Wages paid by charitable organisations may be exempt from payroll tax if the wages are for their charitable purposes.
Non-profit organisations and religious and public benevolent institutions do not have to pay payroll tax on wages if the employee’s work exclusively supports the organisation’s charitable purpose.
This includes some business activities, if they are clearly connected to the charitable purpose. These are called directly related commercial activities.
Directly related commercial activities
Examples of directly related commercial activities include:
- a charity which helps people with disability runs an inclusive employment project
- a religious institution runs a store which sells religious books.
In these cases, the wages paid to employees for delivering these activities are exempt from payroll tax.
Unrelated commercial activities
If an organisation runs a business that isn’t connected to its charitable purpose, it’s called an unrelated commercial activity. Wages paid for this kind of work are taxable, even if the money goes towards the charitable purpose.
For example:
- a charity which aims to relieve poverty also runs a commercial printing and telemarketing business
- a religious institution also runs a catering business.
These commercial activities are unrelated to the charitable purpose, so the wages paid to staff are not exempt.
Employees that do related and unrelated work
Some employees may do both charitable work and unrelated commercial activities.
- If an employee’s work mainly relates to the charitable work, their wages are exempt from payroll tax.
- If an employee’s work mainly relates to the unrelated commercial activities, their wages are liable for payroll tax.
Example
The Helpers Foundation runs a nursery to raise money that lets them provide meals to people in need.
The organisation employs 10 people to run the nursery, 20 people to provide the meals and 3 administrative staff.
Payroll tax applies to wages paid to the 10 nursery staff, but not the 20 people who provide the meals.
If the administrative staff mostly help with providing meals to people in need, their wages are also exempt.
If you are not sure whether your wages are exempt, you may seek a private ruling.
