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Ruling

Subject: Fringe benefits tax: exempt fringe benefits

Issue 1

What fringe benefits are provided by the church when it reimburses expenses incurred by its employees who are pastors pursuant to the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

The church is a religious institution employing pastors for whom the church provides fringe benefits.

Question 1

Are reimbursements by the church of rent, council rates, water rates, household utilities, investment property expenses and day to day living expenses such as grocery bills incurred by its employee pastors, exempt benefits pursuant to section 57 of the FBTAA?

Section 57 of the FBTAA exempts benefits provided to employees of religious institutions where the following conditions are fulfilled:

(a) the employer of an employee is a religious institution;

(b) the employee is a religious practitioner;

(c) a benefit is provided to, or to a spouse or a child of, the employee; and

(d) the benefit is not provided principally in respect of duties of the employee other than:

(i) any pastoral duties; or
(ii) any other duties or activities that are directly related to the practice, study, teaching or propagation of religious beliefs;

The church is a religious institution that has been endorsed as a charitable institution for the advancement of religion. The church employs pastors who are ordained ministers. A 'religious practitioner' is described in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as

(a) a minister of religion; or
(b) a student at an institution who is undertaking a course of instruction in the duties of a minister of religion; or
(c) a full-time member of a religious order; or
(d) a student at a college conducted solely for training persons to become members of religious orders.

These ordained pastors attend to the religious needs of the community, conducting services, preaching and in general propagating the faith through education and spiritual counselling. The pastors are principally engaged for these duties by their employer, the church. The pastors are religious practitioners. The church as a religious institution may provide their religious practitioners with benefits pursuant to section 57 of the FBTAA when the benefits are provided by virtue of their principal duties. Subsection 57(c) specifically includes benefits provided to a pastor's spouse and children as exempt benefits.

Benefits provided are not limited in scope if the benefit is provided to the pastor in respect of the pastoral duties performed. Taxation Ruling TR 92/17 Income tax and fringe benefits tax: exemptions for 'religious institutions' employs examples to illustrate the broad range of benefits that may be provided by the religious institution to its employee. At paragraph 32 it states:

A minister of religion, whose duties are exclusively or predominantly of a pastoral nature, is provided with a residence and a motor vehicle in addition to a stipend. Those benefits are not provided principally in respect of duties other than the minister's pastoral duties, and the benefits are exempt from fringe benefits tax. Similarly, if the religious institution pays the school fees for a child of that minister, that benefit is an exempt benefit.

Any expense incurred by the pastors and their spouses and children may be provided as a benefit by the religious institution if the benefit is provided in respect of the pastors principal duties as a religious practitioner. Rent, council rates, water rates, household utilities, investment property expenses and day to day living expenses such as grocery bills of the pastors and their spouses and children are exempt expenses pursuant to section 57 of the FBTAA.

Question 2

When the church reimburses the pastors for expenses incurred by the pastors' close relatives are the reimbursements an expense payment benefit pursuant to section 20 of the FBTAA?

Are the pastors' relatives 'associates' for the purposes of the FBTAA?

Section 136(1) of the FBTAA states that 'associate' has the meaning given by section 318 of the Income Tax Assessment Act 1936 (ITAA 1936).

For the purposes of this Part, the following are associates of an entity (in this subsection called the "primary entity") that is a natural person (otherwise than in the capacity of trustee):

(a) a relative of the primary entity;

(b) a partner of the primary entity or a partnership in which the primary entity is a partner;

(c) if a partner of the primary entity is a natural person otherwise than in the capacity of trustee - the spouse or a child of that partner;

A relative of a person for the purposes of section 136(1) of the FBTAA 1986 has the meaning provided by section 995-1 of the ITAA 1997.

relative of a person means:
(a) the person's ^*spouse; or
(b) the *parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendent or ^*adopted child of that person, or of that person's spouse; or
(c) the spouse of a person referred to in paragraph (b).

The definition of relative clearly encompasses the pastors' relatives. Therefore when the church provides a benefit to the pastors or the pastors' relatives, as associates of the pastor, in respect of the pastors' employment arrangements, the church is providing a fringe benefit.

A fringe benefit, as defined in subsection 136(1) of the FBTAA, arises where a benefit is provided to an employee (or associate) by an employer (or associate) or a third party under an arrangement with the employer (or associate) in respect of the employee's employment and where such a benefit is not otherwise exempted.

Subsection 136(1) of the FBTAA provides that a fringe benefit which comes within the expense payment definition in section 20 of the FBTAA will be an expense payment fringe benefit. Section 20 sets out the circumstances of when this type of benefit occurs.

Where a person (in this section referred to as the ``provider''):

(a) makes a payment in discharge, in whole or in part, of an obligation of another person (in this section referred to as the ``recipient'') to pay an amount to a third person in respect of expenditure incurred by the recipient; or

(b) reimburses another person (in this section also referred to as the ``recipient''), in whole or in part, in respect of an amount of expenditure incurred by the recipient;

the making of the payment referred to in paragraph (a), or the reimbursement referred to in paragraph (b), shall be taken to constitute the provision of a benefit by the provider to the recipient.

'Provider' is defined in subsection 136(1) of the FBTAA to mean 'the person who provides the benefit'.

'Person' is defined in subsection 136(1) of the FBTAA to include:

· a body politic

· a body corporate

· a partnership

· any other unincorporated association or body of persons; and

· a person in the capacity of trustee.

The church is an incorporated association which is a body corporate and therefore a person for the purposes of the FBTAA.

'Recipient' is defined in subsection 136(1) as 'the person to whom the benefit is provided'. The pastor is the recipient when the church pays the expenses of the pastor and their associates.

Section 20 of the FBTAA provides that an expense payment benefit will arise in two ways:

· where the provider (in this case the church) reimburses the recipient (in this case the employee) for expenses they incur, or

· where the provider (the church) pays a third party in satisfaction of expenses incurred by the recipient (the employee).

The church has advised that it reimburses the pastors for expenses that they incur by either paying the bill for the expense to a third party or by reimbursing the pastor for an expense when a receipt is produced.

Although relatives are not specifically included in subsection 57(c) of the FBTAA as members of a pastor's immediate family, they are included in the definition of 'associate' for the purposes of the FBTAA. They are associates of the employee pastor. When the church reimburses its employees for expenses incurred by the employees' associates, an expense payment fringe benefit will arise by virtue of section 20 of the FBTAA.

Issue 2

Question 1

Will reimbursing a pastor under a prospective salary sacrifice arrangement for an exempt or expense benefit by depositing the money into the pastor's bank account upon production of a receipt, constitute assessable income derived by the pastor pursuant to section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

The church enters into prospective salary sacrifice arrangements with its pastors where the employees' exempt and expense benefits will be reimbursed by the church before the pastors have a presently existing entitlement to salary and wages.

When the employees produce a receipt for an expense that is an exempt or expense benefit and the church reimburses its employees for that expense by depositing money into the employees bank account, the deposit will not be regarded as assessable income of the employee because section 23L of the ITAA 1936 specifically excludes certain benefits in the nature of income as being assessable income.

Subsection 23L(1) identifies fringe benefits that are provided to a taxpayer as neither assessable income nor exempt income when it states.

Income derived by a taxpayer by way of the provision of a fringe benefit is not assessable income and is not exempt income of the taxpayer.

The church provides expense payment benefits to the pastors' associates when it reimburses the pastors for expenses incurred by the pastors' elderly parents pursuant to section 20 of the ITAA 1997. These expense payment benefits are fringe benefits. Income derived by the pastors when they are provided with a fringe benefit by the church is classified as non assessable and non exempt income according to subsection 23L(1) of the ITAA 1936.

Subsection 6-15(3) of the ITAA 1997 states that if an amount is non-assessable non-exempt income it is not assessable income. Therefore the expense payment benefits provided by the church to its pastors are not assessable income according to ordinary concepts (section 6-5 of the ITAA 1997) or statutory income (section 6-10 of the ITAA 1997).

And subsection 23L(1A) identifies as exempt income those benefits derived by a taxpayer and described at paragraph (g) of the definition of "fringe benefit" in subsection 136(1) of the FBTAA as 'exempt benefits in relation to a year of tax.'

Income derived by a taxpayer by way of the provision of a benefit (other than a benefit to which section 15-70 of the Income Tax Assessment Act 1997 applies) that, but for paragraph (g) of the definition of fringe benefit in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986, would be a fringe benefit is exempt income of the taxpayer.

This subsection operates to classify exempt fringe benefits as exempt income but identifies an exception at section 15-70 of the ITAA 1997. Section 15-70 of the ITAA 1997 concerns reimbursed car expenses that are exempt car expense payment benefits subject to section 22 of the FBTAA. Exempt car expense payment benefits are included as assessable income in the hands of the taxpayer.

Section 57 of the FBTAA identifies benefits provided by the church to pastors, as religious practitioners, in respect of their duties as exempt fringe benefits. Section 23L1(A) of the ITAA 1936 therefore acts to classify those exempt benefits with the exclusion of exempt car expense payment benefits, as exempt income. Subsection 6-15(2) of the ITAA 1997 states that if an amount is exempt income it is not assessable income within the meaning of section 6-5 and 6-10 of the ITAA 1997 that includes ordinary income and statutory income as assessable income. Therefore the amounts reimbursed to the pastors as exempt fringe benefits that are not exempt car expense payment benefits are not assessable income in the hands of the pastors pursuant to section 6-5 or section 6-10 of the ITAA 1997.

When the church reimburses a pastor under a salary sacrifice arrangement for an exempt (that is not a reimbursed exempt car expense payment) or expense benefit, by depositing the money into the pastor's bank account upon production of a receipt, the amount of the deposit will not constitute assessable income derived by the pastor pursuant to section 6-5 and section 6-10 of the ITAA 1997.