Tax and Superannuation Query

Posted On: Friday, October 19, 2018

QUESTION

I would appreciate your response to a tax and superannuation question that I have.

For the purposes of the question, please assume:

  • The entity is definitely a ‘religious institution’ according to the meaning of the term 'religious institution' as it appears in the ITAA and the FBTAA.
  • The employee, a minister of religion, is definitely a ‘religious practitioner’ as defined in subsection 136(1) of the FBTAA.
    • Their duties are predominantly pastoral duties and other duties directly related to the practice, study, teaching and propagation of religious beliefs.
      • (subparagraph 57(d)(i) of the FBTAA), or other duties or activities that are directly related to the practice, study, teaching or propagation of religious beliefs (subparagraph 57(d)(ii) of the FBTAA). The latter duties and activities are referred to in this Ruling as 'directly related religious activities'.
  • Because of the application of TR 92/17, benefits provided to this employee will be exempt benefits. Therefore, they are not fringe benefits and so the FBT with or without the rebate is not relevant.
    • Benefits provided to certain employees of a 'religious institution' are exempt benefits under section 57 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). A benefit provided by a religious institution to an employee is an exempt benefit under section 57 of the FBTAA if:

a)the employee is a religious practitioner (i.e. a minister of religion, a full-time member of a religious order, or a person training to become a minister of religion or a member of a religious order); and

b)the benefit is provided to the employee, the employee's 'spouse' as defined in subsection 136(1) of the FBTAA, or the employee's 'child' as defined in subsection 136(1) of the FBTAA; and

c)the benefit is not provided principally in respect of duties of the employee, other than pastoral duties or any other duties or activities directly related to the practice, study, teaching or propagation of religious beliefs.

  • The employer has taken the initiative toward the employee in the years leading up to retirement age, in order to provide a more adequate superannuation balance at retirement age. This is because the minister only receives a ‘minimum award wage’ level of salary upon which the SGA contribution of 9.5% is paid. Therefore, their superannuation balance will be insufficient to provide an adequate income stream to cover basic living expenses. The benefits received by the minister are in the form of a stipend which merely covers living expenses and so there is no capacity for the minister to accumulate any other savings.

There is no question that in this situation, that any benefit provided to the spouse of the employee is an exempt benefit. Therefore, it is not subject to PAYG or FBT.

The point for clarification is around making a contribution to the superannuation fund of the employee’s spouse. So, the question is twofold:

  1. Is a superannuation contribution to the employees’ spouse a benefit and therefore an exempt benefit?

a)I believe the answer to this question is ‘YES’, for the following reasons:

In TR 2001/10, paragraph 38. It states:

38. It is possible for an employee to enter into an effective SSA where the employer makes a superannuation contribution in respect of someone other than the employee, e.g., spouse. However, any such superannuation contribution will be a fringe benefit.

This would suggest that in accordance with an effective SSA, an employer can make a superannuation contribution to the superannuation fund of an employee’s spouse and that the contribution would be regarded as a fringe benefit. Therefore, in the scenario presented, because any fringe benefit provided to the minister of religion is regarded as an exempt benefit, the superannuation contribution will be an exempt benefit, which means it is not subject to either PAYG or FBT.

 

a)Is the superannuation contribution a ‘non-concessional’ contribution and therefore subject to the non-concessional contribution limits of the spouse (i.e. $100,000 p.a.)?

I believe the answer to this question may be ‘NO’, for the following reasons:

Refer to attached pdf from the ATO website – qc19749.pdf – on page 8 & 9, it states:

Types of non-concessional contributions include:

contributions you make, or your employer makes on your behalf, from your after-tax income

contributions your spouse makes to your super fund (unless your spouse makes the contributions because they’re your employer)

However, as I understand it, to be non-concessional, the contribution must be an ‘after-tax’ contribution. If the additional contribution is a ‘benefit’, then I am certain that it can only be regarded as a ‘before-tax’ contribution even though it is an ‘exempt benefit’ and not subject to tax. If my understanding here is incorrect, I would be happy to hear that. Also, because the employer has taken the initiative in this situation and the employee has not influenced the payment in any way, the contribution will be non-reportable.

b)If the answer to part (a) is ‘NO’, then is the superannuation contribution a ‘concessional’ contribution and therefore subject to the concessional contribution limits of the spouse (i.e. $25,000 p.a.)?

I believe the answer to this question may be ‘YES’, for the following reasons:

A superannuation contribution made through an effective SSA would be regarded as a ‘before-tax’ contribution and so it would be regarded as a ‘concessional’ contribution, subject to the concessional contribution limits of the spouse (i.e. $25,000 p.a.) and would be taxed in the super fund at the current tax rate of 15%.

The contribution would be counted under the spouse’s concessional contribution cap and would therefore not be counted under the employee’s concessional contribution cap.

A contribution made directly to the spouse’s superannuation fund as part of an effective SSA would be different from splitting superannuation contributions, because it is effectively a before-tax contribution by the employee to the spouse’s superannuation fund rather than a 'contributions-splitting super benefit' in relation to a contribution already made to the employee’s super fund. Therefore, the rules with regard to super splitting would not apply.

I would appreciate your confirmation of my understanding or any correction or your advice regarding any other relevant matters.

ANSWER

It is necessary to determine whether this charity would qualify as a religious institution and you would need to be certain that the FBT rebate applies before embarking on this course of action.

It is suggested that if an effective salary sacrifice occurs then PAYG does not apply but there may be a taxable value for FBT.

There may be other options…

If the pastor salary sacrifices the amount into his own fund (assumes he is below yearly contribution limit – 25k), then he may consider superannuation splitting with his wife.

If the religious practitioner’s wife plays any active role in the charity... then it may be possible for her to be engaged as an employee and then do an effective salary sacrifice.

Note it is only fund members who can make non-concessional contributions.

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