62% of wages, however this rate varies depending on the claim history of the employer, the industry they work in and the size of the employer.
Employers who pay wages over a certain threshold must register for payroll tax. In Victoria the threshold is $54,166 monthly, and payroll tax is paid at 4.85% of wages (except for Victorian regional employers) over $650,000 per annum. (The rates and thresholds do vary substantially from state to state.) Payroll tax is payable monthly by the seventh day of the following month.
The definition of “wages” includes wages, salaries, commissions, some allowances, superannuation, fringe benefits, and many other payments to employees and some contractors.
Wages are usually exempt where they are paid by churches, however wages paid by churches to people engaged in commercial or business activities are not exempt.
In addition, fringe benefits that are exempt under the Fringe Benefits Tax Assessment Act will also be exempt for payroll tax purposes.
Therefore, churches will almost never have a payroll tax liability.
More information, and circumstances for Victorian regional employers, can be found here: https://www.sro.vic.gov.au/payroll-tax.
Superannuation Guarantee Charge
Churches are required to provide a minimum level of superannuation support for all their employees, including their ministers. For the 2019-20 income year, minimum superannuation contributions are 9.5% of the employee’s earning base up to a maximum salary and wages amount of $55,270 per quarter. Failure to make the required contributions by the due date will result in the imposition of the superannuation guarantee charge.
Updated superannuation guarantee percentages for the next few income years can be found here: https://www.ato.gov.au/rates/key-superannuation-rates-and-thresholds/?anchor=Superguaranteepercentage#Superguaranteepercentage
When must payments be made?
Prior to 1 July 2003, you could make these contributions on an annual basis by 28 July following the year end.
However, from 1 July 2003, employers must make their superannuation contributions at least quarterly, rather than annually. Contributions must be paid by 28 October, 28 January, 28 April and 28 July each year for the previous quarter. Contributions must be made to a complying superannuation fund or a Retirement Savings Account.
Prior to 1 January 2005, employers were required to report in writing to their employees and advise the employee of:
- the amount contributed;
- the name of the fund into which the contributions were made; and
- if possible, the fund’s telephone number.
As there was no specific format for the report, you could report to your employees in any of the following ways:
- letter signed and dated by the employer;
- payslip; or
- copy of a receipt for contributions from the superannuation fund.
From 1 January 2005, this reporting requirement was abolished. Therefore unless there is a requirement to report superannuation contributions in the employee’s award, no reporting obligations now apply
What is included in the employee’s earnings base?
The employee’s earning base is generally ordinary time earnings paid during the period. It includes salary and wages, remuneration while on annual leave, sick leave and long service leave and performance bonuses. However, it excludes fringe benefits, ex gratia payments, non-performance bonuses, annual leave loading, payments during maternity leave and termination payments.
By salary packaging a minister’s salary, the church may reduce its superannuation payments as there is no obligation to provide superannuation contributions in relation to fringe benefits. However, many churches choose to calculate superannuation as 9.5% of the minister’s entire package, rather than just the salary component.
Employers are not required to make superannuation contributions for employees aged 70 or over. Nor are contributions required if the salary and wages paid for the month is less than $450. Part time employees (ie working no more than 30 hours per week) under 18 years of age are also excluded.
Failure to pay the required contributions
Employers who do not meet pay their superannuation contributions by the required date or fail to meet the minimum superannuation contribution level must pay the Superannuation Guarantee Charge (SGC). The charge comprises the outstanding superannuation contributions, plus administrative costs, charges and penalty interest. Failure to report contribution details to your employees may also attract a penalty. The SGC is remitted to the Taxation Office by using a form that can be down loaded from the Taxation Office’s website.
Member Choice Superannuation
Member choice of superannuation fund rules commenced on 1 July 2005. The compliance requirements only apply to the 9.5% superannuation guarantee contributions and not to any other contributions that you make for employees, such as through salary sacrifice.
Standard Choice Forms
One of the important aspects of the rules is the standard choice form. The form allows employees to choose an alternate fund of their choice. If they choose an alternate fund, they must provide you with specific fund information before you can accept their choice. This includes the name and contact details of the fund, the fund ABN, account number, method of receiving payments, and other written statements.
The form also provides the name of the fund into which the employer will contribute if the employee does not make a choice. The form can be downloaded from the following Government website. https://www.ato.gov.au/uploadedFiles/Content/SPR/downloads/SUPER17983Superannuation_standard_choice_form.pdf
To be a complying default fund, it must offer a minimum level of life insurance cover for members at a premium of at least $0.50 per week and with the level of cover shown in the following table:
Level of insurance
The new laws impose the following obligations on employers in regards to the standard choice form:
- By 28 July 2005, you must give a standard choice form to each employee you employed on 1 July 2005
- For new employees commencing after 1 July 2005 you must give a standard choice from within 28 days of their employment commencement
- You must give a standard choice form within 28 days of being asked by an employee unless you have already given the employee a form within the last 12 months
- If you become aware that a fund chosen by an employee can no longer receive your contributions (for example the fund is no longer a complying fund), you must give the employee a standard choice form within 28 days
Note you do not need to give a standard choice form to an employee if the employee has already, by written notice to you, indicated an eligible fund chosen to receive their superannuation guarantee contributions. You are only obliged to allow one choice of fund in any 12 month period.
In limited circumstances, you may reject a fund chosen by the employee. Circumstances include the employee failing to provide sufficient information about the chosen fund or the employee has chosen another fund within the last 12 months. If the fund is not rejected, it becomes the employee’s chosen fund at the latest two months after you receive the standard choice form.
There appears to be no exclusion from the rules for employees where no superannuation guarantee contributions are required. For example, no contributions are required for employees who receive less than $450 per month. Apparently you are still required to provide these employees with a standard choice form.
It is important to understand that employers should NOT advise employees of which fund to choose or provide any investment advice unless they hold an AFS License. Significant penalties can apply for providing investment advice.
You will need to ensure you can substantiate that you have complied with the super choice requirements. This should include an acknowledgement from the employee that the Standard Choice form was provided. Note you do not need to follow up employees who have not returned their standard choice form. If no response is received, you should pay the superannuation guarantee amounts to the default fund.
State and Federal Awards
Provisions in State awards requiring contributions to be made to a particular superannuation fund take priority over the choice of fund laws. Therefore contributions made by employers in accordance with State awards are deemed to comply with choice of fund provisions.
However, choice of fund rules take precedence over Federal awards. If an employee chooses a superannuation fund, the choice will bind the employer in preference to the superannuation fund set out in the award. If the employee fails to make a choice, the Federal award will then apply.
Penalties for Non-Compliance
Failure to comply with the choice of fund laws results in an increased superannuation guarantee charge. The penalty is paid to the employee.
The penalty is generally 25% of the superannuation guarantee contributions paid but subject to a maximum per employee of $500 for a quarter or for a notice period. A notice period can be several quarters as determined by the Commissioner.
An employee’s earnings for the quarter are $15,000. You pay the required superannuation guarantee contributions of 9%, being $1,350, to a complying superannuation fund within 28 days of the end of the quarter. However, you did not give the employee an opportunity to choose the fund to which they wanted their contributions paid. The penalty for failure to comply with the choice of fund rules is:
25% x $1,350 = $337.50
If the calculation had resulted in an amount greater than $500, the penalty would have been reduced to $500.