LCAQD Guide for Congregations and Parishes Manse and GST

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1 LCAQD Guide for Congregations and Parishes Manse and GST Extracts from GST Guide for Churches, as prepared by Chartered Accountants Saward Dawson (Nov. 2007) Manse (Vicarage) Provision of Accommodation The manse is considered to be residential accommodation provided by the Church to a member of the pastoral team. Rental of residential accommodation is input taxed unless the rent charged is less than 75% of market value. If the rent charged is less than 75% of market value, the provision of the manse is GST free. If the manse is GST free, then the church can claim input tax credits for the GST included in expenses associated with the manse, eg insurance repairs, etc. Where a manse is built and will be used to provide GST free accommodation, then input tax credits can be claimed for the GST included in the building costs. If the manse is not provided at less than 75% of market value, it is treated as input taxed. The Church will not be able to claim back the GST input tax credits on the maintenance and refurbishment of the manse or on the construction of the manse. The manse may be used for both residential purposes and for church purposes, such as meetings, church office, etc. However, the property will still be treated as residential if it used predominantly for residential purposes. Predominantly usually means more than 50%. Before 1 July 2003 Prior to 1 July 2003, the value at which the manse was provided depended on the terms of the salary package to the minister. In some denominations, the salary package includes the provision of a manse. If no manse is provided or if the minister does not want to live in the manse, there is no automatic amount that is paid to the minister as additional salary or benefits. The minister has to negotiate with the church whether any additional amount will be paid. In these circumstances, it appears the Taxation Office will accept that the manse is provided for no consideration. Therefore, the provision of the manse is GST free. Other denominations state that where no manse is provided, then the church will pay a housing allowance of a specific amount. In some instances, this allowance is paid as fringe benefits rather than in cash. The Taxation Office generally accepted this housing allowance amount as the value of the manse. If the amount was less than 75% of market value, the provision of the manse was GST free. The Charities Consultative Committer provided benchmarks for residential accommodation provided to ministers. These are provided in Appendix 1 under Long Term Accommodation. Example The denomination states that a manse is to be provided to the minister. If no manse is provided, the church must provide a housing allowance of $7,800 per annum ($150 per week).

2 The Community Church is located in Geelong and provides a three-bedroom manse to the minister. The church can use the long-term accommodation rates for Melbourne to determine a market value. These give a market value for a three-bedroom house as $300 per week. To determine the benchmark market rate, this value is increased by 25%, being $375. Therefore, prior to 1 July 2003 the manse provided by the Community Church was GST free. The fixed rate charged in the minister s salary package is $150, which was considered to be less than 75% of market value ($375 x 75% = $281). Post 1 July 2003 The Taxation Office now states that whether or not the manse is GST free depends on the arrangement between the minister and the church. The key question is whether the minister is providing consideration for the provision of the manse. The Taxation Office s position is that, if a church is obliged to provide accommodation to the minister regardless of the minister s activities, then the minister has not provided any consideration for the manse. The provision of the manse is dependent on the minister s status as a religious practitioner and does not relate to the provision of any particular activities. Even if the minister carries out no activities, the accommodation must still be provided. The Taxation Office then published an example of a situation when the provision of church accommodation would meet the above requirements and would therefore be GST free. This example was clearly taken from the circumstances specifically relevant to the Catholic Church and is reproduced in Manse - ATO Example 1. It appears from this example that the Taxation Office expects the minister to receive a base stipend irrespective of the provision of any accommodation. There should be an obligation on the church to provide the minister with accommodation because of the person s status as a minister of religion and not because of any particular activities that the person performs. The Taxation Office subsequently published a second example that is more relevant to most Protestant churches. In the example, the Taxation Office concludes that the accommodation is not provided to the minister merely because of the practitioner s status but is dependent upon the minister carrying out certain duties. The example is reproduced in Manse - ATO Example 2. In this example, the denomination sets salary package guidelines that include a housing amount if no manse is provided. Where a manse is provided, the Taxation Office concludes that this housing allowance amount is the consideration for the provision of the manse. The church must determine the market value rent it could receive if it rented the manse to an arm s length unrelated partly. If the housing allowance is less than 75% of this market rent, the provision of the manse is GST free. If the housing allowance is 75% or more of the market rent, the provision of the manse to the minister is input taxed. Every church will need to determine how relevant are the Taxation Office examples to their church s circumstances. However, it is our understanding that many Protestant denominations have salary package guidelines similar to those in the second example. If you are unsure, we suggest you contact your denominational body as a number of denominations have sought private rulings or have had discussions with the Taxation Office on the issue.

3 Many denominations set the same housing allowance regardless of where the church is located. The market rent on manses located in the inner suburbs of large cities will be high. It is likely that the housing allowance will be less than 75% of this market rent. However, the market rent on manses located in country areas is likely to be much lower and many country churches will not meet the 75% test. If the provision of the manse is not GST free, then no input tax credits can be claimed on costs associated with the manse. This new treatment will affect not only expenses relating to the upkeep of a manse, but capital acquisitions as well. Therefore these churches will not be able to claim GST input tax credits associated with the building or renovation of manses. Repaying Input Tax Credits Previously Claimed The Taxation Office has advised that it will not apply the change of use rules to manses affected by the Taxation Office policy changes. As discussed above, on 1 July 2003 some manses will have changed from being GST free to being input taxed. Usually where there is a change from GST free to input taxed, some or al of the GST on expenses previously claimed would need to be repaid. The Taxation Office has now decided not to apply these change of use rules if the only reason for their application is because of the change in Taxation Office policy. However, if there is a change in use for other reasons, such as the church begins to charge the minister market rent or the manse is rented externally, input tax credits may still need to be repaid. You should refer to Adjustments to GST Claimed for details and examples of the change of use. Church Use of the Manse In some instances, a part of the manse is used for church related purposes, eg preparation of sermons, hosting bible study groups, meetings with church members, etc. The Taxation Office takes the view that these areas of the manse are still considered to be residential if they are used predominantly for residential accommodation. Predominantly usually means more than 50%. However, if there are areas within the manse that are used solely for religious activities and not for residential purposes, input tax credits relating to those areas can be claimed. This will mean that, if your manse is not ordinarily GST free, some expenses, such as electricity, will need to be apportioned. Apportionment on the basis of floor area would be acceptable. If there are rooms that are used more than 50% but less than 100% for religious activities, a portion of input tax credits, calculated on a time basis, can be claimed. There may be one room, such as a study, that is used solely or predominantly for religious activities. The church will need to determine whether the extra administration costs calculating the input tax credits associated with that one room exceed the value of the credits claimed. Sale of Manse The sale of the manse will be the sale of property to be used predominantly for residential purposes. Therefore, the sale will be input taxed (unless it is the sale of new residential property). No GST is charged on an input taxed transaction. The church does not charge GST on the sale of the manse. However, it cannot claim input tax credits for the GST included in selling costs, such as commission, conveyancing, etc.

4 Similarly where the church purchases a property to be used as a manse, the transaction will be input taxed provided it is not new residential property. This means no GST will be charged by the seller on the purchase. Where the purchase is input taxed, no input tax credits can be claimed on purchase costs, such as conveyancing. If the manse is a new residential property, then GST needs to be charged on the sale. New residential premises are premises that: Have not previously been sold as residential premises Have been created through substantial renovations Have been built to replace demolished premises. Therefore if a church builds a manse or substantially renovates it, the church will need to charge GST when it sells the property. There are two major exceptions to the rules for new residential premises, being the five year rule and residential accommodation before 2 December Five Year Rule New residential premises exclude premises that have been used for making input taxed supplies for at least 5 years since the premises were acquired or built or since they were substantially renovated. However, even if the property has been used for more than five years as a residential home by the ministers of the church, this GST exemption may not apply. Many churches are able to provide the manse as GST free accommodation as it is provided at less than 75% of market value. Therefore the manse has not been used for making input taxed supplies. Residential Accommodation before 2/12/98 New residential premises exclude premises used for residential accommodation before 2 December However, if there has been a change to the premises after that date, eg substantial renovations, the premises will still be considered to be new. Residential Premises Not Previously Sold In a previous draft ruling, the Commissioner took the view that where residential premises had previously been sold as residential premises but there had been a change to the title, then the residential premises will become new residential premises. Therefore subdivisions and compulsory acquisitions of a small part of the land resulted in the premises becoming classed as new. In the new ruling, the Commissioner takes a more lenient approach. He now accepts that the reduction in the size of the land does not cause premises to become new. The sale of the original building can still be input taxed. For example, a church owns a church house that it acquired many years ago. It decides to subdivide the land in two and build a new residential property on one block. It then sells both properties. The sale of the existing house is considered to be input taxed. The sale of the newly constructed house will be subject to GST.

5 Where there is an increase in the size of the land, the Commissioner considers that the residential package is now made up of two parts. One part is the land and buildings on the original land. If this part has previously been sold as residential premises, then the sale of this part is input taxed. The other part, being the increased land area, will be subject to GST on sale. As the sale will have both a taxable and a non-taxable component, an apportionment of the proceeds on sale is required. The Commissioner has also now conceded that the process of strata titling of apartment blocks does not by itself create new residential premises. Where a building is moved from one place to another on the same block of land, new residential premises do not arise. However, if a house is moved from one block to another block, then new residential premises are created. As the house and the new block of land have never been sold together, the residential premises are not considered to have been previously sold. Substantial Renovations Many churches own houses that are old and have been renovated or altered over the years. Therefore, when the house is sold, there is a need to determine whether substantial renovations have occurred and whether GST needs to be charged. Substantial renovations are defined in the GST Act to be renovations in which all, or substantially all, of a building is removed or replaced. However, the renovations need not involve removal ore replacement of foundations, external walls, interior supporting walls, floors, roof or staircase. The Commissioner states that you need to consider the building in its entirety and not just certain rooms. Substantial renovations should directly affect most rooms in the building. Generally, substantial renovations will involve the removal or replacement of structural components of the building, such as alterations to foundations, floors or supporting walls, modification of roofs or replacing doors in a way that alters the brickwork. However, substantial renovations can occur where there are changes to non-structural components with little alteration to structural components. This is particularly true of units and apartments. Non-structural work includes electrical wiring, alteration to nonsupporting walls, plastering, plumbing, kitchen cupboards, bathroom fixtures and air conditioning. Cosmetic work by itself, such as painting and replacing curtains and light fittings, cannot give rise to substantial renovations. Whether substantial renovations have occurred is a question of fact and degree. A draft GST ruling from the Taxation Office provides some examples that may be of assistance. In one example, substantial renovations occurred where there were removal and replacement of exterior walls, removal of some internal walls to create a more open plan house and the replacement of flooring and the kitchen. In another example, there were no substantial renovations to a four bedroom, two story house. This was despite the fact that a new bathroom was constructed in an upstairs bedroom, the kitchen was renovated, including the removal of a wall and changes to the door and back window, and the replacement of the roof, ground floor floorboards and ceilings. The ruling states that the house in its entirety has not been substantially renovated (the four upstairs bedroom are untouched with the exception of one room that has become a bathroom). Consequently substantial renovations have not occurred. Renovations undertaken by previous owners are ignored. However, if the church undertakes various renovations over a period of time, the renovations may eventually

6 become substantial. Note that renovations that occurred before 2 December 1998 can be ignored. Example A church acquired a residential property on 1 July 2001 for $198,000. The seller was not registered for GST and no GST was included in the purchase price. Over a period of time the church undertakes substantial renovations. At the time it sells the property on 1 July 2006 for $385,000, the premises are now considered new due to the extent of the renovations. The church must remit GST of $35,000 on the sale, being 1/11th of the sale price. However, it may be possible to use the margin scheme as discussed below. Purchase of Manse Generally there is no GST included in the price for the purchase of a manse, as residential accommodation is input taxed. However, if a church acquires a new residential property from someone registered for GST, eg a developer, the church will need to pay GST on the purchase. If the margin scheme is applied to the purchase, the church cannot claim input tax credits for any GST included in the purchase. If GST is paid on the full purchase price, whether input tax credits can be claimed will depend on the use to which the premises are put. If the premises are provided to the minister as GST free accommodation, then the church can claim an input tax credit for the GST included in the purchase. If the property is to be rented out or the provision of accommodation to your minister is not GST free, no credits can be claimed. If the property is initially used for GST free accommodation, but is later rented out, there may need to be an adjustment made to input tax credits previously claimed. If the purchase price was less than $500,000, then adjustments must be considered for five adjustment periods. If the purchase price is $500,000 or more, then there are ten adjustment periods. The first adjustment period is the period ending on 30 June at least 12 months after the period in which the acquisition is made. Example A church purchases a property in November 2001 for $400,000. The first adjustment period ends on 30 June It must consider any change of use of the property until 30 June Margin Scheme If the manse being acquired or sold is new residential premises, then GST needs to be included in the price. Generally, GST is 1/11 of the price. However, it may be possible

7 to apply the margin scheme. The margin scheme is described in detail under Sale of Church Real Estate. Example Use the same facts as in the example under substantial renovations, but the church chooses to apply the margin scheme. Under this scheme, the church only needs to charge GST on the increase in value since purchase. As the increased value is $187,000, GST of only $17,000 is required to be remitted to the Taxation Office. This represents a substantial saving to the church. GST Treatment of Manses Taxation Office Examples Example 1 Under the governing rules of the church, the church is required to provide support to the religious practitioner to enable them to carry out their pastoral duties. This support is provided by way of a stipend and the provision of accommodation. The governing rules provide that the church is required to provide this support to all ordained religious practitioners of this denomination, regardless of the nature of the activities they perform or whether, in fact, they perform any activities. In addition, these rules require that the church must continue to provide accommodation to the religious practitioner on retirement for the remainder of their life or in the event of any long term absence from duties as a result of illness. For this example the Taxation Office held that the provision of accommodation was GST free. Example 2 The regional governing body of the Church issues guidelines which cover matters such as stipends, conditions associated with accepting a call and statements of understanding between the religious practitioner and the Church. These guidelines cover all Churches of the denomination within a region. The guidelines recommend that the Church and the religious practitioner reach terms of agreement before a call is accepted and that this be documented. This statement clarifies the role of the religious practitioner, the terms and conditions of the call, and processes by which the ministry will be conducted in partnership together. The statement will include details such as the duration of the call, the role of the religious practitioner and the practitioner's relationship to the Church, the total remuneration and how it is to be packaged, the process for decision-making, review of ministry, and

8 dispute resolution and what happens when the ministry is concluded. The guidelines set out that in calling and inducting a religious practitioner, the Church and the religious practitioner enter into an arrangement which invokes particular responsibilities and rights for the parties concerned. The guidelines stress the importance of ensuring that the incoming religious practitioner is aware of what the Church expects from the role. Therefore, the terms of agreement should include a role description that lists the main duties and accountabilities in the role. It is recommended that the Church conduct on-going reviews of its collective life and ministry. This review will include the manner in which the religious practitioner is exercising the ministry of leadership. A properly constituted special Church members meeting can conclude the religious practitioner's call and engagement allowing three months notice. This will occur where the conclusion of the ministry is in the best interests of both the Church and the religious practitioner. Examples of where this may occur include where the emphasis or the direction in which the religious practitioner is attempting to lead the Church is no longer in accord with that which was agreed when the religious practitioner was called, where the religious practitioner is in conflict with the expectation of the Church and this cannot be easily reconciled, and where the religious practitioner no longer has the confidence and support of the Church leadership. For serious misconduct, a properly constituted Church members' meeting may conclude a religious practitioner's call without notice and with immediate effect. The guidelines provide recommended remuneration levels. The majority of Churches pay their religious practitioners based on the recommended levels. However, it is open for the Church and the religious practitioner to negotiate a package different to the recommended levels. The guidelines provide a differing recommended stipend depending upon whether a manse is provided or not. Based on the terms of engagement of the religious practitioner in these circumstances, the religious practitioner's services are consideration for the supply of accommodation as there is a sufficient nexus between the two. The acceptance of a call by a religious practitioner results in the entry into an arrangement between the church and religious practitioner that invokes responsibilities and rights for both parties. Therefore, the accommodation is not provided to the religious practitioner merely because of the practitioner's status as it is dependent upon the practitioner carrying out those duties or responsibilities which arise from accepting the call. In valuing the religious practitioner's services, reliance is placed upon GSTR 2001/6. This ruling provides that the test for determining the market value of non-monetary consideration is an objective test. The guidelines recommend a package including total stipend and benefits where a manse is not provided and a lower package where a manse is provided. By recommending that churches pay a lower package in those circumstances where a manse is provided, the regional governing body has effectively identified the value of that component of the religious practitioner's services that represents consideration for the supply of the accommodation. Where, in practice, the church follows the guidelines issued by the regional governing body in relation to the recommended level of religious practitioner's

9 stipends and benefits, we accept that the value of the non-monetary consideration for the supply of accommodation to the religious practitioner for the purposes of subparagraph (1)(b)(i) of the GST Act is currently the difference in stipend depending upon whether a manse is provided. Therefore, where this is less than 75% of the GST inclusive market value of the accommodation provided by the Church, the supply will be GST-free. In this example, the Taxation Office concluded that the housing component of the salary package is the consideration for the supply of the manse. If this amount is less than 75% of the market rental value, the provision of the manse is GST free. If the 75% test is not met, the provision of the manse is input taxed and no GST input tax credits associated with the manse can be claimed.