Fringe Benefits Tax exemption for Religious Practitioners
In Australia there are some special tax benefits for eligible Religious Practitioners and Pastoral Workers provided that particular rules are followed.
The Australian Tax Department introduced a Fringe Benefits Tax (FBT) in 1986.
A fringe benefit is an extra benefit/payment that might supplements an employee’s wage or salary Examples for these are a company car used for private, private health insurance, housing, or personal expenses.
When this tax was being discussed, complaints about the tax were made to the government by many religious organisations. Some large religious organisations provide full board (housing, food, transport etc) for their ministers and a very minimal wage or stipend. All these ‘benefits” would be taxable at the very high FBT rate if this tax was applicable for religious Institutions.
As a result, the government provided FBT concessions for Religious institutions. That is,
Religious institutions may be eligible for FBT concessions/exceptions for benefits they provide to their religious practitioners and therefore removing the requirement to pay FBT.
Click here for the Australian Taxation Office (ATO) webpage with further details
What does this mean? How does this benefit the minister or the church?
– Compared to companies and business that trade for a profit the religious practitioner or the religious institute pay less income tax to the ATO, and/or
– the overall cost of the religious practitioner to the religious institute may be less
This is because:
– The religious institution can provide benefits to the religious practitioner, that are income and FBT free, and
– the religious practitioner can also choose to sacrifice some of their gross wages to be added to the FBT and Income Tax free benefits amounts. Thereby reducing their taxable income in the form of a wage.
There are certain conditions that need to apply for the FBT exemption to be available. These are:
- The employer must be a Religious Institution
- The employee must be a Religious Practitioner
- The Payment must be a Fringe Benefit
1. The employer must be a Religious Institution
A religious institution is a not-for-profit body registered with the ACNC, that promotes religious purpose.
Generally, private schools, private universities and residential colleges will not be considered religious institutions. However, Bible colleges, seminaries and theological colleges may come within the definition of a religious institution.
Click here for the ATO webpage to read further about this.
2. The employee must be a Religious Practitioner
Subject to certain requirements, benefits provided by registered religious institutions to religious practitioners are FBT exempt if they are mainly for the practitioners’ pastoral duties, or other duties related to the practice, study, teaching or propagation of religious beliefs.
Religious Practitioner is a:
- minister of religion
- student at an institution who is undertaking a course of instruction in the duties of a minister of religion
- full-time member of a religious order
- student at a college conducted solely for training people to become members of religious orders.
Click here for some examples of Religious Practitioners and Pastoral duties
3. The Payment must be a Fringe Benefit
Fringe Benefits are not Salary & Wages (defined by ATO)
A Fringe Benefit A fringe benefit is a ‘payment’ to or for an employee or family, but in a different form to salary or wages. Click here for the ATO webpage on this topic
- must be paid to a third-party entity or a reimbursement for payments already made. Payments made directly to employees are taxable, and
- the arrangement must be in place (calculated, agreed and documented) before the work is performed. Click here for the ATO webpage on this topic
How to set up the benefits within the guidelines to benefit from the FBT free concessions.
Presuming the employer is a Religious Institution and the Employee is a Religious Practitioner as defined above and in the relevant ATO webpages to establish this arrangement, we recommend that you follow these steps:
Develop a detailed employee contract with details of entitlements, wages, Benefit ( sometimes referred to as allowances) and arrangements.
- Have the employee and employer clearly understand and agree on all the terms of a salary sacrifice arrangement and amounts; and
- Have the arrangement documented in a written agreement to avoid uncertainty and disputes, signed by both employee and employer.
Any salary and wages, leave entitlements, bonuses or commissions accrued before entering into an arrangement can’t be part of an effective salary sacrifice arrangement. Therefore, the amounts are taxable in the hands of the empoyee.
It’s important that salary arrangements between employee and employer are signed and in place before any work or pay has been actioned.
- Review the total package payable and decide on the following
- Gross Wages/Stipend
- Other Benefits (AKA allowances) – e.g. car allowance, housing, resource allowance
- What other benefits the Religious Practitioner will receive that does not include a payment of an allowance. For example, the provision of housing or car that is already paid for by the religious institution.
- Both parties agree on a percentage of the Gross wages that will be sacrificed as Fringe Benefits. (Some denominations recommend 30% or 40%. Some allow the employee to decide). The amount remaining as Gross Wages/Stipend will be paid directly to the employee after appropriate PAYG tax is deducted from the wage.
- For reference, the total amount of the “Sacrificed Salary and all the Other Allowances and Benefits” is generally named Non-Cash Benefits (NCB), Minister’s Expense Allowances (MEA), Minister’s Benefit Funds (MBF)
- Clearly document the agreed arrangement of the three points above. (See our recommended method below.)
- Establish a process that enables the payments of these benefits to be paid:
- Directly to the 3rd party supplier e.g., loan and rent payments, or
- To a specific Debit Card, that the religious practitioner can use to buy things, or
- To the employee upon receipt of adequate documentation (Preferably a Tax Invoice), or
- A mixture of the above methods
GST and Minister’s Benefits
In certain circumstances the Religious Institution can claim back the GST included in the Minister’s Benefit payments within the usual lodgement of the Business Activity Statement (BAS) process.
This is possible where the Religious Institute:
- is registered for GST, and
- holds valid Tax Invoices for the transactions with the GST claimed
The Religious Institution can choose to retain the GST received back from the ATO or allow the religious practitioner to have this benefit.
There are some circumstances under the Goods and Services Taxation (GST) legislation that disallow person from claiming GST on personal use items. An example of these would be pharmacy items and supermarket groceries.