Private ruling: Status of mortgage support payments
Date of advice: 25 May 2016
Published: July 2016
Ruling period: Year ended 30 June 2014.

Ruling: Q1: Are the payments made by the religious institution to the mortgagee bank under clause 3.2 of the Settlement and Release Deed assessable income in the taxpayer's hands under section 6-1 of the Income Tax Assessment Act 1997 ? | A1: No

Relevant facts and circumstances: The taxpayer was engaged by a religious institution under a written agreement (the Agreement) in 20XX, to act as the Assistant Minister assisting the Chief Minister for the congregation. In 20YY the taxpayer was promoted to Chief Minister and remained in that position until their engagement with the religious institution finished. The agreement was for a fixed term of X years and the taxpayer's role was that of a spiritual leader, counsellor, educator and role model and they had little to no involvement in the day-to-day running of the religious institution. The taxpayer's remuneration under clause 6.1 of the Agreement consists of a salary component (clause 6.1.1) as well as non-salary and wage fringe benefits (clause 6.1.2). On dd/mm/yyyy, the parties agreed to terminate the Agreement by way of a Settlement and Release Deed. Under clause 3 of the Deed the religious institution continued to provide mortgage support for the taxpayer and made payments totalling $X directly to their mortgagee.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5

Reasons for decision: Summary: Section 6-1 of the ITAA 1997 provides that your assessable income includes ordinary income and statutory income. However, under section 6-15 of the ITAA 1997, if an amount is exempt income, it is not assessable income. Section 6-20 provides that an amount of ordinary income or statutory income is exempt income if it is made exempt from income tax under the ITAA 1997 or another Commonwealth Act (such as the ITAA 1936). Under subsection 23L(1A) of the ITAA 1936, income derived by a taxpayer by way of the provision of a benefit (other than a benefit to which section 15-70 of the ITAA 1997 applies) that, but for paragraph (g) of the definition of fringe benefit in subsection 136(1) of the FBTAA would be a fringe benefit is exempt income of the taxpayer. Paragraph (g) of the definition of "fringe benefit" excludes as a fringe benefit any benefit that is an "exempt benefit". A number of provisions of the FBTAA provide that particular benefits are exempt benefits. By virtue of subsection 23L(1A), such benefits do not give rise to assessable income so far as the employee is concerned, even though they do not give rise to a fringe benefits tax liability for the employer. (The exception is where the benefit is assessable income under section 15-70 of the ITAA 1997. This provision brings in as assessable income, a reimbursement of car expenses, where that reimbursement is an exempt car expense payment under section 22 of the FBTAA. This provision is inapplicable in the present case.) Under section 57 of the FBTAA, a benefit provided to a minister of religion or to a full-time member of a religious order in that capacity is an exempt fringe benefit. The exemption applies where: • A religious practitioner is an employee of a registered religious institution; • A benefit is provided to the practitioner, or to his or her spouse or child; • The benefit is provided principally in respect of the employee's pastoral duties, or their duties directly related to the teaching and propagation of religious beliefs. In the present case, the taxpayer is a religious practitioner as defined in subsection 136(1) of the FBTAA. They were also an employee of a registered religious institution. A benefit has also been provided to the taxpayer, through the mortgage payments made by the religious institution to the bank that is mortgagee of the taxpayer's home. This benefit has also been provided principally in respect of the taxpayer's pastoral duties or their duties that are directly related to the teaching and propagation of religious beliefs. The taxpayer was uninvolved in the day to day running of the religious institution. Their duties are exclusively or predominantly pastoral. See paragraph 27 of Taxation Ruling TR 1992/17. The facts here are also similar to those in ATO Interpretative Decision 2001/332. In that ATOID, the ATO took the view that the provision of accommodation, the use of a car and the use of a corporate credit given by a church to a retired pastor were exempt benefits under section 57 FBTAA. The same finding should be made in the present case. We do not consider that the payments made by the religious institution to the mortgagee bank under clause 3 of the Settlement and Release Deed are properly characterised as being an eligible termination payment. The term "eligible termination payment" (ETP) as defined in subsection 27A(1) of the ITAA 1936 includes any payment made in respect of a taxpayer "in consequence of the termination of any employment" of the taxpayer, other than certain specified payments. Paragraphs 5 and 6 of Taxation Ruling TR 2003/13 expand upon the meaning of the phrase "in consequence of" as used in the statutory definition of ETP, as follows: 5. The phrase "in consequence of" is not defined in the ITAA 1936. However, the words have been interpreted by the courts in several cases. Whilst there are divergent views as to the correct interpretation of the phrase, the Commissioner considers that a payment is made in respect of a taxpayer in consequence of the termination of the employment of the taxpayer if the payment "follows as an effect or result of" the termination. In other words, but for the termination of employment, the payment would not have been made to the taxpayer. 6. The phrase requires a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment. The question of whether a payment is made in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case. We consider that the continued mortgage support provided under clause 3 of the Settlement and Release Deed is not a payment made in respect of the taxpayer "in consequence of" the termination of his employment. This payment does follow as an effect of or result of the termination. Rather, the payment under clause 3 is made essentially in respect of the fringe benefit amounts under clause 6.1.2 of the Agreement under which the taxpayer was appointed, which would have been made had the engagement continued its full term. Therefore, the payments were in respect of the appointment of the taxpayer under the Agreement, but were merely brought forward. The amount actually paid was slightly less than the amount of the fringe benefit payment the taxpayer was to receive under clause 6.1.2 of the Agreement over the remainder of the term ($X of the benefits were paid as compared with a further $Y of benefits which would have been paid had the engagement continued for the full term). Accordingly, we do not consider that these are payments which would not have been made but for the termination of the employment of the taxpayer. The payments made under clause 3 of the Settlement and Release Deed are more properly characterised as an exempt fringe benefit under section 57 of the FBTAA. The taxpayer has then received income in the form of a benefit which would, but for paragraph (g) of the definition of "fringe benefit" in subsection 136(1) of the FBTAA, be a fringe benefit. This income is exempt income of the taxpayer under section 23L of the ITAA 1936. It is not ordinary income or statutory income in the taxpayer's hands and does not form part of their assessable income under section 6-1 of the ITAA 1997.