Introduction – Religious Practitioners
Further PAYG Withholding Issues
Zero PAYG Withholding Rate
Tax to be Withheld
PAYG Payment Summaries
Alternatives to Withholding Tax
Religious Practitioners – Introduction
The Government has passed legislation to amend the treatment of religious practitioners for tax purposes. The changes affect the GST, FBT, PAYG withholding and ABN rules for religious practitioners.
Reason for the Changes
Previously the tax treatment of religious practitioners differed depending on whether or not the person was a common law employee. Some religious practitioners are not employees at common law, but were considered to be holders of an office or undertaking activities in the pursuit of a vocation.
Under the previous tax laws, these non-employee religious practitioners were treated as carrying on a business for taxation purposes. They may have needed an ABN and, in some cases, may also have needed to be registered for GST. They were not entitled to FBT exemptions available for religious practitioners who were employees.
The new rules ensure that there is a common treatment for all religious practitioners undertaking activities as a member of a religious institution. All religious practitioners are now treated as common law employees for taxation purposes regardless of their actual status.
This treatment only applies for GST, ABN, PAYG and FBT purposes. It does not affect the legal status of religious practitioners at common law.
When do the Rules Apply?
The new laws apply where a “religious practitioner is undertaking activities in the pursuit of a vocation as a religious practitioner, and as a member of a religious institution”. The new laws apply not only to duties directly related to religion, but also to administrative and other activities performed. Note that where a minister is undertaking principally administrative duties, the church may not entitled to the FBT exemption as discussed in Exemptions for Churches.
If a minister is undertaking activities that are not related to a religious institution, then the rules do not apply. If the minister is affiliated with a religious institution, the rules apply for activities undertaken in pursuit of a vocation.
All of the relevant Acts now use the same definition of religious practitioner and it is based on the current definition in the FBT Act. This is detailed in Exemptions for Churches, as is the definition of religious institution.
Effect on Religious Practitioner
In respect of the relevant activities, the religious practitioner is:
- Entitled to the FBT exemption for certain fringe benefits provided by a religious institution
- Not entitled to be registered for GST
- Not entitled to an ABN
A religious practitioner that is running another business or not associated with a religious institution is still entitled to an ABN and to be GST registered in respect of those activities.
These changes have been backdated to 1 July 2000. Where a religious practitioner was registered for GST, then technically their Business Activity Statements previously lodged should be amended or withdrawn. However, it appears that in many cases the Taxation Office is simply ignoring the fact that BASs have been lodged for these quarters.
Effect on Religious Institution
For GST purposes, the activities of the religious practitioner are considered to be the activities of the religious institution. Therefore, the religious institution may need to charge GST. These rules have been backdated to 1 July 2000.
Based on an example in the Explanatory Memorandum , if a minister buys prayer books and sells them to members of the church, the sales will be considered to be sales by the church. Therefore, the church may need to remit 1/11 of the proceeds as GST. The church will also be entitled to claim an input tax credit for the GST included in the purchase price for the books purchased by the minister.
The PAYG withholding system has been amended to include payments to religious practitioners. Ministers not considered to be common law employees of the church will no longer be able to receive their payments from the church on a pre-tax basis. The church will need to withhold tax as if the minister is an employee. The church will provide the minister with a “PAYG Payment Summary – Individual Non Business” (formerly known as a group certificate) at the end of each financial year.
This amendment apply from 1 July 2002. Therefore churches that have not previously been withholding tax on payments to their religious workers should now have registered for PAYG withholding. To register, a church should complete the form “Application to Register for the New Tax System Add a New Business Account” (NAT 2954). This form is available from the Taxation Office or can be down loaded from its website.
Taxation Office Examples
The Taxation Office has issued several interpretative decisions on when a religious practitioner is “undertaking activities in the pursuit of a vocation as a religious practitioner and as a member of a religious institution” and therefore when supplies should be treated as those of the religious institution rather than the religious practitioner. Note that an interpretative decision is only binding on the Taxation Office in relation to the particular taxpayer to whom it was issued. Nevertheless these decisions are useful in gaining an understanding of the Taxation Office’s position on various issues .
Sale of Religious Tracts
Using details from the first interpretative decision, a religious practitioner buys religious tracts which set out the doctrines and practices of the church or the denomination. The religious practitioner then sells the religious tracts to church members. The Taxation Office held that for GST purposes the sale of the religious tracts was a sale by the church rather than a sale by the religious practitioner. If the church is registered for GST it will need to remit GST on the sale proceeds, unless a GST exemption applies. Although not commented on the Taxation Office decision, it seems unlikely that any GST exemption will be available.
Writing and Sale of a Book on the Church’s History
This applies where the religious practitioner writes a book about the history of the church or denomination of which they are a member and plans to sell the book to the general public. In this case, the Taxation Office concluded that the sale of the book was not an activity undertaken by the church. It determined that the writing and sale of a book was not part of a religious practitioner’s normal activities and was not an activity undertaken in pursuit of their vocation.
Writing and Sale of Booklets on Belief and Practices
This particular decision considers the meaning of religious practitioner and religious institution. A person is the self-appointed leader of a large group of people. The group believes this person can assist them in achieving spiritual enlightenment. The philosophy of the group includes belief in a supernatural being. The religious practitioner is authorised to conduct worship and other ceremonies. This leader writes booklets that set out the beliefs and practices followed by the group with the intention of selling these booklets to prospective group members.
The Taxation Office concludes that the group does qualify as a religious institution as it has a belief in a supernatural being and has an acceptance of canons of conduct, which give effect to that belief. It also concluded that the leader of the group was a minister of religion and was therefore also a religious practitioner.
Although the interpretative decision does not consider this issue, it can then be concluded that the sale of booklets setting out the beliefs and practices of the group must be treated as sales by the religious institution. The religious institution will need to remit GST on those sales, unless a GST exemption applies.
Implications for Churches
Supplies made by employees of the church will generally be treated as supplied by the church for GST purposes. However, unusual activities and activities undertaken by people other than employees can still be taxable supplies of the church and subject to GST. This can include supplies made by religious practitioners and it should be remembered that religious practitioners and ministers of religion can include people other than ordained ministers.
Churches should ensure they address the GST liabilities on all supplies relating to activities undertaken by members, employees, agents and religious practitioners. If you do not want a particular activity to be subject to GST, you can consider utilising the non-profit sub-entity or input taxed fundraising provisions.
Further PAYG Withholding Issues
PAYG withholding rules can extend beyond payments that the church might make to its minister. The actual definition states that an entity must withhold an amount from a payment it makes to a religious practitioner for an activity if:
- The activity is done by the religious practitioner in pursuit of their vocation as a religious practitioner, and
- The activity is done by the religious practitioner as a member of a religious institution, and
- The payment is made by the entity in the course or furtherance of an enterprise the entity carries on.
There is no requirement for the religious practitioner to be an employee of the particular entity making the payment. Therefore, if a church makes a payment to any religious practitioner for an activity and the activity is done as a member of any religious institution, the church must withhold tax. For example, technically a payment to a locum minister may be subject to PAYG withholding.
Similarly, there is no requirement for the payer to be a religious institution. For example, payments by a funeral company to a minister are included in these rules.
A further example can be found in an interpretative decision on the Taxation Office website. A wedding planning business engages a religious practitioner to perform weddings. The religious practitioner is not an employee. As stated above, a business must withhold tax on payments to a religious practitioner if the activity undertaken by the religious practitioner is done in pursuit of their vocation and as a member of a religious institution. The Taxation Office concluded that these conditions were met and therefore the wedding planning business must withhold tax from payments it makes to the religious practitioner.
The Taxation Office has varied to nil the amount that is required to be withheld on certain payments made to religious practitioners and these are discussed in the next section.
Zero PAYG Withholding Rate
The Taxation Office has issued a PAYG bulletin and two PAYG fact sheets for religious practitioners. These documents provide some concessions regarding the withholding of tax on payments to religious practitioners.
Following representations by various denominations, the Taxation Office has issued a fact sheet stating that the withholding rate has been varied to nil for certain payments to locums. 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. It is important to note that the nil withholding rate does not alleviate the obligation on the church to issue PAYG payment summaries at year-end in respect of those payments, but merely relieves the entity of the obligation to deduct tax.
A quarter is defined as being a three month period ending on 31 March, 30 June, 30 September or 31 December. It cannot be taken as any three-month period. The zero withholding concession commences on 1 July 2002.
If a locum provides services for more than 2 continuous days in the quarter, tax must be withheld on the whole payment.
If a locum provides services for 2 days initially and is then engaged for a further period in the same quarter, tax is not required to be withheld on the payment for the initial 2-day period. It must be withheld on the subsequent payments in that quarter.
The word “locum” is not defined by the Taxation Office. The example given by the Taxation Office relates to locum services provided by another minister while the minister is on annual leave.
However, the Macquarie dictionary defines locum to mean a “temporary substitute”. There is a reasonable argument that most services provided by a guest speaker are a temporary substitute for a usual event, for example, the minister’s sermon. However, discussions with the Taxation Office have indicated that it was not the Taxation Office’s intention that the fact sheet be extended to these payments.
Subsequently 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. The nil rate of withholding on such payments applies provided the services undertaken by the religious practitioner do not exceed two days in any one quarter. We are aware of some denominations that have applied for this nil withholding rate on payments to guest speakers, etc. If you are unsure whether your denomination has such a variation, you should contact your denomination directly.
The nil variation only alleviates the need for churches to withhold tax. A church is still required to ensure that a TFN declaration is completed and signed by the religious practitioner. At the end of the financial year, the church must issue a PAYG payment summary and include the payment in the reconciliation provided to the Taxation Office. Note that if the religious practitioner does not quote their tax file number on the TFN declaration, there is still no requirement for the church to withhold tax. The nil withholding variation overrides the rules regarding deducting tax where no TFN is provided.
The Taxation Office has extended the general rules for PAYG withholding on allowances to allowances paid to religious practitioners on or after 1 July 2002. The rules apply to payments made by any type of payer to a religious practitioner who is not an employee.
Tax must be withheld on most allowances including allowances for non-deductible expenses, such as meals and travel from home to the usual place of work.
The allowances must also be disclosed on the PAYG payment summaries at the end of the financial year.
However, tax does not need to withheld on cents per kilometre car allowances provided:
- Total kilometres reimbursed during the year does not exceed 5,000, and
- Reimbursement rates do not exceed Taxation Office rates.
Although tax is not withheld, cents per kilometre car allowances must still be disclosed on the payee’s annual PAYG payment summary as an allowance.
The Taxation Office rate under the cents per kilometre method from 1 July 2018 is 68 cents per kilometre.
A church may be able to utilise the rules regarding cents per kilometre rates for small payments to religious practitioners. For example, a payment to a speaker may be made in the form of reimbursement of kilometres traveled. This will alleviate the need to consider whether the payment is for locum services, although a payment summary must still be prepared at year-end.
Payments by Non-Religious Institutions
Where an entity that is not a religious institution makes a payment to a religious practitioner, the tax required to be withheld has been varied to nil in the following circumstances:
- The services provided are not for chaplaincy or counselling services (eg payments for funerals and weddings)
- The services are for chaplaincy or counselling but are less than:
$100 where the entity pays weekly;
$200 where the entity pays fortnightly; or
$433 where the entity pays monthly.
Where the payments meet the above requirements, the entity is not required to prepare PAYG payment summaries, however the religious practitioner may still be required to declare the payment as assessable income on their income tax return.
Tax to be Withheld
If the payment is not subject to a zero withholding rate, then PAYG tax will need to be withheld. The religious practitioner must complete a TFN declaration. If no declaration is completed, the entity must withhold tax at the top marginal tax rate, being 46.5%.
If the religious practitioner does complete a TFN declaration, then you will need to refer to the PAYG weekly withholding tables provided by the Taxation Office to determine the amount of withholding. These are the same tables the church uses to determine the tax to be withheld on the minister’s salary.
If the religious practitioner has no other employment on the day that they provide the service or activity, it is possible that no tax actually needs to be withheld. However, if the religious practitioner is employed elsewhere, they generally cannot claim the tax-free threshold when completing the TFN declaration for your church. Therefore, you are likely to need to withhold tax of at least 15%, even on small payments.
PAYG Payment Summaries
The church will need to provide PAYG payment summaries for all payments it makes to religious practitioners. Even if no tax was withheld due to the zero withholding rate, a payment summary must still be prepared.
Alternatives to Withholding Tax
One possible way of overcoming the PAYG withholding and reporting requirements is to make the payment to the religious institution rather than to the religious practitioner. The religious institution can then make the payment to the religious practitioner.
For example, a minister visits from another local church and takes the service. If you make a payment directly to the minister, the payment may be subject to the zero withholding rate. However, even if the zero rate applies, a PAYG payment summary must still be prepared at year end. As an alternative, you could make the payment directly to the minister’s home church. There is no requirement to withhold tax or prepare a payment summary. The minister’s home church can then pay the amount to the minister as part of his normal salary or as a fringe benefit.
The GST consequences of making a payment from one church to another church must be considered. In some instances, both churches will belong to the same GST religious group and no GST needs to be included. Even where the two entities are not part of the same GST religious group, the transaction may be a GST free religious service and therefore GST may not need to be charged