Based on a paper first presented at the CMA 2007 annual conference
A significant trap that we see for ministries in employment law is the provision of exempt Fringe Benefits to its employees. We are regularly seeing ministry employers, such as churches and para-church organisations, providing exempt Fringe Benefits to employees in circumstances where that employee probably is not eligible for those payments.
Additionally, we have seen confusion regarding the proper calculation of income for Centrelink payments, and particularly whether exempt Fringe Benefit payments should be included in the income when calculating eligibility for these payments.
The result of a benefit being exempt is that the benefit is not a Taxable Fringe Benefit, and is therefore not reportable to the Tax Office by the employer or subject to income tax in the hands of the employee. However, if the benefit is provided to an ineligible employee, it can have negative impacts on both the employer and the employee.
Please note that this Paper only addresses the provision of exempt Fringe Benefits to Religious Practitioners. It does not address the payment of Fringe Benefits by Public Benevolent Institutions, for which other rules apply. However, it is our experience that most Christian organisations utilise the Religious Practitioner exemptions when paying exempt Fringe Benefits to their employees.
Question 1: Can Fringe Benefits be paid to persons who are not “employees”?
A preliminary question that we are sometimes asked is, can a person be given exempt Fringe Benefits even if they are not employees? The answer is, ‘generally yes’, provided that the person is a religious practitioner, and the payer is a ‘religious institution’.
This is particularly relevant for Christian organisations that want to avoid ‘employing’ their workers, particularly where the worker is a missionary or is responsible for raising their own support. In those situations, it may be more appropriate to regard that person as a ‘volunteer’ or ‘spiritual appointment’, as opposed to a ‘common law employee’.
There is a large amount of case law regarding the interpretation of religious practitioners as employees or ‘spiritual appointments’, and it is not our intention to discuss that now. However, what I do want to point out is that, even if you intend to pay an amount of money to a ‘volunteer worker’ or ‘spiritual appointee’, this payment can still be an exempt Fringe Benefit, provided the recipient of the money is a ‘religious practitioner’.
To get to this point, you need to follow a torturous path through the Fringe Benefits legislation and the wider taxation legislation. Unfortunately, the legislation is not easy to navigate.
Employee is defined in the Fringe Benefits legislation as meaning “a current employee, a future employee or a former employee”.
However, an “employee” does not take its usual, everyday meaning, or indeed, its meaning at common law. Rather, a “current employee” is defined as meaning “a person who receives, or is entitled to receive, salary or wages”.
The question to ask, therefore, is whether the religious practitioner is paid a salary or wages. To determine this, the Fringe Benefits legislation refers you to section 12-47 in Schedule 1 of the Taxation Administration Act 1953.
Under that section, a payment will be a ‘salary or wage’ if:
- It is a payment made to a religious practitioner for an activity, or a series of activities;
- The activity, or series of activities, is done by the religious practitioner in pursuit of his or her vocation as a religious practitioner;
- The activity, or series of activities, 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 that the entity carries on.”
Often, payments made to missionaries or other ‘spiritual appointees’ will fall within this definition, provided the payment is made to the person in the pursuit of their vocation as a religious practitioner, and the payer is a ‘religious institution’.
This is supported by Taxation Ruling 92-17. In that Ruling, the Tax Office states:
It does not follow that a religious practitioner who comes within the meaning of employee in subsection 221A(1) of the ITAA is an employee at common law. That question must be determined in accordance with common law principles.
Question 2: What makes an employee of a Christian organisation eligible for exempt Fringe Benefits?
Being employed by a Christian organisation of itself will not make a person eligible for exempt Fringe Benefits. Rather, the employee must satisfy a strict and narrow test regarding the nature of the employer and the nature of the employee’s role and duties within the organisation.
Section 57 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) provides as follows:
- The employer of an employee is a religious institution;
- The employee is a religious practitioner;
- The benefit is provided to, or to a spouse or a child of, the employee; and
- The benefit is not provided principally in respect of duties of the Employee other than:
- any pastoral duties; or
- any other duties or activities that are directly related to the practice, study, teaching or propagation of religious beliefs; the benefit is an exempt benefit.” (emphasis added)
Question 3: Is the employer a religious institution?
The term ‘religious institution’ is not defined in the Act, and therefore takes its ordinary meaning.
In the High Court decisions of YMCA of Melbourne v. FC of T (1926) 37 CLR 351 and Stratton v. Simpson (1970) 125 CLR 138, the Court held that an ‘institution’, for the purposes of Taxation legislation, is an establishment, organisation or association, instituted for the promotion of some object (especially one of public or general utility) that is religious, charitable, educational, etc.
As most, if not all, Christian organisations are non-profit organisations (whether as unincorporated associations, Companies limited by guarantee, incorporated associations under State legislation, or Letters Patent entities) they will satisfy the ‘institution’ test. This is because they will include, in their constituent documents, objects for the promotion of a public good.
For an institution to be a religious institution, it must have been created for religious purposes. That is, the purpose of the organisation, its objects and its activities must predominantly reflect its character as an organisation established to promote or attain a religious object. Again, most, if not all, Christian entities primarily or predominantly involved in Christian ministry will meet this ‘purpose’ test. In this regard, churches would certainly meet this test, as would most para-church organisations.
However, a tangential, remote or less than primary connection to Christianity will not be sufficient for an organisation to meet the ‘religious institution’ test. For an institution to be a religious institution, its primary or predominant purpose, objects and activities must be religious in character. Christian schools, for example, will not meet this test, as their primary or predominant activities, objects and purposes will involve providing education to students. Whilst part of a Christian school’s objects and activities will be religious in character, it is unlikely that this character will meet the ‘primary or predominant’ requirement.
Additionally, community care entities established by churches to take on the ‘community’ aspects of the Church’s ministry may also fail this test unless its activities, objects and purposes remain predominantly religious in character. If it drifts too far into ‘secular’ activities, such that the religious character fails to be predominant, it may not meet the ‘religious institution’ test. For example, if the primary object of the organisation is to provide counseling or welfare services to members of the community, then it may fail the test, and its ‘religious practitioner’ employees would not be eligible for exempt Fringe Benefits. Care must therefore be taken when preparing such an entity’s constituent documents.
Question 4 – Is the employee a “Religious Practitioner”?
In our view, this is the main cause for concern for Christian organisations when deciding to provide exempt Fringe Benefits to employees.
It is clear that, for an employee to be eligible for exempt Fringe Benefits, the employee must be a religious practitioner.
Section 136(1) of the FBTAA defines a religious practitioner as meaning:
- a minister of religion;
- a student at an institution who is undertaking a course of instruction in the duties of a minister of religion;
- a full-time member of a religious order; or
- a student at a college conducted solely for training persons to become members of religious orders.
The employee must therefore be a Minister of Religion, or training to be such, or a member of a religious order, or training to be such.
Minister of Religion
“Minister of religion” is not defined and will take its ordinary meaning. However, the Taxation Office (in Taxation Ruling 92/17), has stated that many, if not all, of the following characteristics should be present for determining if a person is a minister of religion:
- the person is a member of a religious institution (such as a member of a church or para-church organisation);
- the person is recognised officially by ordination or other admission or commissioning, or, where the particular religion does not require a minister to be formally ordained, the person is authorised to carry out the duties of a minister based on a specified level of theological or other relevant training or experience. In this regard, we consider that a person credentialed by a Denomination to perform ministry within that Denomination would fulfill this criterion.
- The person is recognised officially as having authority in matters of doctrine or religious practice. Such recognition would normally come from the church or denominational body of which the employee is a member.
- The person’s position is distinct from that of the ordinary adherents of the religion.
- The person has acknowledged leadership in the spiritual affairs of the religious institution (which, again, could come from the church or a denominational body).
- The person is authorised to discharge the duties of a minister or spiritual leader, including the conduct of religious worship and other religious ceremonies.
Note that the Taxation Office has indicated that most, if not all of these criteria must be satisfied. It is not sufficient for a person to meet 1 or 2 of the criteria. In our view, given the ordinary and usual meaning of ‘Minister of Religion’, this is entirely reasonable and appropriate.
It seems to us, based upon the criteria established by the Taxation Office, that a person must be sufficiently set apart as a spiritual leader (through ordination or, where the organisation does not practice ordination, a similar process of setting that person apart from the rest of the adherents), or be training for such, in order to qualify as a Minister of Religion.
It is our view that, for para-church organisations, the entity would need to be satisfied that the employee is a Minister of Religion within their own particular church, denominational body, or para-church organisation. However, if the employee was employed in a para-church organisation, we consider that they would still require some form of authority or recognition from their church or denominational body. Unless the employee, has been sufficiently set apart as a spiritual leader, the employee would not, in our view, qualify as a Minister of Religion.
Alternatively, the person could be a member of a religious order, or training to be a member of a religious order. Again, the term religious order is not defined. However, it is reserved for associations where the members live in a community separate to secular society, to pursue religious life on a full-time basis. The members will participate regularly in activities such as private and public prayer, religious study, teaching, care of the aged, missionary work or church reform, and live an ascetic lifestyle. For example, a monastery or convent lifestyle would fall within this definition.
Para-church Religious Order
There is a view that members of para-church organisation could be members of a “religious order”. For this to be defensible at least the following elements would need to be in place:
- the person would be invited to become a member of the community, and the “sacrificial life” that goes with it;
- the appointment would be a spiritual appointment, not an offer of employment and would need to be marked in some way by “ceremony”;
- a “covenant” could be prepared to set out the terms of the membership.
This view is not contemplated in the ATO rulings and goes beyond what the ATO considers to be a “religious order” and so should only be adopted after carefully considered specific advice.
Question 5 – Is the Fringe Benefit not provided principally in respect of duties other than any pastoral or directly related religious activities?
Once the employer is satisfied that the employee is a Minister of Religion, they must then be satisfied that the Fringe Benefit is provided principally in respect of pastoral duties or other duties or activities directly related to the practice, study, teaching or propagation of religious beliefs.
Option A: The Fringe Benefit is provided principally in respect of pastoral duties
Pastoral duties is not defined in the FBTAA. However, TR 92/17 gives the following examples of pastoral duties:
- communication of religious beliefs;
- teaching and counselling adherents and members of the surrounding community;
- providing adherents and member of the surrounding community with spiritual guidance and support;
- attendance at an in-service training seminar by a person, provided that the seminar is of a spiritual nature; and
- meeting with and visiting adherents, the sick, the poor, or persons otherwise in need of emotional and spiritual support.
This list is not exhaustive, and there may be other examples.
However, the Fringe Benefit must be provided principally in respect of these pastoral duties. This part of the legislation is unclear in meaning and there are a couple of investigations open.
The conservative view – directly related to pastoral duties
This view says that the principal reason to provide the Fringe Benefit is to compensate the employee for their pastoral duties.
“Principally” is not a defined term, and will take its ordinary meaning. In the Macquarie Dictionary, it is defined as ‘chiefly or mainly’.
The term has received little judicial consideration. However, in a recent Federal Court decision (The Brewery Company Pty Ltd v Commissioner of Taxation  FCA 821), the Court considered the meaning in the context of ‘marketing principally’. The Brewery Company suggested that the meaning for principally was ‘dominant or preponderant’. The Commissioner for Taxation preferred ‘chiefly or mainly’. The Court commented that there was little difference between the two suggestions.
Given the meaning with the Macquarie Dictionary, and the Court’s comments, we suggest that you consider ‘principally’ to mean ‘chiefly or mainly’.
The question you must therefore ask is as follows: Is the employee provided with the benefit mainly because of their pastoral duties? If pastoral activities form only a minor part of the employee’s duties, any benefit would need to be pro-rata reduced.
This conservative view says that the benefit must essentially or principally be compensation for the pastoral duties part of the role.
The wider view – because of pastoral duties
The wider view says, because someone has pastoral duties, they can be provided with exempt fringe benefits.
That is, it says, because someone has pastoral duties, we are going to provide them with the benefit and therefore the benefit is not being provided principally in respect of duties other than pastoral duties.
This wider view goes beyond what the ATO rulings contemplate.
Option B: the Fringe Benefit is provided principally in respect of other duties directly related to the practice, study, teaching or propagation of religious beliefs
Duties directly related to the practice, study, teaching or propagation of religious beliefs (directly related religious activities) would also be acceptable. Being ‘directly related’, rather then merely ‘related’, means that there must be a strong connection between the duty or activity and the practice, study, teaching or propagation of religious beliefs.
For example, I consider that a minister of religion performing duties associated with the preparation of a church service or an evangelical program would be duties that are ‘directly related’ to the practice, study, teaching or propagation of religious beliefs. However, activities of an administrative nature, such as the purchase of a building, preparation or policies or procedures, control of finances etc, would arguably not be ‘directly related’ to the practice, study, teaching or propagation of religious beliefs.
In support of this conclusion, in TR 92/17 the Taxation Commissioner provides the following non-exhaustive list of following activities that are not pastoral or directly related religious activities:
- the administration of a church;
- work undertaken by a Director of a Department of a Diocese or similar unit of ecclesiastical administration; and
- the administration of a school.
Again, the Fringe Benefit must be provided chiefly or mainly in respect of these duties. That is, the principal reason to provide the Fringe Benefit is to compensation the employee for their duties directly related to the practice, study, teaching or propagation of religious beliefs. These duties must form a substantial part of their role, and not a minor or insubstantial part.
The question you must therefore ask is three-fold:
- Is the employing organisation a religious institution?;
- Is the employee a religious practitioner, that is, is he/she a minister of religion or member of a religious order, or training to be such?; and
- Is the employee provided with the benefit mainly because of their pastoral duties or their duties directly related to the practice, study, teaching or propagation of religious beliefs?
If the answer to any of these three questions is ‘no’, the employee is not eligible for exempt Fringe Benefits.
What is the possible implication of providing exempt Fringe Benefits to an employee that is not eligible?
Where an exempt Fringe Benefit is provided to an employee who is not eligible, we see the following risks:
- The employer may be prosecuted or fined for making a false declaration on the employee’s group certificate, by failing to declare a Fringe Benefit on the Group Certificate;
- The employer may be required to pay Fringe Benefits Tax on the Fringe Benefit when later discovered. Penalty tax could also be imposed, even if the employer is otherwise tax exempt.
- The employee may be required to pay income tax on the benefit. We consider that the employee could bring an action against the employer for such costs as it would have relied upon the employer’s false or misleading statements; and
- Any public criticism that may be directed against the employer for failing to comply with the Taxation laws.
We consider that this is an area that is ripe for investigation and auditing by the ATO, particularly given the large amounts of revenue that the Taxation Office is being prevented from collecting. We recommend to our clients that you ‘get your house in order’ before an audit is made.
Exempt Fringe Benefits and Family Tax Benefits or Centrelink Benefits
A further issue that has caused concern for some of our clients is whether their ‘religious practitioner’ employers are required to declare exempt Fringe Benefits when applying for Family Assistance (Family Tax A and B) or Centrelink payments.
Whilst these payments are managed by the Family Assistance Office, the Family Assistance Payments, referred to as Family Tax A and B Payments, are administered by the Australian Taxation Office pursuant to its legislation. Centrelink payments, such as the Parenting Payment, are administered by Centrelink, under its legislation.
Unfortunately, some religious practitioners are not aware of the distinction between Family Assistance Payments and Centrelink payments, and that exempt Fringe Benefits can fall within Centrelink’s income tests. This can result in over-payment of Centrelink payments, which Centrelink could discover through its audit program, and seek refund of.
Income for Assessing Family Assistance Payments (Family Tax A and B Payments)
To calculate a person’s eligibility for Family Tax Benefits, the decision maker is required to take into account the ‘adjusted taxable income’ for that individual, which includes reportable Fringe Benefits.
However, it does not include exempt Fringe Benefits, such as those paid to religious practitioners. Accordingly, exempt Fringe Benefits will not be taken into account when determining a person’s eligibility for Family tax Payments.
Income for assessing Centrelink Payments
Income for assessing Centrelink Payments (such as the Parenting Payment) is more difficult.
For Centrelink, the definition of income is contained within section 8 of the Social Security Act 1991 and is wider then that contained in the Taxation legislation. In particular, it includes ‘valuable consideration’ provided to an employee.
Valuable consideration is not defined in the Social Security Act 1991, and takes its ordinary meaning. It is defined in the Macquarie Dictionary as “something of value given in exchange of the making of a contract”. This definition is broad and would include non-cash payments to an employee by an employer as part of an employment contract (i.e. the provision of a benefit in exchange for the delivery of services).
Fringe Benefits, even if they are exempt under the taxation legislation, would still be valuable consideration within the common meaning of the term, and would be included as income within the ambit of the Social Security Act 1991. In determining a person’s eligibility for a Parenting Payment, and assessing a person’s income, Centrelink would take into account exempt Fringe Benefits provided that the benefit is a ‘valuable consideration’.
What makes a Fringe Benefit paid to a religious practitioner ‘valuable consideration’?
As a matter of practicality, we have seen correspondence from Centrelink that indicates that in determining whether exempt Fringe Benefits provided to a Minister of Religion is ‘valuable consideration’, it will only include non-cash benefits that are provided for the Minister’s own private benefit allowances and reimbursements of ministry related expenses.
This appears to be an internal Centrelink practice for calculating valuable consideration and benefits the Minister of Religion as their gross income is reduced by the ‘ministry related’ exempt Fringe Benefits. Whilst it is not directly included in the legislation, it seems to us to be consistent with the meaning of ‘valuable consideration’, as a reimbursement or allowance for ministry related expenses would not be valuable consideration for the Minister, but rather just places the Minister into a neutral monetary position.
In our view, an appropriate method for determining whether a benefit is Ministry or Personal is to consider whether that benefit is related to the religious practitioner’s appointment as a minister, and is used for the purpose of furthering the religious practitioner’s work. In other words, was the payment for the specific purpose of performing ministry functions (such as pastoral care visitations)?
For example, payments for a vehicle used for work purposes would be, in our view, a Ministry benefit. However, where the benefit is used for personal reasons, such as paying the Minister’s rent or mortgage, or using the motor vehicle for personal use it would need to be included as personal income.
In determining whether a benefit is Ministry related, a further suggestion would be to consider whether the Minister could claim a tax deduction for the amount as a work-related expense. For example, costs for home offices, work-related telephone calls and travel expenses would be deductible as a work-related expense.
Some benefits may be a mixture of Ministry and Personal. In such a case, we understand that Centrelink requires the Minister to differentiate by percentage amounts that part of the benefit that is personal, and that part which is Ministry, and include those Personal amounts in the income declaration.