Our experience in working with hundreds of churches is that many churches often do not classify and process all payments to people legally. They pay cash* to people and expect that it does not need to conform with proper process or documentation.
When we ask people working on the accounts about the methods of payment, these are typical replies:
“Oh, we’re paying ‘cash’* because they’re just doing the cleaning, playing the organ, gardening . . . .“
“We don’t need invoices because they are only casual workers . . . .”
“They’re only preaching so we don’t want to ask for money paperwork . . . .”
“That’s the way we’ve always done it. . . .”
“Nobody’s ever told us this before. . . .”
“The auditor hasn’t said anything.”
“It’s just a small gift for all the all the work they do. . . .”
“They don’t want it to affect their SS benefits. . . .”
*Cash and Cash Payment in this article refers to payments made to people without any accompanying legally recognised documentation, such as tax invoice, employee documentation and timesheet or receipt. These payments may be paid using cash (Notes/Coins), cheques or bank transfer etc
So how does this happen and what must be done in future?
First is to understand about illegal payment processes.
The illegal payment process is mostly due to ignorance. Church treasurers or administrators are often unaware that rules and laws have changed. Some churches simply process payments to people the same way it has been done for many years and seem to have no idea that they may be acting illegally.
If you are paying people illegally, stop!
If you are not paying people legally, stop your current method immediately! Make arrangements to change your processes from now on and make payments correctly.
There are consequences for paying people incorrectly, and any of these may apply for your leadership team in your situation:
- disgruntled volunteers or workers may make retrospective claims for correct payments
- the church and/or the recipient is fined by the ATO
- the church and the recipient will have to remake the payment correctly and incur fines
- both the church and the recipient could be investigated by the ATO as suspect for other inaccuracies
- people working or volunteering around the church may not be covered by insurances, such was workers compensation or public liability
A musician left the church in unhappy circumstances and claimed incorrect wages and taxes over the many years they had worked and been paid “cash-in-hand”. The church had no case to rest on and so had to payout a large claim.
>>>>Correct payment methods and processes are essential<<<<
Since the implementation of the new tax system in 2000 the following applies when an organisation is paying people.
There are only 4 methods to pay people correctly, as:
- An employee – through payroll
- A supplier – for a tax invoice
- A private recreational pursuit or hobby – with a Statement by Supplier
- A Volunteer – for reimbursement of expenses
Following is an introduction to the correct processes and procedures.
For assistance with these for your church or organisation you are welcome to contact the team at benkorp
The correct procedures and documentation for these must be followed as below:
1. An Employee:
- a Tax File Declaration form is required to be completed and submitted to the ATO. Superannuation is also payable
- Employee must be paid under the Fair Work Commission legislation – Read More
Some people have the impression that setting up people as an employee is difficult. It is relatively easy with Xero and has many benefits for employee and employer.
2. A Supplier
- Must have an ABN.
- They may or may not be registered for GST
- Must supply a valid Tax Invoice – Read More
3. A Person not carrying out an enterprise
A person not carrying out an enterprise – it is is made as part of a private recreational pursuit or hobby
If payment is made to a person who is not an employee or does not have a registered ABN, Statement by a supplier form is required to be completed and must be filed with any other supporting documentation. If this form is not completed, then the church/paying organisation is required to withhold 48.5% of the amount and submit to the ATO in the next BAS.
An individual or a business that supplies goods or services can only complete a Statement by a supplier form if one or more of the following applies:
- they are not carrying on an enterprise in Australia
- they are an individual under 18 years and the payment does not exceed $350 per week
- the payment does not exceed $75, excluding any goods and services tax (GST)
- the service that the payment relates to is wholly input taxed
- they are an individual, and a written statement is provided to the payer to the effect that the service is either
- made in the course or furtherance of an activity done as a private recreational pursuit or hobby, or
- wholly of a private or domestic nature
- they are an individual or a partnership without a reasonable expectation of profit or gain
- they are not entitled to an ABN because they are not carrying on an enterprise in Australia
- the whole of the payment is exempt income.
Suppliers cannot use this form if any of the following apply:
- they are receiving payments for the service as an employee
- their activity is not wholly of a private or domestic nature
- they are receiving payments for the service as a company director or office holder
- they are receiving payments for the service under a labour hire arrangement or specified payment
- they are receiving payments for the service as a religious practitioner
- they are entitled to an ABN for the relevant activity.
4. A Volunteer
A payment to a volunteer that is not assessable income for the volunteer will have many of the following characteristics:
- The payment is to meet incurred or anticipated expenses.
- The payment has no connection to the volunteer’s income-producing activities or services.
- The payment is not received as remuneration or as a consequence of employment.
- The payment is not relied upon or expected by the volunteer for day-to-day living.
- The payment is not legally required or expected.
- There is no obligation on the part of your organisation to make the payment.
- The payment is a token amount compared to the services provided or expenses incurred by the volunteer. Whether the payment is token depends on the full facts surrounding the payment and volunteer’s circumstances.
For volunteers, see this link to the ATO site: https://www.ato.gov.au/non-profit/your-workers/volunteers/paying-volunteers/
Got more questions? Let us know