By John Vaughan-Williams, Lawyer
Charities and not-for-profits in Australia are entitled to certain concessions and exemptions regarding fringe benefits tax (FBT) for their employees. A new draft tax ruling has been issued by the Australian Taxation Office (ATO), clarifying the FBT exemptions available to certain charities.
What is FBT?
While there are several exceptions which can apply, a fringe benefit, put simply, is a benefit which is given to an employee by an employer in lieu of salary. It can take the form of a right, a privilege or a service. The general question, when considering whether an employee has received a fringe benefit, is whether the employee would have received that benefit without being employed in the relevant position.
Most employers are required to pay tax on fringe benefits which they pay to employees, so long as those benefits are covered by the Fringe Benefits Tax Assessment Act 1986 (Cth) (FBT Act).
General Exemptions and Concessions – FBT Rebate
The broad position (independent of the new draft tax ruling), is that certain not-for-profits are entitled to an FBT Rebate. Organisations which benefit from the FBT rebate are entitled to a discount of 47% of FBT which would otherwise be payable per employee (with this percentage changing slightly from year to year), capped at the amount of tax which would be payable on $30,000.00 worth of fringe benefits to that employee.
A not-for-profit is entitled to the FBT rebate if:
- it is registered with the ACNC as a charity; or
- it is not a charity, but “self-assesses” as falling within one of several categories of exemption (e.g. community service organisations or resource development organisations).
Further, a not-for-profit must be an “institution” to benefit from the rebate, which generally means that a mere trust or fund is not entitled to it.
For charities, it is easy to determine whether they are entitled to the rebate, as the rebate will be shown publicly on the Australian Business Register. The rebate is generally granted automatically with charity endorsement.
However, not-for-profits which are not endorsed as charities are required to “self-assess” their eligibility for the rebate. This means that these not-for-profits must make their own determination as to whether their objects and activities fall within one of the categories of exemption. Ideally, the board should conduct such an assessment annually, or at the worst, biennially. If an organisation gets its self-assessment wrong, but based its decision on reasonable justification, then it is less likely to be charged any penalty tax or interest, if the ATO later determines that the organisation was not entitled to the rebate. Conversely, if a not-for-profit has never conducted the assessment, and wrongly assumed that it was entitled to the rebate, then the ATO is more likely to charge penalties or interest.
General Exemptions and Concessions – PBIs and HPCs – FBT Exemption
Every organisation which is registered as a charity in Australia must be registered under at least one of 14 available “sub-types”. Two of these subtypes of charity in Australia are public benevolent institutions (PBIs) and health promotion charities (HPCs). PBIs and HPCs are arguably entitled to the richest tax endorsements and concessions in Australia.
Additionally to being deductible gift recipients, and benefiting from all other tax concessions for charities, PBIs and HPCs are also entitled to the FBT exemption.
Whereas the FBT rebate is a discount on the amount of FBT payable, PBIs and HPCs are entitled to a complete exemption from FBT, up to a cap of the amount of FBT which would be payable on per employee, capped at the amount of tax on $30,000.00 worth of fringe benefits per employee.
New Draft Ruling – Background
Certain religious organisations are entitled to an FBT exemption beyond the more general concessions and exemptions which have been detailed in this article.
The new draft ruling, ‘TR 2018/D2 – Fringe benefits tax: benefits provided to religious practitioners’ (TR2018/D2), brings greater clarity to the exemptions which are enjoyed by such religious organisations.
While the nature of the exemptions discussed in TR2018/D2 are not new, TR2018/D2 has clarified the application of the law to the current legislative scheme for charities (particularly, catering for the establishment of the Australian Charities and Not-for-profits Commission (ACNC), and the introduction of the Charities Act 2013 (Cth)). Before TR2018/D2, the exemption in question was discussed in another tax ruling, ‘TR 92/17W – Income tax and fringe benefits tax: exemptions for ‘religious institutions’’ (TR92/17W). However, that ruling was out of date, as it did not reflect the role of the ACNC. TR2018/D2 has abolished TR92/17W.
TR2018/D2 clarifies that any institution which is registered with the ACNC as a charity under the sub-type of “advancing religion” is entitled to an FBT exemption to certain fringe benefits provided to a “religious practitioner”, as that term is defined in the FBT Act, as well as some of the practitioner’s family members.
There are four primary requirements for the exemption, as set out in TR2018/D2:
- The organisation must be an institution;
- The organisation must advance religion;
- The fringe benefits must be provided to an employee who is a “religious practitioner”, or certain family members; and
- The fringe benefits must be in respect to the practitioner’s pastoral duties or directly related religious activities.
Requirement 1 for Exemption – Institution
As with the other concessions and exemptions, in order to benefit from this exemption, the organisation must be an “institution”. There is considerable law regarding when an organisation will be considered an “institution”. The most common (but not exhaustive) types of institution are public companies limited by guarantee and incorporated associations.
Notwithstanding this, even some organisations which are public companies limited by guarantee or incorporated associations will not be considered “institutions” (for example, if they only raise funds for other organisations).
Requirement 2 for Exemption – Advancing Religion
Since the introduction of the ACNC in 2012, there is a publicly searchable register of all charities, including the sub-type under which they are endorsed. Therefore, so long as an organisation appears on the public register with the sub-type of “advancing religion”, they will be considered to advance religion for the purpose of this FBT exemption. It does not matter whether the organisation is simultaneously registered under another sub-type (for example, some religious organisations must also be registered under the sub-type of “advancing education”, if they conduct religious instruction).
Importantly, TR2018/D2 has clarified (where TR92/17W did not) that the organisation must be registered with the ACNC under the relevant subtype. Even if an organisation would be eligible to be registered but has not applied to the ACNC, it will not be eligible for the exemption.
Requirement 3 for Exemption – Religious Practitioner, or Certain Family Members
The term “religious practitioner” is defined similarly to how it is in other areas of tax law. The term can cover a minister of religion, an individual studying to become a minister of religion, or a full-time member of a religious order.
Certain fringe benefits which are paid to religious practitioners, as well as to their spouses and children, will be exempt from FBT.
A minister of religion will normally have the following characteristics (as well as others):
- be recognised by ordination, or otherwise has authority to carry out the duties of a minister based on theological training or experience;
- be distinct from ordinary followers of the religion; and
- is authorised to conduct religious worship and other religious ceremonies.
Further, a “religious order” will normally have the following features (and others):
- members make long-term commitment to the order;
- members are part of a religious community and are pursuing a religious life on a full-time basis; and
- the order is controlled by, or supervised by, or affiliated with, or partially or wholly funded by an organisation which is a religious “institution” (as described earlier).
Requirement 4 for Exemption – Pastoral Duties or Directly Related Religious Activities
Finally, in order to be exempt, the fringe benefits must be principally for the “pastoral duties” or “directly related religious activities” of the practitioner.
The term “principally” is not defined in the FBT Act, and will be determined by the individual facts and circumstances, as discussed in detail in TR2018/D2. Generally, if the only duties conducted by the practitioner fall within either of these definitions, then the fringe benefits will be “principally” for “pastoral duties” or “directly related religious activities”.
A pastoral duty is generally one connected with spiritual care of people. This includes (but is not limited to) communicating religious beliefs, teaching and counselling members of the community, and visiting individuals who are in need of pastoral care.
Similarly, directly related religious activities are ones that promote the practice, study, teaching and propagation of religious beliefs. Importantly, these activities can sometimes be secular, if directly linked to religious beliefs (some examples will include educational activities conducted by religious organisations, which are motivated by religious principles, but are not direct religious instruction).
Calls for submissions on TR2018/D2 are now over. While it is in draft form, it is likely to reflect the approach of the ATO moving forward.
As set out in this article, the application of the exemption to individual religious organisations will vary, so organisations should undertake detailed analysis and/or seek advice before determining that they can benefit from the exemption.
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