There’s a good reason why your local volunteer-run netball club doesn’t pay tax. In Australia, various not-for-profit organizations are exempt from paying income tax, including people who perform charitable activities, resembling churches.
These exemptions or credits might also apply to other taxes, including fringe advantages tax, state and native property taxes, and payroll taxes.
The traditional justification for granting these concessions is that the charity advantages society. They contribute to the well-being of the community in a variety of non-religious ways.
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For example, charities offer social, health and academic services that might otherwise be provided by the federal government because of their obvious public advantages. Tax exemption, which allows a charity to maintain all funds raised, provides the financial support required to alleviate the federal government of this burden.
The nonprofit sector is usually called the third sector of society, the opposite two being government and for-profit enterprises. But in Australia this third sector is sort of large. Some grassroots organizations are small in scope, but other nonprofits are very large. And many of these larger entities – including some “megachurches” – run huge business enterprises. They are sometimes indistinguishable from comparable business activities within the for-profit sector.
So why is that this income not taxed? And should we actually give all nonprofits the identical tax breaks?
Why don’t churches pay taxes?
The primary purpose of a church is to develop or promote its religion. This in itself counts as a charitable purpose inside the meaning of Art Charities Act 2013. However, section five of the Act requires that the Church have exclusively charitable purposes – every other purposes have to be incidental to or supportive of them.
Seen individually, operating a church with extensive business activities – which can include selling merchandise or hosting concert events and conferences – just isn’t a charitable purpose.
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However, Australian case law and ATO ruling each support the view that conducting business activities could also be incidental or may support a charitable purpose. This could possibly be the case, for instance, if the business activities of a large church were intended to assist further its charitable purposes.
For this reason, under current Australian income tax law, a church operating a large business enterprise can retain exemption from income tax on profits from that business.
There are various public policy concerns related to this. First, forgone tax revenues are more likely to be significant, although the federal government’s annual tax expenditure statement doesn’t currently provide an estimate of the quantity of foregone tax revenues.
Secondly, tax exemption may end in dishonesty. A for-profit enterprise competing with a church in a given industry could also be at a competitive drawback – despite similar operations, the for-profit entity pays income tax, while the church doesn’t. This competitive drawback could also be reflected in lower prices for church business customers.
What about taxation of their employees?
Churches that run large-scale businesses likely employ many employees. Generally speaking, all normal Australian tax rules apply to how these employees are paid – for instance, employees pay income tax on these wages. Distributing profits amongst members can be contrary to the atypical principles of the Church, and that’s what this prohibition is required in any case, for the organization to qualify as a charity.
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Some churches could also be criticized for paying founders or leaders “excessive” salaries, but these are still taxed in the identical way as normal salaries.
It is essential to contemplate fringe advantages tax, which employers must pay on certain advantages they provide to employees. Apart from some qualifications, all the things as usual rules for taxation of additional advantages apply to non-wage advantages provided to church employees.
Like their business (and taxable) counterparts, payments for “luxury” travel and lodging for church leaders and employees while on duty is not going to generate a taxable fringe profit amount for the church.
However, there’s one caveat: the church will probably be the church rebateable employer under the perimeter advantages tax system. This means you may get tax relief on advantages provided to every worker, as much as a specific amount.
We might have to rethink general tax exemptions for charities
At a time when nonprofits were mostly small and focused on meeting the needs of people underserved by the market, it seemed appropriate to exempt such charities from income tax.
However, in modern times, some charities – including some churches – run huge businesses and collect rents on vast estates.
Many persons are currently questioning whether we should always proceed to supply them unlimited income tax relief, especially if there are concerns concerning the proper use of these profits.
Debates about solutions to the issue have focused on various arguments. However, it might have more data on how charities allocate their profits to charitable causes, especially those with significant business activities.
An all-or-nothing rule that excludes your entire charitable sector may now not be useful if it doesn’t consider the very different circumstances of different nonprofits.
