Are you paying people for their services legally?

In this article, we explain the correct way for churches to deal with payments made to people for their services. Many people work for or operate with churches in various ways. For example, there are employees, volunteers, and suppliers. Some of these people are paid and some are not. Payments for services may be in the form of:

• • Stipend or wages as per an official award or denomination recommendation.
  • Payment for invoices supplied from arm’s length suppliers.
  • Payments for services performed for the church as decided by the church council or committee.
  • Donations or gifts in kind in recognition of services provided.
  • In our experience working with hundreds of churches across Australia, churches are sometimes unaware that the Australian Taxation Office (ATO) have particular guidelines that we are required to follow when paying people for services. Churches are not exempt from these guidelines, and we must follow them.

When we have asked people working on church accounts about the methods of payment, these are some of the replies we hear:

• • “Oh, we’re paying ‘cash’ because they’re just doing the cleaning, playing the organ, or gardening”
  • “We don’t need invoices because they are only casual workers”
  • “They are ministers so we don’t want to ask for paperwork”
  • “That’s the way we’ve always done it”
  • “Nobody has ever told us this before”
  • “The auditor hasn’t said anything before”
  • “It’s just a small gift for all the work they do”
  • “They don’t want it to affect their government benefits”

There can be consequences for paying people incorrectly. These may include:

• • disgruntled volunteers or workers make retrospective claims for incorrect payments,
  • the church and/or the recipient may be fined by the ATO,
  • the church and the recipient will have to remake the payment correctly and incur possible penalties or fines,
  • both the church and the recipient could be investigated by the ATO, and
  • people working or volunteering around the church may not be covered by insurance.

An example of this could be: A musician left the church in unhappy circumstances and makes claims to the ATO or Fair Work that incorrect wages and taxes have been made for many years of service. They may have worked and been paid “cash-in-hand”. However, no tax was withheld, and superannuation was never paid. The church would not have appropriate evidence to rest on and so may have to pay a large claim to the employee and fines to the ATO.

Correct payment methods and processes are essential Since the implementation of the new tax system in 2000 the following applies when an organisation, like churches, are paying people. 

There are only four methods to pay people correctly. These are:

1. 1. An employee – through payroll
   2. A supplier – for a tax invoice
   3. A person not carrying on an enterprise. They are pursuing a private recreational pursuit or hobby- with a Statement by Supplier
   4. A Volunteer – for reimbursement of expenses.

Following is an introduction to the correct processes and procedures. For more specific assistance with these for your church or organisation you are welcome to contact the team at Benkorp.
The correct procedures and documentation for these must be followed as below:

1. An Employee:

• • a Tax File Number Declaration form is required to be completed and Superannuation is also payable; and
  • Employees must be paid under the Fair Work Commission legislation. – Read More 

Some people have the impression that setting up people as employees is difficult. It is relatively easy with Xero and has many benefits for the employee and employer, even if they are just a casual worker.

2. A Supplier or independent contractor

• • They must have an Australian Business Number (ABN);
  • They may or may not be registered for Goods & Services Tax (GST); and
  • They must supply a valid Tax Invoice– Read More

3. A Person not carrying on an enterprise

A person not carrying on an enterprise may provide services as part of a private recreational pursuit or hobby. If payment is made to a person who is not an employee or does not have a registered ABN, a Statement by a supplier form is required to be completed and must be filed with any other supporting documentation. If this form is not completed, then the church/paying organisation may be required to withhold 48.5% of the amount and submit it to the ATO in the next Business Activity Statement (BAS). An individual or a business that supplies goods or services can only complete a Statement by a supplier form if one or more of the following applies:

• • they are not carrying on an enterprise in Australia
  • they are an individual under 18 years and the payment does not exceed $350 per week
  • the payment does not exceed $75, excluding any GST
  • they are an individual, and a written statement is provided to the payer to the effect that the service is either
  • made in the course or furtherance of an activity done as a private recreational pursuit or hobby, or
  • wholly of a private or domestic nature
  • they are an individual or a partnership without a reasonable expectation of profit or gain
  • they are not entitled to an ABN because they are not carrying on an enterprise in Australia
  • the whole of the payment is exempt income

Suppliers cannot use this form if any of the following apply:

• • they are receiving payments for the service as an employee
  • their activity is not wholly of a private or domestic nature
  • they are receiving payments for the service as a company director or office holder
  • they are receiving payments for the service under a labour-hire arrangement or specified payment
  • they are receiving payments for the service as a religious practitioner
  • they are entitled to an ABN for the relevant activity

Click here for more details including a link to the Statement by a Supplier form to be completed and held by the church.

4. A Volunteer Volunteers can be paid in cash, given non-cash benefits or given a combination of both cash and non-cash benefits. These payments have various descriptions, including honorariums, reimbursements and allowances. It must be determined if these payments are assessable income to the volunteer. A payment to a volunteer that is not assessable income will have many of the following characteristics:

• • The payment is to meet incurred or anticipated expenses.
  • The payment has no connection to the volunteer’s income-producing activities or services.
  • The payment is not received as remuneration or as a consequence of employment.
  • The payment is not relied upon or expected by the volunteer for day-to-day living.
  • The payment is not legally required or expected.
  • There is no obligation on the part of your organisation to make the payment.
  • The payment is a token amount compared to the services provided or expenses incurred by the volunteer. Whether the payment is token depends on the full facts surrounding the payment and the volunteer’s circumstances.

For more details click here.

Examples Specific to Churches Paying money to ministers who speak at your church

Depending on the denomination, people who are organised to speak or preach at church are called Pulpit Supply, Locums or interim ministers. Payments to ministers of religion who speak or preach at church (regardless of the frequency) is connected to their income-producing activities or services. Therefore, any payments are to be processed as a casual employee through the payroll system. PAYG tax is to be deducted and superannuation paid where appropriate. These payments are to be included in the annual Single Touch Payroll (STP) finalisation statements. If the speaker is classified as a Religious practitioner, after an agreement is in place, payments can be made to a 3^rd party and treated as Fringe Benefits Tax free payments and no PAYG withheld from payments. These payments will still need to be reported to the ATO via STP. The payment can be treated similarly to an independent contractor if the minister has their own ABN and provides a Tax Invoice.

Paying money to a speaker who represents a Mission Organisation If money is given to a member of a mission organisation who speaks at a church and the money will be given to the mission organisation, it is to be treated as a donation to that mission organisation. Often receipts for donations are given by the mission organisation.

Paying singers and musicians for their services The above notes also apply to singers and musicians who provide their services for the church. The applicable treatment needs to be determined on the facts for each person. Particularly if their income-producing activities or services are in the music industry, they are carrying on a business in the music industry or if music is just a private recreational pursuit or hobby. Please note that minimum employment award rates and entitlements may apply when the person is determined to be treated as an employee. Please click here for some more information.

What should you do?
For each person who receives payment when they provide their services:

• • Review the types of payments made
  • Determine the facts
  • Determine which of the four categories above best applies
  • Document the results and the factors used to make the decision
  • Implement the appropriate action

Should you be unsure of your obligations, please contact Benkorp to organise a consultation with one of our staff members.