The ability for ministers of religion to be paid exempt, non-reportable fringe benefits is a very generous concession within the Australian Taxation landscape. Unfortunately, misunderstandings of how this concession works sometimes lead to inappropriate payroll settings being used. Previously this may have only resulted in a lack of clarity for internal reporting, but with the introduction of Single Touch Payroll Phase Two (STP2) such oversights could result in inaccurate reporting to the ATO.
This article aims to clarify how exempt, non-reportable fringe benefits work, linking back to standard payroll concepts, which will then make it clear how such payments should be recorded for STP2 purposes.
Exempt, non-reportable fringe benefits
Section 57 of the Fringe Benefits Tax Assessment Act 1986 is explained and clarified in Taxation Ruling 2019/3 Fringe benefits tax: benefits provided to religious practitioners. Stating that where:
the employer of an employee is a religious institution; the employee is a minister of religion; a benefit is provided to the employee; and the benefit is not provided principally in respect of duties of the employee other than any pastoral duties; the benefit is an exempt benefit.
For the purpose of this article, it is assumed you have already determined that the employer is a religious institution, the employee is a minister of religion and that the benefits are being provided principally in respect of pastoral duties. Benefits in this context refers to fringe benefits. For additional clarification on the application of those assumed components, Taxation Ruling 2019/3 is a helpful reference.
Exempt, non-reportable fringe benefits paid to ministers of religion are known by a variety of different names, including:
Minister’s benefits
Exempt benefits
Exempt fringe benefits
Non-reportable fringe benefits
For the purpose of this article the abbreviation NRFB will be used.
The salary or wages paid to a minister of religion by transfer to their bank account are not NRFB; they are recorded, paid and taxed under the same rules as any other employee.
Fringe benefits
Fringe benefits are things of value that an employer provides to an employee, but excluding wages / salary paid by cash / bank transfer. For example, the use of a motor vehicle, the use of a house at below market rental, reimbursement of private expenses, repayment of a loan.
Fringe benefits may be provided either as a benefit in addition to the employee’s salary, or through a valid salary sacrifice arrangement. You will need to review the employment contract to determine which (or which combination) of these payment types is being paid. If it is not clear it might be timely to update your employment contracts. There is a very different payroll treatment depending on which type of payments are being made.
Salary Sacrifice Fringe Benefits may often be described in an employment agreement with wordings such as ‘you will receive a salary of $50,000, but may elect to receive up to 70% of that remuneration as fringe benefits’, or ‘you will receive an hourly rate of $40 and can receive up to 50% as NRFB’. These should be processed within the payroll system and appear as a deduction from the gross remuneration of the employee.
In Addition Fringe Benefits may be described in terms such as ‘in addition to your salary of $50,000pa you will also be provided with a fully maintained motor vehicle’ or ‘as part of your employment you may live rent free in the housing provided by the employer’. These are not normally processed through the payroll system, and may be described qualitatively or quantitatively within the employment contract.
Every employment contract is worded slightly differently, so it can’t be stressed enough the importance of reading the actual employment contract and ensuring that you are processing payroll as per how it has been agreed in the contract.
Fringe benefits can also arise when an employee receives a benefit during the course of their work, for instance meals and entertainment enjoyed at a work function. These types of benefits are not part of the employee’s remuneration, and hence not discussed further in this article.
To ensure an equitable taxation outcome between wages that form part of an employee’s taxable salary and fringe benefits that are not part of salary, the ATO levies fringe benefits tax on employers. Fringe benefits tax is charged at a rate such that if the employee were on the highest tax bracket there would be the same amount of tax collected whether they received a salary or fringe benefits. The fringe benefit tax payable normally works out to cost about as much as the value of the benefit provided. However, the ATO provides a special incentive to religious institutions, that they are ‘exempt’ from paying fringe benefits tax on fringe benefits provided to a religious practitioner undertaking pastoral duties (Taxation Ruling 2019/3 for full details).
Normally any fringe benefits provided to an employee would be listed on their annual tax finalisation as part of the reporting to the ATO under the heading ‘reportable fringe benefits amount’ (RFBA). This can have some bearing on the employees’ personal financial situation. For ministers of religion, fringe benefits received have not previously been reportable to the ATO, and don’t form part of the ‘reportable fringe benefits amount’.
Salary Sacrifice
Other fringe benefits are salary sacrifice benefits, where the employee may choose to forgo a part of their agreed salary to receive a fringe benefit of equal value instead. It is normally the employee’s choice whether or not they want to receive any salary sacrifice benefits, however, I have seen many employment contracts that stipulate 70% of the salary is to be received as such benefits.
A note on superannuation
An employer is required to make superannuation guarantee payments in respect of ordinary time earnings at the relevant rate. However, fringe benefits and other non-cash payments are not salary or wages for superannuation guarantee purposes and thus are not ordinary time earnings. (ATO SGR 2009/2 (46)).
This generally means that it is not technically mandatory for the religious institution to pay superannuation guarantee in respect of the NRFB portion of a minister’s remuneration. However, in practice we see that the vast majority of religious institutions choose to pay superannuation at the relevant rate on the full remuneration of their ministers, including the NRFB component.
Unfortunately in some instances the religious institution may have intended to pay superannuation on the full remuneration, however, due to incorrect setup of the payroll system, this is not implemented and the minister may not have received superannuation on the NRFB component.
Payroll setups that can cause problems
We have seen a great variety of different setups used for the processing the payments of NRFB. It is helpful to describe some of the setups that do not work well, as this can contrast against the setups that work in a more preferable manner. Listed below are some setups that have been used in practice, and the reasons why they are less preferable:
‘cash wages’ and NRFB processed as separate categories of ‘base hourly wages’. The pay slip would show one line item for cash wages and a separate line item for NRFB, added together this gives the total remuneration.
Leave taken doesn’t get correctly applied between the two categories
Leave balance reports don’t calculate based on the correct hourly rate
When there are changes in pay rates it is more complicated to process the updates and more prone to error
Salary sacrifice fringe benefits not included in the payroll system at all, instead a ‘spend money’ type of transaction is used to record the payment of NRFB when transferred out of the bank account.
Gross wages reports generated from the payroll module of your software do not include all the remuneration of the employee
It is not easy to track the total value of Salary sacrifice fringe benefits provided
Workers compensation calculated on only the totals from the payroll software don’t cover the salary sacrifice portion of the remuneration
Superannuation guarantee can’t be automatically calculated based on the Salary sacrifice fringe benefits amounts
Preferable payroll setup
Both in order to be able to comply with STP2 reporting obligations and for more helpful internal reporting, the preferable way of setting up the payroll of ministers of religion is:
Total remuneration (prior to any salary sacrifice) processed as a single pay item – normally called ‘base hourly’, ‘base salary’, or similar.
Salary Sacrifice NRFB processed as a deduction item. This can be set in the payroll system as a pre-tax deduction to reduce gross salary prior to calculation of PAYG withholding and prior to calculation of W1 for activity statements, and reported as a salary sacrifice deduction in STP2 reporting. Where the employee has elected for the NRFB to be a set percentage of their gross remuneration, this pay item can be set as a percentage so it will automatically be correct even after changes in rates of pay. This pay item would normally be linked to a liability account on the employer’s balance sheet, so that with each payroll the value of NRFB due to the minister is coded to that liability pending distribution to the minister. The employer can select whether this item will reduce or not reduce the superannuation guarantee payable.
The payroll system will automatically calculate the net cash salary payable after the salary sacrifice deduction.
The benefits of processing in this setup include:
Payroll reports will reflect the full remuneration – helpful for internal reporting, workers compensation, etc
Leave taken can be recorded through the payroll system and will report correctly for STP2 purposes
NRFB amount is automatically calculated according to the employees directions
NRFB are automatically coded to a liability account in the employee’s name with each payroll transaction
Employer can easily process superannuation on the full remuneration if required
Changes in pay rates are easy to process
NRFB are often provided to ministers by way of a reimbursement of expenses already incurred or a payment to their home mortgage account. This is easily facilitated by having a liability account in the name of each minister, which increases with each payroll being processed and decreases with each payment made. The balance of that account is the value of NRFB due but not yet provided to the minister.
Interaction with STP2
Most bookkeepers would be well aware of single touch payroll phase two (STP2). This has been talked about for a while and there is plenty of guidance on how to set up your payroll software to provide the required additional information to the ATO.
As a brief recap, STP1 was essentially converting the previous manual system into an electronic system for lodgement of payroll data to the ATO each payday. STP2 then goes further to start capturing additional and different types of data, with one of the ultimate goals being to reduce some of the administrative work required from various different lodgements and processes. For example TFN declaration forms will no longer be required as the data that would have previously been on the TFN declaration form will now be lodged to the ATO through the STP system.
I will not attempt to cover all of the details of the STP 2 system in this article, rather, to look at how it might apply in the context of payments made to religious ministers. STP2 does not treat religious practitioners differently to other employees in any way, and all of the normal payroll rules and concepts still apply. However, there is a degree of confusion and misunderstanding in relation to payments to ministers, and this could lead to mistakes in reporting through STP2. Before progressing further, the most important fact to highlight is that STP 2 could result in reporting to the ATO more data than was reported previously; just because full remuneration was not reported previously, does not mean it won’t be reported going forward.
For STP 2 will need you to be able to categorise payroll transactions into more detailed categories than previously. Some of the reporting categories include:
Gross Remuneration
Paid leave
Other paid leave (Annual leave, LSL, TOIL, etc)
Paid parental leave
Cash out of leave in service
Unused leave on termination
Allowances
cents per km
domestic or overseas travel
qualification and certification allowances
task allowances
other allowances
Overtime
Bonuses and commissions
Salary sacrifice
Note: not all available categories are listed here – you can see a full list including definitions on the ATO website here: STP 2 reporting amounts paid
In order to do this, all of the types of payroll payments made will need to be able to be coded between those different categories. The way that some organisations have previously set up their payroll will not allow them to do this without first changing the way their payroll is processed.
Reporting example
Assume a religious minister has a contract of employment including the following terms:
$50,000 pa remuneration
$5,250 superannuation guarantee (10.50%)
$35,000 exempt fringe benefits (70%)
$15,000 salary – paid to bank account (30%)
Rent free accommodation at church owned house
Prior to STP2 this would have been recorded as:
$50,000 recorded as gross remuneration in payroll system
$50,000 appears as ‘wages expense’ on income statement
$35,000 pre-tax, post super deduction – coded to liability account. Not reported to ATO.
$15,000 reported to ATO as salary
House costs a church expense (accounts payable / spend money)
Under STP 2 the reporting of payroll data to the ATO will change:
Impact of increased reporting
There may be some concern among ministers and employers that this increased reporting could impact on a variety of different benefits. Currently the ATO clarifies on their website that this shouldn’t be the case and ‘STP 2 salary sacrifice’ and ‘RFBA’ are two different items for two different purposes.
Depending on how payroll was processed under STP1, the change to STP 2 could impact the information visible on pay slips. Staff may not be fully aware of how these changes apply in relation to remuneration of religious ministers, and there is a risk this could cause errors in processing pay, lodging STP and assessing minister’s eligibility for various benefits. Especially if these decisions are being made based on STP lodgement data which will be reporting Salary Sacrifice amounts on each pay date, while the RFBA may only be reported on an annual basis.
It's important to remember that salary sacrifice type O and RFBA are different things and used for different purposes:
Salary sacrifice type O helps us identify the pre-tax deduction so that we can help your employee complete their tax return correctly.
RFBA is used in income tests for various obligations and benefits administered by the ATO and Services Australia, including study and training support loan repayments and Family Tax Benefit and helps us ensure you are meeting your FBT obligations.
ATO: Relationship between reporting RFBA and salary sacrifice type O
If you are unsure about your payroll setup or have further questions specific to your personal circumstances, please contact our office.