Edited version of your private ruling

Authorisation Number: 1012519565181

Ruling

Subject: Are payments to a retired religious practitioner gifts.

This ruling applies to:

A religious institution

Question 1

Is the payment of $X in four bi-annual instalments to a retired minister of religion with the Rulee to assist them to enjoy post-employment housing free of encumbering, a gift and therefore not subject to PAYG withholding pursuant to section 12-47 of the Taxation Administration Act 1953 (TAA)?

Answer

Yes

Question 2

Is the payment of $X in four bi-annual instalments as a gift to a retired minister of religion with the Rulee to assist them to enjoy post-employment housing free of encumbering, a benefit as defined in section 136(1) of the Fringe Benefits Tax Assessment Act 1986, and is the benefit an exempt benefit under section 57 of the FBTAA 1986?

Answer

No

Question 3

Is the payment of $X in four bi-annual instalments as a gift to a retired minister of religion with the Rulee to assist them to enjoy post-employment housing free of encumbering, an Employment Termination Payment pursuant to section 82-130 of the ITAA 1997?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commences on:

01 July 2013

Relevant facts and circumstances

The Rulee is a registered religious institution which was incorporated in Australia under the Associations Incorporation Act 1985.

As a religious institution it is established and operates in Australia.

The Rulee is proposing to provide an unsolicited non expectant gift to one of its retired ministers of religion purely on charitable grounds based on their current financial position and outstanding current mortgage on their residence, to enable the retired minister to enjoy post-employment housing free of encumbrance.

The Rulee is currently endorsed as a Tax Concession Charity (TCC) on the basis of being a Religious Institution.

The Rulee, a not for profit organisation, claims the provision of the proposed payment as a gift is within its powers and incidental to its objects and intentions as a religious institution. The amount is paid to ensure retired ministers are not financially disadvantaged and can maintain suitable housing.

The Rulee has its own constitution which includes its primary objectives

to be the following:

(a) The encouragement, propagation and development of the religious beliefs….

(b) To educate people in a knowledge and understanding of the Bible and of biblical principles, as well as in communication, interpersonal skills and life skills, by systematic training and instruction so that they will be equipped for works of service, so that the body of Christ may be built up

(c) The support, protection, and assistance of incorporated and unincorporated associations, companies or other entities, whose objects are altogether or in part similar to those of the association ….

The Rulee, in their submission, also states that neither during the employment the recipient of the payment as a full time minister of the rulee, nor after their retirement had or has any contractual obligation or is bound to make the proposed payment for housing relief.

Rather the decision by the current Management Committee of the Rulee was made at its own volition and reasonably regarded as incidental to the performance of the Rulee's proper functions, that it would be appropriate in the circumstances to provide the needed support to a retired minister in respect of housing assistance by way of a gift which was unsolicited, non obliged, and non expectant of the recipient.

To support their argument that the proposed payment is a 'gift for charitable purpose' the Rulee made reference to a number of case decisions relating to the provision of support, aid, and relief for clergy, such as making provision for transport to assist retired clergy, and other forms of aid and assistance.

The Rulee also made reference to the general principles as expressed in Taxation Ruling IT 2674 Income tax: gifts to missionaries, ministers of religion and other church workers - are the gifts income? and Taxation Ruling TR 2003/13, Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of'; where the circumstances and factors as to whether the making of a gift give rise to assessable income or an employment termination payment, are relied on.

The Rulee claims that the capacity and the way the gift is made, together with the argued position that it is voluntary, not solicited, non obliged, non expectant and not a common incident of the recipient's calling or occupation, is not followed as an effect or result of the termination of their employment, but rather can be traced to gratitude engendered as a gift from the Rulee to the recipient because of their financial circumstances.

In response to the Commissioner's request to provide explanations and details relating to recording, accountability and the basis of the ex employee making a specific donation to the Rulee and incurring some costs, the following was provided:

1. (a) The original donation was treaded in the books of the Rulee as a freewill offering received onto the building funds. A copy of the entry onto QuickBooks is attached.

(b) The amount in costs borne by the ex employee were only recently notified to us as a list of costs for information purposes only. No capital equipment was paid for or donated, and so consequently, these costs were not entered into the books of the Rulee. They have been treated in the same way as voluntary labour, in that value is not measured or recorded in the accounts of the rulee.

As a part of the church building projects, people are free to donate time, money or resources as they are able. The rulee only records the value of monetary or capital equipment donations.

2. The monetary donation and subsequent costs borne by the ex employee were unsolicited donations. All offerings and donations are received in good faith as freewill offerings and donations unless specifically agreed and minuted by the management committee as a loan, accompanied by a properly drawn up, loan agreement, no loan agreements were entered into with the donor or any other person.

3. The usual policy with regard to freewill offerings is that no receipt is issued unless specifically requested. No receipt was requested by the donor and consequently, no receipt was issued to them.

The donor made the donation to the rulee by direct bank transfer and we would expect that they would have received an online transaction confirmation from their bank.

4. The ex-employee was at all times fully and adequately remunerated as per their employment contract. The basis of remuneration is better described as stipend rather than salary. Rather than being paid for services or as reward for tasks performed in a secular employment, remuneration is meant to provide financial support and offset expenses while engaged in the work of the ministry.

They received a nominal cash salary plus specific non-cash, exempt benefits as a minister of religion. A copy of their Employee Payment Summary for the relevant year is attached along with the QuickBooks Payroll summary.

Rulee's contentions

The Rulee argues the payment is based on its motive for reliance to provide a comfortable way of life to the recipient and is a gift and not income or benefit of any kind, as it does not relate to any income producing activity or as a result of an expected Employment Termination Payment.

In respect to a position that may be adopted by the Commissioner relating to the payment being regarded as being connected to employment of the ex-employee as a Minister of Religion, either as assessable income or Employment Termination Payment, the Rulee then relies on the application of section 57 of the FBTAA 1986 to treat the payment as a benefit as defined in section 136 (1) of the FBTAA 1986 and treat the benefit as an exempt benefit accordingly as all the requirements of section 57 would be met.

The Rulee, in its submission, claims that the provision of financial support to the retired minister, is a gift for a charitable purpose, because it is provided to give support, aid and relief to them, as an unsolicited, non-expectant amount and is not connected to their previous employment with the Rulee.

Question 1

Summary

The payment is in the nature of a gift and not subject to PAYG withholding.

Detailed reasoning

Is the payment of certain amount in four bi-annual instalments to a retired minister of religion with the Rulee to assist him to enjoy post employment housing free of encumbering, a gift and therefore not subject to PAYG withholding pursuant to section 12-47 of the Taxation Administration Act 1953 (TAA)?

Section 995-1 of the ITAA 1997 defines "assessable income" to have the meaning given by sections 6-5, 6-10, 6-15, of the ITAA 1997.

Division 12 of Part 2-5 of the TAA covers Pay as You Go (PAYG) withholding and payments from which amounts must be withheld.

Subdivision 12-B of the TAA covers payments for work and services and in particular section 12-47 of this Act covers payment to religious practitioners.

Section 12-47 of the TAA reads:

An entity must withhold and amount from a payment it makes to a religious practitioner for an activity, or a serious of activities, if:

(a) the activity, or serious of activities is done by the religious practitioner in pursuit of his or her vocation as a religious practitioner ; and

(b) the activity, or serious of activities, is done by the religious practitioner as a member of the religious institution, and

(c) the payment is made by the entity in the course or furtherance of an enterprise that the entity carries on.

Section 6-5, of the ITAA 1997 relates to the inclusion of "ordinary income" in the assessable income of an Australian resident and or of a foreign resident from Australian source.

Section 6-15 of the ITAA 1997 relates to the inclusion of "statutory income" in the assessable income, where amount are not included in ordinary income, but are included by provisions of assessable income. Although statutory income is included in assessable income under a provision of the ITAA Act 1997, it may be exempt or non-assessable income under another provision, i.e. per section 6-20 and section 6-23.

Since the payment relates to a matter involving the payer in its capacity as a former employer and the recipient of the payment as a former employee in their capacity as religious practitioner, it is necessary to consider whether the proposed payment has the character of a payment which relates to work and services provided in the past, for the purposes of the application of section 12-47 of the TAA and the need for the Rulee to treat the payment being subject to PAYG withholding.

If the proposed payment is considered to be a payment connected to work and services provided in the past and subject to PAYG withholding, then such payments would be included in the payment summary to issue to the recipient and have the character of "ordinary income" per section 6-5, of the ITAA 1997, which will then be included in his "assessable income" per section 995-1 of the ITAA 1997.

It is noted the Rulee is already endorsed as a Tax Concession Charity on the basis of being a religious institution.

The recipient of the payment is an Australian resident.

The recipient of the payment is a former employee as a Religious Practitioner.

The recipient of the payment is no longer an employee and he no longer provides services to the employer under an employment arrangement or obligation. Therefore it is only necessary to consider whether the proposed payment to the former employee as and when made:

· either, is connected to services provided or work done in the past and has the character of ordinary income, or

· alternatively, has the character of being a gift for altruistic purposes and therefore the amount paid could not be regarded as ordinary income to him as an Australian resident according to ordinary concepts that would fall within the application of section 6-5(1) of ITAA 1997 and or section 12-47 of the TAA.

Principles - Ordinary Income

There have been a number of cases which determine what is considered to be ordinary income.

In general, if the amount received does not have the character of income in the hands of the recipient it will not be ordinary income: for example, Scott v. FC of T (1966) 117 CLR 514 at 526 per Windeyer J. Parsons takes up the specific point of gifts in his magisterial Income Taxation in Australia at Proposition 8: 'A gain which is a mere gift does not have the character of income' (paragraphs 2.132-2.157). He accepts that the voluntary nature of a payment is not enough to give a non-income character, hence his emphasis on mere gift. As Hill J said in First Provincial Building Society Ltd v. FC of T 95 ATC 4145 at 4149:

'A mere gift made to a taxpayer would be received by the taxpayer on capital account and it will not matter whether the taxpayer was carrying on a business: Scott (supra); Hayes [(1956) 11 ATD 68; (1956) 96 CLR 47]; FC of T v. Harris 80 ATC 4238 ... and Federal Coke Co Pty Ltd v. FC of T 77 ATC 4255 ...'

Gifts to persons who are not employees but which are related to services which they have rendered, such as to tips to a waiter, a railway porter or a taxi cab driver, or a jockey, have been held to be income.

In FC of T v. Squatting Investments Co. Ltd (1954) 88 CLR 413 and Federal Coke Co Pty Ltd v. FC of T 77 ATC 4255 at 4264 per Bowen CJ, an additional payment was made by the Government to a wool grower, who had previously submitted wool for appraisal and been paid for it. The additional payment by the Government, whilst discretionary, was related to the amount of wool supplied and was held to be in a real sense a product of the business of wool growing carried on by the recipient and to be income in its hand.

The voluntary nature of payments has not been enough on its own to show they do not have an income character for the recipients. That is, the fact that a gift is made voluntarily is not sufficient to show it is not income.

The facts and circumstances relating to the connection between the recipient as a former employee and the payer as the former employer, that may relate to or connected to income producing activities or entitlements, were considered in line with the original submission together with subsequent additional information provided, to determine whether:

in truth such payments are connected to his past employment, were or will be a product of that employee employer relationship and therefore assessable either under the ITAA 1997 and subject to PAYG under the TAA, or the FBTAA 1986

As the significance of the motive depends upon the circumstances [Federal Coke Co Pty Ltd v. FC of T 77 ATC 4255 at 4273 per Brennan J] the Information provided and claim made that the recipient is not an employee, the payment does not relate or is connected to any of the past employment or services provided by the recipient to the Rulee, but rather is purely made for personal reasons and as a member of the community, for altruistic purposes to help him in difficult time due to poor financial position, it supports a conclusive decision that the motive of the proposed payment is purely an unsolicited gift and does not relate to any past, current or future income producing activity or services rendered.

Therefore the proposed payment is accepted to be a genuine gift and will not be income or a payment from which the payer must withhold an amount.

Taking into account the above, the result is consistent with the views expressed by Parsons, Hill J in First Provincial, that a mere gift will not be income.

If it is a genuine gift then the facts that make it so would also be consistent with the lack of a sufficient link with income producing activities.

The basis and reason for the payment as provided by the Rulee, support the position that there in no sufficient link between the payments and income producing activities.

Furthermore the "Principle - periodical receipts" as illustrated by the decision in Harris 80 ATC 4238, where a series of periodical payments by a bank to former employees was considered, were held not to be income.

Gifts which are voluntary donations or contributions of that kind, do not have the usual characteristics of income, remuneration for services, the proceeds of a business, or other revenue producing activity.

This is also supported by paragraph 20 of Taxation Ruling IT 2674 Income tax: gifts to missionaries, ministers of religion and other church workers - are the gifts income? which expresses the Commissioner's view when gifts are not assessable income.

Paragraph 20 of IT 2674 states:

A personal gift received by a church worker for personal reasons, not related to any income-producing activity on the part of the church worker, is not assessable income under subsection 25(1) or paragraph 26(e) of the ITAA. In other words, a gift received only on grounds personal to the church worker is not assessable income. Nor is a gift assessable income if it is referable exclusively to the attitude of the donor personally to the church worker personally. A personal gift given to a church worker on personal grounds (in a situation where there is no connection between the receipt of the gift and any income-producing activity by the church worker) is not assessable income if, for example:

(a)  the gift is given because the church worker is in dire physical or financial circumstances; or

(b)  the church worker's personal qualities or attributes occasion the gift.

On the basis of the Rulee's submission and claim that:

· its main purpose and objective for the provision of the four biannual payments to the recipient is an unsolicited decision by the management committee of the Rulee; and

· voluntary to provide relief and assistance to the recipient for personal reasons; and

· without any connection to any income producing activity on the part of the recipient, and

· is only made because of their financial position and not connected in any way or entitlement to their previous employment,

it is accepted the payment is in the nature of a gift and not subject to PAYG withholding. As such is does not have the character of ordinary income and should not form part of the recipient's assessable income.

Question 2

Summary

The payment is in the nature of a gift for altruistic purposes and is not considered to be a fringe benefit.

Detailed reasoning

The Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986) is quite separate from the ITAA 1936 and ITAA 1997.

The FBTAA 1986 imposes tax on the taxable value of the fringe benefits and establishes the rules for assessment and collection of the tax.

The FBTAA 1986 contains subsection 136(1) under Part XII -Interpretation, which covers various definitions for the purposes of the application of the Act.

Subsection 136(1) amongst others, includes and defines the following:

benefit includes any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility and, without limiting the generality of the foregoing, includes a right, benefit, privilege, service or facility that is, or is to be, provided under:

(a) an arrangement for or in relation to:

(i) the performance of work (including work of a professional nature), whether with or without the provision of property;

(ii) the provision of, or of the use of facilities for, entertainment, recreation or instruction; or

(iii) the conferring of rights, benefits or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar exaction;

(b) a contract of insurance; or

(c) an arrangement for or in relation to the lending of money.

fringe benefit , in relation to an employee, in relation to the employer of the employee, in relation to a year of tax, means a benefit:

(a) provided at any time during the year of tax; or

(b) provided in respect of the year of tax;

(c) being a benefit provided to the employee or to an associate of the employee by: (c) the employer; or

(d) an associate of the employer; or

(e) a person (in this paragraph referred to as the arranger) other than the employer or an associate of the employer under an arrangement covered by paragraph (a) of the definition of arrangement between:

(i) the employer or an associate of the employer; and

(ii) the arranger or another person; or

(ea) a person other than the employer or an associate of the employer, if the employer or an associate of the employer:

(i) participates in or facilitates the provision or receipt of the benefit; or

(ii) (ii) participates in, facilitates or promotes a scheme or plan involving the provision of the benefit;

and the employer or associate knows, or ought reasonably to know, that the employer or associate is doing so;

in respect of the employment of the employee, but does not include:

(f) a payment of salary or wages or a payment that would be salary or wages if salary or wages included exempt income for the purposes of the Income Tax Assessment Act 1936; or

…….

(la) an early retirement scheme payment (within the meaning of the Income Tax Assessment Act 1997); or

(lb) a genuine redundancy payment (within the meaning of the Income Tax Assessment Act 1997); or

(lc) an employment termination payment (within the meaning of the Income Tax Assessment Act 1997); or

(ld) a payment that would be an employment termination payment (within the meaning of the Income Tax Assessment Act 1997) apart from paragraph 82-130(1)(b) of that Act; or

(le) any of the following payments, if they would be employment termination payments (within the meaning of the Income Tax Assessment Act 1997) apart from paragraph 82-130(1)(b) and section 82-135 of that Act:

(i) an unused annual leave payment (within the meaning of that Act);

(ii) an unused long service leave payment (within the meaning of that Act);

(iii) a payment covered by Subdivision 83-D (Foreign termination payments) of that Act;

(iv) a payment covered by paragraph 82-135(g) of that Act;

(v) a payment of an annuity, or a supplement, covered by section 27H of the Income Tax Assessment Act 1936; or

(m) consideration of a capital nature for, or in respect of:

(i) a legally enforceable contract in restraint of trade by a person; or

(ii) personal injury to a person; or

employee means:

(a) a current employee;

(b) a future employee; or

(c) a former employee.

employer means:

(a) a current employer;

(b) a future employer; or

(c) a former employer;

(d) but does not include:

(e) the Commonwealth; or

(f) an authority of the Commonwealth that cannot, by a law of the Commonwealth, be made liable to taxation by the Commonwealth.

employment, in relation to a person, means the holding of any office or appointment, the performance of any functions or duties, the engaging in of any work, or the doing of any acts or things that results, will result or has resulted in the person being treated as an employee.

in respect of, in relation to the employment of an employee, includes by reason of, by virtue of, or for or in relation directly or indirectly to, that employment.

arrangement means:

(a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable, or intended to be enforceable, by legal proceedings; and

(b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise

Since the making of the payment relates to an arrangement involving the payer in its capacity as a former employer and the recipient of the payment as a former religious practitioner in their capacity as a former employee, it is necessary to consider whether:

· the proposed payment has the character of a payment which relates to the provision of a benefit which may fall within the meaning of a fringe benefit, for the purposes of the application the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986).

· the proposed payment has the character of a payment which relates to the provision of a benefit which may fall within the meaning of the excluded category under paragraphs f to r of subsection 136(1) of the definition of a fringe benefit, for the purposes of the application the FBTAA 1986.

· it qualifies for exemption pursuant to operation of section 57of the FBTAA 1986.

Having regard to the reasons and nature of the payment to the recipient and the decision reached relating to questions 1 and 3, that it is made to the recipient as a gift for altruistic purposes and not connected to their past employment; the gifted payment does not fall within the meaning of a benefit or a fringe benefit under subsection 136(1), of the FBTAA 1986.

As the payment is not a fringe benefit the application of section 57 of the FBTAA 1986 is not relevant.

Conclusion.

The payment is considered to be a gift for altruistic purposes and not connected to the former employee's employment. Therefore it is not a fringe benefit for the purposes of the FBTAA1986

Question 3

Summary

The payment is in the nature of a gift and not an Employment Termination Payment.

Detailed reasoning

Section 82-130 (1) of ITAA 1997 What is an employment termination Payment? states: 

A payment is an employment termination payment if:

(a) it is received by you:

(i) in consequence of the termination of your employment; or

(ii) after another person's death, in consequence of the termination of the other person's employment; and

(b) it is received no later than 12 months after that termination (but see subsection (4)); and

(c) it is not a payment mentioned in section 82-135.

Furthermore, section 82-135 Payments that are not employment termination payments states:

The following payments you receive are not employment termination payments:

(a) a *superannuation benefit (see Divisions 301 to 307);

(b) a payment of a pension or an *annuity (whether or not the payment is a superannuation benefit); and

(c) an *unused annual leave payment (see Subdivision 83-A);

(d) an *unused long service leave payment (see Subdivision 83-B);

(e) the part of a *genuine redundancy payment or an *early retirement scheme payment worked out under section 83-170 (see Subdivision 83-C);

(f) a payment to which Subdivision 83-D (Foreign termination payments) applies;

(fa) a payment (or part of one) made by a company or trust as mentioned in subsection 152-310(2);

(g) a payment that is an advance or a loan to you on terms and conditions that would apply if you and the payer were dealing at *arm's length;

(h) a payment that is deemed to be a *dividend under this Act;

…….

The payment to the recipient does not fall into any of the categories contained within these sections as the payment is considered to be a gift for altruistic purposes, and is not connected to the former employee's employment. It is therefore not considered to be an Employment Termination Payment pursuant to section 82-130 of the ITAA 1997.

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