House of Representatives

Taxation Laws Amendment Bill (No. 5) 2001

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 1 - Religious practitioners

Outline of chapter

1.1 Schedule 1 to this bill explains proposed amendments to clarify the treatment of religious practitioners under the new tax system. Amendments are proposed to the TAA 1953, the ITAA 1997, the FBTAA 1986, the GST Act and the ABN Act to ensure that religious practitioners are treated similarly to office holders (such as judges and parliamentarians) and common law employees. Consequently, religious practitioners who are not employees of religious institutions will be treated in the same way as those who are for tax purposes.

1.2 The amendments are intended to apply to religious practitioners in any religion.

Context of reform

Different conclusions about whether religious practitioners are employees

1.3 The tax treatment of religious practitioners has differed under the existing law. These differences arise because the courts have reached different conclusions (in matters other than taxation) on whether religious practitioners are common law employees.

1.4 For example, in The Greek Orthodox Community of South Australia Inc v His Grace Archbishop Spyridon Ermogenous
[1998] SAIRC 30 , the Archbishop was held to be an employee of the Church. In contrast, in Reverend Howard Ian Knowles and the Anglican Property Trust, Diocese of Bathurst
[1999] NSWIRComm 157 , it was held that Reverend Knowles was not an employee because there was no common law contract between the parties.

1.5 The current taxation treatment of religious practitioners has created a number of areas of uncertainty in the new tax system, as outlined in paragraphs 1.6 to 1.8.

GST and ABN law

1.6 Under the existing GST and ABN law, religious practitioners that are not employees are treated in the same way as businesses. The reason is that the definition of business includes any vocation or calling, and therefore includes a religious practitioner. In contrast, any religious practitioners who are employees are outside the GST and ABN systems for their activities as religious practitioners.

PAYG withholding

1.7 Religious practitioners who are employees are required to have amounts withheld under the PAYG withholding event for employees. There is currently no specific withholding event for religious practitioners who are not employees. Religious practitioners who are not employees, and do not have an ABN, are subject to withholding for failure to provide an ABN. In line with Assistant Treasurers Press Release No. 33 of 28 June 2000, the Commissioner has, as an interim measure, varied to nil the amount to be withheld in these circumstances.

FBT

1.8 Under the current law, a benefit provided by a religious institution to a religious practitioner who is an employee is exempt if it is provided principally in relation to pastoral or related duties. Under Taxation Ruling TR 92/17, the Commissioner has accepted that the concept of employee extends to religious practitioners who receive a stipend or other form of remuneration, including non-cash benefits. A religious practitioner who is not an employee under the FBTAA 1986 is not covered by the exemption, the result being that benefits provided may be assessable income.

Summary of new law

1.9 Under the ABN and GST law, activities performed by a religious practitioner, as a religious practitioner of a religious institution, will be taken to be the activities of the religious institution (and not the activities of the religious practitioner). Consequently, a religious practitioner will not carry on an enterprise by performing these activities. The result will be that these religious practitioners will not be eligible (or need) to register for GST or an ABN for these activities.

1.10 Under the PAYG withholding arrangements, an entity will be required to withhold from payments made to a religious practitioner for any activity or series of activities done as a religious practitioner of a religious institution. This will only apply if the paying entity makes the payment in the course or furtherance of an enterprise.

1.11 Benefits provided to a religious practitioner by a religious institution for the performance of pastoral or related duties will be an exempt benefit under the FBTAA 1986, regardless of whether the religious practitioner is an employee of the religious institution.

1.12 This treatment under the taxation laws will not affect the legal status of a religious practitioner. If a religious practitioner is not an employee at common law, they will continue not to be an employee.

Comparison of key features of new law and current law
New law Current law
Religious practitioners will not be subject to GST for activities done in the pursuit of a vocation as a religious practitioner, and as a member of a religious institution. Religious practitioners will not be required or entitled to register for GST for these activities. However, these activities will still be the activities of the religious institution for GST purposes, and the religious institution may be subject to GST. The non-employee religious practitioners are subject to GST law. Consequently, they would have to register for GST if their annual turnover exceeded $50,000. If their annual turnover does not exceed $50,000, registration is optional. The activities of religious practitioners who are employees are not subject to GST law.
Activities done in the pursuit of a vocation as a religious practitioner, and as a member of a religious institution, will not entitle a religious practitioner to an ABN. Religious practitioners will not require an ABN for these activities. The activities will still be the activities of the religious institution. Religious practitioners that are not employees are eligible to obtain an ABN. Where religious practitioners are employees, their activities as a religious practitioner do not entitle them to an ABN.
Payments to a religious practitioner for activities done in the pursuit of a vocation as a religious practitioner, and as a member of a religious institution, will be subject to PAYG withholding. This will only apply if the entity making the payment does so in the course or furtherance of an enterprise. Religious institutions are required to withhold amounts from the remuneration paid to any religious practitioners that are employees. In practice, some religious institutions withhold amounts from the remuneration of their practitioners, although not considering them to be employees. However, some practitioners pay their income tax under the PAYG instalment system.
Religious practitioners will be considered employees of their religious institution for the purposes of the FBTAA 1986. This will maintain the existing FBT exemption for a benefit provided by a religious institution to a religious practitioner that is principally for pastoral or other activities directly related to the practice, study, teaching or propagation of religious beliefs. A benefit provided by a religious institution to a religious practitioner, who is an employee of the institution, is an exempt benefit provided it is principally for pastoral or other religious duties. In practice, the Commissioner has accepted this exemption extends to religious practitioners who receive a stipend, or other form of remuneration. Benefits that are not for the performance of pastoral or related duties are liable to FBT. Benefits subjected to the FBTAA 1986, exempt or assessable, are treated as exempt income under income tax law.
No-ABN withholding arrangements will not apply to a payment by an entity to a religious practitioner for activities done in pursuit of a vocation as a religious practitioner, and as a member of a religious institution. No-ABN withholding arrangements currently apply to a payment, for services of a religious practitioner, by a religious institution to the practitioner, who is not an employee and who does not quote an ABN to the religious institution. However, the Commissioner has varied the amount to be withheld in these circumstances to zero.

Detailed explanation of new law

Main terms

Religious practitioner

1.13 A definition of religious practitioner will be inserted in the ABN Act, the GST Act and the ITAA 1997. The ITAA 1997 definition also applies to Schedule 1 to the TAA 1953 (which contains the new PAYG withholding provision for religious practitioners). [Schedule 1, item 5, section 195-1 of the GST Act, item 2, section 41 of the ABN Act and item 16, subsection 995-1(1) of the ITAA 1997]

1.14 The definition mirrors the definition of religious practitioner in subsection 136(1) of the FBTAA 1986. Religious practitioner is defined to mean:

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.

1.15 The definition uses the terms minister of religion and member of a religious order. These terms are intended to include a person of the described kind in any religion.

Activities done by a religious practitioner in the pursuit of a vocation as a religious practitioner, and as a member of a religious institution

1.16 The amendments in this bill generally 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 object of these words is to describe the activities that the practitioner does as a religious practitioner of a religious institution. [Schedule 1, item 1, section 5A of the ABN Act, item 4, section 50-5 of the GST Act and item 24, section 12-47 of Schedule 1 to the TAA 1953]

1.17 The term vocation is currently used in the definition of business in the ITAA 1936, the ITAA 1997, the GST Act and the ABN Act. A business is defined as including any profession, trade, employment, vocation or calling, but does not include occupation as an employee. The idea that a vocation covers a wider range of circumstances than the term employee is used in these amendments.

1.18 In addition to duties directly related to religion, a religious practitioner may undertake a range of activities within a religious institution and the wider community. This could include, for example, administration of a parish or teaching in a school. The amendments aim to treat all activities done by a religious practitioner as a representative of a religious institution in the same way. The term vocation is intended to facilitate this.

1.19 As the words link a religious practitioner to a religious institution, religious practitioners who do not belong to a religious institution will not be covered by the amendments. Religious practitioners who are affiliated with a religious institution will only be within the scope of the amendments for activities undertaken in the pursuit of a vocation.

Example 1.1 A religious practitioner who plays professional golf or conducts farming activities will not be within the amendments for these activities.

1.20 Where a religious practitioner does an activity that, although perhaps within their calling, has no connection to the religious institution with which they are practitioners, that activity is also outside the proposed amendments.

1.21 In some circumstances, a religious practitioner may undertake an activity that is connected to the skills they have developed as a religious practitioner, but is nevertheless outside the scope of a vocation.

Example 1.2 A religious practitioner is engaged by a large company to be a facilitator at a meeting. The religious practitioners skill in facilitation has been developed through a vocation as a religious practitioner. This particular meeting, however, is about secular issues. In this case, the religious practitioner is not undertaking an activity in pursuit of a vocation as a religious practitioner.

Religious institution

1.22 The term religious institution will not be used in a defined sense in the amendments in this bill. This follows the existing income tax, FBT and GST laws which use the term in its ordinary sense.

1.23 Taxation Ruling TR 92/17 discusses the meaning of religious institution for the purposes of the ITAA 1997 and the FBTAA 1986. That ruling says that a body is a religious institution if its objects and activities reflect its character as a body instituted for the promotion of some religious object, and the beliefs and practices of the members of that body constitute a religion.

1.24 The High Court in The Church of the New Faith v. Commissioner of Pay-roll Tax (Vic)
83 ATC 4652 ; (1983)
14 ATR 769 (the Scientology case) established that the 2 most important factors in deciding whether a particular set of beliefs and practices constitute a religion are:

belief in a supernatural being, thing or principle; and
acceptance of canons of conduct which give effect to that belief, but which do not offend against the ordinary laws.

1.25 Generally, private schools, private universities and residential university colleges will not be considered religious institutions. However, Bible colleges, seminaries and theological colleges may come within the definition of religious institution. This decision must be made having regard to the primary or dominant object of the body as stated in its constituent documents.

ABN

1.26 If a religious practitioner undertakes activities in the pursuit of a vocation as a religious practitioner, and as a member of a religious institution, these activities will be taken to be the activities of the religious institution, and not the activities of the religious practitioner, for the purposes of the ABN law. As a result, the religious practitioner will not be carrying on an enterprise and will not be entitled to an ABN for these activities (although these activities will form part of the enterprise of the religious institution of which the practitioner is a member). [Schedule 1, item 1, section 5A]

1.27 The amendments will not apply to a religious practitioner who is acting as an employee or agent. The application of the ABN law to employees and agents is already clear. Employees are not carrying on an enterprise and do not need an ABN, for their activities as an employee. Employees and agents are specifically excluded from the operation of the amendments to ensure that a double credit or double taxation situation does not arise under the GST law. In the case of an employee under the current law, a credit arises when the employer reimburses the employee for an expense incurred in relation to activities as an employee. If employees were not excluded from the definition, it would be possible for the religious institution to also claim an input tax credit for any expense incurred by the religious practitioner, as the expense would be considered the expense of the religious institution. This would lead to a possible double credit situation.

1.28 This will ensure that there is no difference between religious practitioners who are employees (who do not require an ABN for their activities) and those who are not.

1.29 Religious practitioners may be entitled to an ABN for other activities they carry on, if those activities satisfy the definition of enterprise. For example, if a religious practitioner were also a successful writer of crime fiction, the practitioner would be entitled to an ABN for that activity.

1.30 In some situations there may be a fine line between an activity pursued as part of a vocation, and one that is outside the bounds of a vocation. Individual circumstances and factors within each religion will need to be considered in each case.

Example 1.3 A religious practitioner writes a book on the history of a particular religion. If the book is not for general distribution, and the intended audience are followers of the religion, it will probably be considered part of a vocation. If the book is widely circulated and the intended audience is the general public, it may be considered beyond the scope of a vocation, and an ABN may be required.

GST

1.31 Activities undertaken by a religious practitioner (other than as an employee or agent) in pursuit of their vocation as a religious practitioner and as a member of a religious institution will be treated for GST purposes as though they were the activities of the religious institution. [Schedule 1, item 4, section 50-5]

1.32 This means that these activities will not be part of any enterprise carried on by the religious practitioner and that the practitioner will not be entitled to register for GST in relation to these activities (although these activities will form part of the enterprise of the religious institution of which the practitioner is a member).

1.33 However, if a religious practitioner undertakes other activities that are not in pursuit of their religious vocation or that are not done as a member of a religious institution, then that practitioner may be entitled to GST registration, or may be required to register for GST.

Example 1.4 Mr Goodwin makes supplies amounting to $32,000 per annum for his activities as a religious practitioner for his religious institution. He is not an employee or agent of the religious institution. Mr Goodwin also carries on a small farming business, which has an annual turnover of $51,000.Supplies made by Mr Goodwin as part of his religious activities do not form part of his enterprise and therefore will not be included in his annual turnover. These supplies will be included in the annual turnover of his religious institution.However, his farming activities are not related to his religious vocation, nor are they done as a member of a religious institution. Therefore, these activities will form part of an enterprise that Mr Goodwin carries on. He will be required to register for GST for his farming activities as his annual turnover for these activities meets the registration turnover threshold.

1.34 If a religious practitioner (other than an employee or agent) makes supplies in the pursuit of a vocation as a religious practitioner and as a member of a religious institution, the religious institution will be liable for any GST payable on those supplies. The religious practitioner will not be liable for any such GST. This is because for GST purposes, the religious institution is taken to have made those supplies.

Example 1.5 Mr Kennedy sells prayer books to members of his religious institution in the course of his activities as a religious practitioner. He will not be liable for any GST payable on the supply of these books, but his religious institution will be liable for any GST if that institution is GST registered.1.35 Similarly, if a religious practitioner that is not an employee or agent makes acquisitions or importations in the pursuit of their vocation as a religious practitioner and as a member of a religious institution, the religious institution will be entitled to claim any input tax credits allowable for those acquisitions or importations. The religious practitioner will not be entitled to any input tax credits on any such activities.

Example 1.6 When Mr Kennedy buys his prayer books, GST is included in the price of the supply to him. Mr Kennedy will not be entitled to claim any input tax credits on the acquisition of the prayer books. However, if his religious institution is GST registered, it will generally be entitled to claim input tax credits for the GST included in the price of the prayer books.

New PAYG withholding event for religious practitioners

1.36 A new withholding requirement (usually referred to as a PAYG withholding event) will be introduced into the PAYG withholding system to cover payments received by religious practitioners for activities done in the pursuit of a vocation as a religious practitioner, and as a member of a religious institution. All entities who make payments to religious practitioners in the course or furtherance of an enterprise will be required to withhold. This will ensure that religious practitioners who are not employees are treated under the PAYG law in the same way as those who already are. [Schedule 1, item 24, section 12-47]

1.37 Under this approach, payments to religious practitioners will be treated in a similar way to payments made to office holders such as members of the Commonwealth, State and Territory judiciaries and members of Australian Parliaments.

1.38 The new withholding event is contained in section 12-47 of Schedule 1 to the TAA 1953 which deals with payments for work or services. It applies to activities done in the pursuit of a vocation as a religious practitioner, and as a member of a religious institution. The limitation of this provision to payments from entities in the course of carrying out an enterprise of that entity will ensure that an entity making a payment to a religious practitioner in a private capacity (e.g. as a member of a wedding party or a congregation) will not be required to withhold.

1.39 The Commissioner will continue to consult with representatives of religious institutions to determine whether there are any payments (especially of an irregular or unusual nature) for which the amount to be withheld should be varied to zero.

Priority rule

1.40 The withholding events in sections 12-35 (payments to employees) and 12-45 (payments to office holders) will have priority over the new withholding event in section 12-47 in Schedule 1 to the TAA 1953. This is consistent with the effect of the amendments to the ABN and GST law, which ensure that taxation treatment does not change for religious practitioners who are common law employees. [Schedule 1, item 23, subsection 12-5(2)]

1.41 The withholding event for religious practitioners has priority over withholding events in sections 12-60 (payments under labour hire arrangements) and 12-190 (recipient does not quote an ABN) in Schedule 1 to the TAA 1953. This is achieved by inserting a reference to the new withholding event, section 12-47, into the table in section 12-5, which explains what to do if more than one provision requires a withholding. This will ensure that religious practitioners covered by the new withholding event are not liable to withholding for failure to provide an ABN (under section 12-190 of Schedule 1). [Schedule 1, item 22, subsection 12-5(2)]

FBT

1.42 The amendments to the FBTAA 1986 ensure that fringe benefits provided by a religious institution to a religious practitioner in respect of pastoral or related duties continue to be exempt regardless of whether or not the religious practitioner is a common law employee of the religious institution. [Schedule 1, item 7, paragraph 136(1)]

1.43 Broadly, a fringe benefit is defined in subsection 136(1) of the FBTAA 1986 to be a benefit provided to an employee, or an associate of an employee, by an employer, or an associate of the employer, in respect of the employment of the employee, but does not include salary or wages or exempt benefits. Subsection 136(1) defines employee by reference to the definition of current employee, that is, a person who receives, or is entitled to receive, salary or wages. Salary or wages means a payment from which an amount must be withheld under a provision in Schedule 1 to the TAA 1953, including payments to employees, company directors and office holders.

1.44 As a result of the insertion of section 12-47 in Schedule 1 to the TAA 1953 by this bill, the definition of salary or wages in subsection 136(1) is also amended. The definition of salary or wages is extended to include a payment from which an amount must be withheld, regardless of whether the amount is actually withheld, under section 12-47 where:

the payment is made to a religious practitioner by a religious institution; and
the activity, or activities, for which the payment is made is done by the religious practitioner as a member of the religious institution (see explanation in paragraphs 1.16 to 1.25).

1.45 Therefore, a religious practitioner may receive salary or wages for the purposes of the FBTAA 1986 through the operation of section 12-35 as an employee or through section 12-47 as a religious practitioner receiving payment from a religious institution.

1.46 However, where benefits are provided principally in respect of the pastoral or related duties of a religious practitioner by a religious institution, the benefits are exempt benefits under section 57 of the FBTAA 1986.

Application and transitional provisions

1.47 The new PAYG withholding event for religious practitioners will apply to payments made to religious practitioners by a religious institution or by an entity carrying on an enterprise other than a religious institution. The requirement to withhold will commence on 1 July 2002. [Schedule 1, item 25]

1.48 The amendments which exclude activities done as a religious practitioner of a religious institution from the definition of an enterprise for both ABN and GST purposes, will apply from 1 July 2000. This will ensure that a religious practitioner will not have been required to have an ABN or be registered for GST as announced by the Government in Assistant Treasurers Press Release No. 33 of 28 June 2000. [Schedule 1, items 3 and 6]

1.49 The amendments to the FBTAA 1986 will apply to benefits provided to a religious practitioner by a religious institution on or after 1 July 2000. This will be achieved by a transitional provision applying from 1 July 2000 until the date that the PAYG withholding event commences on 1 July 2002 [Schedule 1, item 9] . From 1 July 2002, the PAYG withholding event will ensure that payments by a religious institution to a religious practitioner will come within the definition of salary or wages for the purposes of the FBTAA 1986. Consequently, benefits provided by a religious institution to a religious practitioner or to their spouse or child, in respect of pastoral duties or directly related religious activities, will be exempt benefits [Schedule 1, item 8] .

Consequential amendments

Amendments to the ITAA 1997

1.50 The following sections of the ITAA 1997 are amended to include a reference to the new PAYG withholding event for religious practitioners in the tables of withholding events. These amendments will commence when the new PAYG withholding event in section 12-47 commences on 1 July 2002. [Schedule 1, item 17]

1.51 New subsections 28-185(3), 130-90(5) and 900-12(3) include a reference to the new withholding event for religious practitioners in the tables of withholding events in those sections. Section 28-185 is about the 4 methods of calculating motor vehicle expenses, section 130-90 is about the capital gains implications of shares or rights acquired under an employee share trust and section 900-12 is about the application of the substantiation rules. [Schedule 1, item 11, subsection 28-185(3), item 14, subsection 130-90(5) and item 15, subsection 900-12(3)]

1.52 These amendments will ensure that these provisions will apply to religious practitioners receiving withholding payments covered by the new withholding event in section 12-47 in the same way as they apply to employees and office holders.

1.53 Item 10 amends section 26-30, which is about deducting relatives travel expenses, to refer to payments by a religious institution which are covered by the new withholding event in section 12-47. This means that, for the purposes of this section, a religious practitioner will only be equated to an employee when receiving a payment from a religious institution. [Schedule 1, item 10, subsection 26-10(6)]

1.54 Item 13 amends section 85-35 to ensure that the deduction limitation rules for individuals earning personal services income do not apply to payments to religious practitioners covered by the new PAYG withholding event. Consequently, religious practitioners will have the same exclusion as employees and office holders from these rules. [Schedule 1, items 12 and 13, section 85-35]

Amendments to Schedule 1 to the TAA 1953

1.55 Items 17 to 20 amend Schedule 1 to the TAA 1953 to include reference to the new PAYG withholding event for religious practitioners in relevant sections.

1.56 Subsection 10-5(1) will be amended to include the new withholding event in the general summary of withholding payments. [Schedule 1, item 18, subsection 10-5(1)]

1.57 Subsection 12-1(1) will be amended to ensure withholding is not required from a religious practitioner if the income is exempt income. [Schedule 1, item 19, subsection 12-1(1)]

1.58 Subsection 12-2(2) will be amended to ensure that withholding will not be required from a payment to a religious practitioner that is a living away from home allowance. [Schedule 1, item 20, subsection 12-1(2)]

1.59 Subsection 12-1(3) will be amended to ensure that withholding will not be required from a payment to a religious practitioner that is an expense payment fringe benefit. [Schedule 1, item 21, subsection 12-1(3)]


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