Taxation Administration (Withholding Variation for Certain Payments to Religious Practitioners) Legislative Instrument 2026

The instrument is short and built around a small set of concepts. These are the operational nodes that determine whether the PAYG withholding amount is varied to nil and whether particular reporting exemptions attach.

1. Nil variation of withholding amount. Each operative provision (ss 6-8) is a variation of the amount an entity must withhold under s 12‑47 in Schedule 1 to the Taxation Administration Act 1953. The variation operates to make the withholding amount nil where the statutory conditions are satisfied; it does not amend the underlying withholding rules in Schedule 1, it varies the amount required to be withheld in particular circumstances (see ss 6(1), 7, 8(1)).

2. Conditionality and conjunctive tests. Nil withholding is not automatic; each head contains conjunctive conditions. For allowances (s 6), three conditions must be met: the payment must relate to a specified allowance (s 6(2)), the payer must reasonably expect deductible work expenses at least equal to the allowance, and the amount and nature of the payment must be separately shown in accounting records (s 6(1)(a)-(c)). For locum services (s 7), the payment must relate to locum services performed in a quarter and be for not more than two days in that quarter, taking account of any prior withholding payments in the same quarter (s 7(a)-(c)). For other work or services paid by non‑religious entities (s 8), the payer must be not a religious institution and the payment must either be for non‑chaplaincy non‑counselling services or be chaplaincy/counselling below the specified payment thresholds (s 8(1)).

3. Defined cross‑references. The instrument relies on definitions in Schedule 1 to the Act and the ITAA 1997. It states that many expressions have the same meaning as in Schedule 1 to the Act, and enumerates particular ITAA definitions that are relevant (business kilometres, car expense, travel allowance expense, quarter, religious practitioner) (s 4). It also uses ITAA numeric ceilings (s 6(2)(a)(ii)-(iii) and s 6(2)(b)-(c) cross‑reference ss 28‑25(2) and (4), and ss 900‑50 and 900‑55).

4. Reasonableness standards and Commissioner determinations. Two different kinds of administrative parameters appear. First, a payer must form a reasonable expectation that deductible work expenses will at least equal the allowance (s 6(1)(b)). Second, the Commissioner is referenced as the decision‑maker for what amounts are “reasonable” for domestic and overseas travel allowances for the purposes of the ITAA (s 6(2)(b)-(c), cross‑referencing ss 900‑50 and 900‑55 of the ITAA 1997). The instrument also references a separate legislative instrument under s 15‑25 of Schedule 1 to the Act that sets normal withholding rates for the relevant financial year (note to s 6).

5. Accounting and record‑keeping trigger. The nil variation for allowances requires the payer’s accounting records to show the amount and nature of the payment separately (s 6(1)(c)). This makes record‑keeping a condition of entitlement to the variation.

6. Reporting exemptions linked to the s 8 variation. Only where s 8 applies does the instrument lift certain reporting and payment summary obligations (s 9). The exemptions cover payment summaries (ss 16‑155 and 16‑160), the reporting obligation under s 16‑153(2), and the notification obligation under s 389‑5 of Schedule 1 to the Act.

7. Temporal thresholds that change. The chaplaincy/counselling thresholds differ for payments made on or before 30 June 2026 and for payments made on or after 1 July 2026 (s 8(2)). This embeds a temporal, step‑change threshold rather than an indexation formula.

8. Scope exclusions by payor type. The s 8 variation and its reporting exemptions apply only where the entity making the payment is not a religious institution (s 8(1)(a); s 9 states “An entity that makes a withholding payment to which section 8 applies…”). By contrast, s 7 expressly addresses payments by religious institutions for locum services; s 6 is framed generically as “an entity” and does not exclude religious institutions.

9. Repeal of an earlier instrument. The instrument expressly repeals a prior instrument titled “Pay as you go withholding - Variation and exemption of withholding requirements for certain payments made to religious practitioners” in full (Schedule 1,Repeals), replacing prior text with the current rules.

These concepts structure who can take advantage of nil withholding and when reporting obligations are removed. They also create points where factual assessment (reasonable expectation), accounting practice (separate ledger entries), numeric compliance (kilometre caps, per‑pay‑period thresholds), and payor classification (religious institution or not) determine the legal outcome.

The instrument creates consequences for three discrete groups of actors and for the interactions among them: religious practitioners who receive payments, entities that make withholding payments (paying entities), and the Australian Taxation Office (ATO) as the regulator and administrator.

1. Religious practitioners. The instrument targets payments made to persons defined as “religious practitioner” under the ITAA 1997 (the instrument states that “religious practitioner” is defined in s 995‑1 of the ITAA 1997; s 4). Where the conditions are satisfied, a religious practitioner will receive payments from which the payer withholds nil for PAYG purposes (ss 6-8). That affects the cash flow to the practitioner and the timing of the practitioner’s tax liabilities, because PAYG withholding is a withholding on account of income tax. It also affects whether a practitioner receives a payment reflected in a payment summary or reported under Single Touch Payroll and related reporting obligations (s 9 limits some reporting obligations that otherwise would apply where s 8 applies).

2. Paying entities generally. The instrument repeatedly speaks of “an entity” (s 6, s 8) and of “a religious institution” in s 7 and s 8(1)(a). The practical effect is that:

   • Any payer of a relevant allowance or payment must form a reasonable expectation about the recipient’s anticipated deductible work expenses before applying the nil variation for those allowances (s 6(1)(b)). That imposes a decision and documentation burden on payers.

   • Any payer must separately show amount and nature in accounting records for allowance payments if they intend to apply the nil variation (s 6(1)(c)). That imposes a record‑keeping requirement and may require changes to payroll accounting systems.

   • Religious institutions making payments for locum services must monitor the number of days of locum services paid in a quarter, because nil withholding applies only where the payment relates to locum services for not more than two days in the quarter and the cumulative days paid in the quarter do not exceed two (s 7).

   • Non‑religious entities making payments for work or services to religious practitioners can apply nil withholding for non‑chaplaincy non‑counselling services, and can use the specified per‑pay‑period thresholds for chaplaincy/counselling services to determine whether nil withholding applies (s 8). When s 8 applies, those payers also get the reporting/payment‑summary exemptions in s 9.

3. The ATO / Commissioner. The instrument assigns a role to Commissioner determinations and other legislative instruments:

   • The instrument refers to rates and kilometre caps set under the ITAA 1997 (ss 28‑25(2) and (4), 900‑50, 900‑55) and to a separate legislative instrument under s 15‑25 of Schedule 1 to the Act that sets normal withholding rates for the financial year (note to s 6). Those instruments and determinations are produced by, or under the authority of, the Commissioner (or the ATO), so administrative determinations determine the numerical boundaries that trigger the nil variation.

   • The Commissioner’s determinations about what is “reasonable” for travel allowances for ITAA purposes are incorporated into the eligibility tests for s 6(2)(b)-(c).

Consequently, the direct payers bear decision, record‑keeping and monitoring burdens. Religious practitioners benefit from reduced or nil withholding in specified circumstances but may bear the later tax compliance obligations if PAYG instalments and final tax liabilities are not met. The ATO’s role is to articulate the rates and reasonable amounts that feed into the instrument and to administer any disputes or compliance actions where the nil variation was applied incorrectly.

Who pays: the instrument reassigns the economic incidence of PAYG withholding in specific circumstances. Typically, the paying entity would have withheld tax and remitted it to the Commissioner. Under this instrument, that withholding obligation varies to nil when conditions are met, so the paying entity retains the payment without deducting withholding tax; the recipient receives the gross amount and remains subject to normal income tax rules on the income side. Who decides: the paying entity must decide whether the statutory conditions (including a reasonable expectation test) are satisfied; the Commissioner decides the amounts and rates referenced in the instrument and enforces compliance under existing taxation administration powers.

The instrument prescribes a mix of duties (for paying entities) and rights (an entitlement to apply nil withholding and to claim reporting exemptions). The duties are conditional; the rights attach only if the conditions are satisfied.

Duties of paying entities

• Establish reasonable expectation about deductible work expenses when relying on the allowance variation. Section 6(1)(b) requires the entity to “reasonably expect” that the religious practitioner will incur deductible work expenses related to the allowance at least equal to the allowance amount. The entity therefore must form and be able to justify that expectation if it applies the nil variation for allowances.

• Record‑keeping: separate accounting entries. Section 6(1)(c) imposes a duty to show the amount and nature of the payment separately in the entity’s accounting records where the entity relies on s 6. That is an express requirement of eligibility for the nil variation.

• Track locum days. Under s 7, religious institutions must monitor the days of services per quarter (including prior payments) for locum services; nil withholding is available only where the payment relates to not more than two days of services in that quarter and total days of services in the quarter do not exceed two.

• Apply appropriate thresholds for chaplaincy/counselling payments. Where the payer is not a religious institution, s 8 requires the payer to check whether a chaplaincy or counselling payment is below the per‑pay‑period monetary thresholds (differing pre‑ and post‑1 July 2026). The payer must know whether the payment frequency and the amount interact to qualify.

• Determine entity type. Section 8(1)(a) uses the payor’s classification: the nil variation for work/services in s 8 applies only if “the entity is not a religious institution.” The payer therefore must assess whether it is a religious institution for the purpose of this instrument (definitions referenced in s 4 and Schedule 1 to the Act will govern that classification).

Rights and entitlements

• Entitlement to vary withholding to nil where conditions are met. The instrument creates a statutory entitlement to treat the withholding amount as nil in specified circumstances (ss 6-8). That reduces immediate PAYG withholding obligations for paying entities and increases cash received by recipients.

• Reporting exemptions for payments under s 8. Section 9 gives a positive entitlement: where s 8 applies, the entity is not required to issue payment summaries under ss 16‑155 or 16‑160, is not required to report under s 16‑153(2), and is not required to notify the Commissioner of amounts required under s 389‑5. Those are explicit statutory exemptions.

Limits to rights

• The notes and operative text make clear normal withholding rates apply to any part of a payment that exceeds the statutory limits (see notes in s 6 and s 7). For the allowances in s 6(2)(a), normal withholding applies where the set rate used exceeds the ITAA rate or the total business kilometres exceed the ITAA cap. For locum services (s 7) normal withholding applies to locum services performed on more than two days in a quarter.

• The rights are conditional on the payor’s factual determinations and record‑keeping. If later review finds the payor’s reasonable expectation was not justified or records do not show the amount and nature separately, the right to nil withholding may be undermined and usual withholding obligations may be invoked.

Interaction with other duties under tax law

• The instrument is made under the Taxation Administration Act and operates by varying amounts under s 12‑47 in Schedule 1 to that Act (s 3). It does not purport to alter income tax liabilities under the ITAA 1997; it affects only withholding obligations and certain reporting obligations. Where it refers to ITAA provisions (e.g. ss 28‑25, 900‑50, 900‑55), those provisions continue to govern income tax treatment and the eligibility for deductions or substantiation.

• The right to reporting exemptions under s 9 is confined to payments to which s 8 applies. The instrument does not exempt payers from other tax obligations outside the listed sections.

Operational implication: The active duties rest with the paying entity to form a reasonable expectation, keep separate accounting records, classify payers correctly, track locum days, and apply the monetary and kilometre limits. The principal rights granted are the ability to withhold nothing for qualifying payments and, for s 8 payments, to avoid particular PAYG reporting and payment‑summary tasks.

The instrument itself does not create new penalty offences or a bespoke enforcement regime; it operates by varying the withholding amount under existing PAYG withholding law in Schedule 1 to the Taxation Administration Act 1953. Enforcement therefore occurs through the ATO’s existing administrative and compliance powers under the Act and related law. The instrument’s text provides a few points that frame enforcement risk and compliance focus.

No bespoke penalty clauses in the instrument

• The instrument is silent on new or specific penalties. It operates as a variation of the amount to be withheld under s 12‑47 in Schedule 1 to the Act (see s 6(1), s 7, s 8(1)). Any failure to comply with withholding obligations is therefore dealt with under the Taxation Administration Act 1953 and Schedule 1 to that Act, under the ordinary compliance and penalty mechanisms that apply to incorrect PAYG withholding.

Compliance triggers and audit focal points

• Record‑keeping requirement is an explicit trigger. The allowance variation in s 6(1)(c) conditions nil withholding on the amount and nature of the payment being shown separately in the entity’s accounting records. The ATO’s compliance approach is likely to examine whether payers have contemporaneous, separate records if a nil withholding claim is made. Non‑existence or inadequacy of those records would be a natural basis to disallow the nil variation and treat the payments as subject to normal withholding requirements.

• Reasonable expectation test is another focal point. Section 6(1)(b) requires the entity to “reasonably expect” that deductible work expenses will be at least equal to the allowance. The instrument does not specify the form of evidence required; therefore, the ATO would have latitude to examine the basis on which the payer formed that expectation. In practice, the Commissioner’s enforcement would rely on the ordinary investigatory and objection/review mechanisms available for PAYG disputes under the Taxation Administration Act.

• Numeric ceilings and Commissioner determinations used in eligibility tests will be reviewable. The s 6(2) caps rely on ITAA rates and kilometre caps (ss 28‑25(2), 28‑25(4) of the ITAA 1997) and on “reasonable” amounts for travel allowances determined by the Commissioner (ss 900‑50 and 900‑55 of the ITAA 1997). A payer applying nil withholding based on those caps will need to be able to show the specific rate and kilometres used in the calculation. If the allowance exceeds the statutory or Commissioner‑determined caps, normal withholding applies to the excess and ATO compliance action could seek withholding on the excess.

Reporting exemptions do not remove audit exposure. Section 9 removes obligations to issue payment summaries and to report under certain provisions where s 8 applies. However, the ATO retains compliance powers under the Taxation Administration Act and can require information in other contexts. The absence of a payment summary requirement does not mean the payment cannot be examined in a subsequent audit or objection.

Potential enforcement outcomes

• If a payer inappropriately applies the nil variation, the ATO could treat the payer as having failed to withhold under Schedule 1 to the Act. That could result in assessments for withheld amounts that should have been remitted, and the normal penalty and interest provisions within the taxation legislation would be available to the Commissioner. The instrument does not change the substance of withholding liability where the conditions are not met; it simply specifies when variation to nil is permitted.

• The instrument provides for no forward‑looking indemnity or retrospective immunity. The entitlement to nil withholding is fact‑dependent; if facts later prove otherwise, normal withholding and enforcement mechanisms would apply.

Administrative discretion and enforcement risk

• The instrument references Commissioner decisions and separate legislative instruments (note to s 6, and s 6(2)(b)-(c) referencing the Commissioner’s reasonable amounts). Those are areas where administrative discretion determines numeric thresholds and may be subject to review or challenge through the administrative law and taxation objection pathways, but the instrument itself contains no dispute resolution mechanism or guidance on evidentiary standards for “reasonable expectation”.

In short, the textual effect is to create conditional exemptions but enforcement and penalties remain governed by the Taxation Administration Act and the normal powers of the Commissioner. The immediate compliance exposures are record‑keeping shortfalls and contestable reasonable‑expectation judgements.

The instrument is constructed as a targeted variation within the existing PAYG withholding framework. It repeatedly cross‑references the Taxation Administration Act 1953 (the Act) and the Income Tax Assessment Act 1997 (ITAA 1997). The principal interactions are as follows.

Interaction with Schedule 1 to the Taxation Administration Act 1953

• Operative mechanism. The instrument varies withholding amounts under s 12‑47 in Schedule 1 to the Act (see ss 6-8 which state “the amount an entity must withhold from a withholding payment it makes … is varied to nil” under s 12‑47). It is therefore an instrument that modifies the application of Schedule 1 rather than rewriting Schedule 1. The instrument itself is made under sections 15‑15, 16‑153 and 16‑180 and subsection 389‑10(1) in Schedule 1 to the Act (s 3), which are parts of the Schedule dealing with withholding and reporting.

• Reporting and payment summary provisions. Section 9 of the instrument expressly interacts with Schedule 1 reporting obligations by removing requirements to issue payment summaries under ss 16‑155 and 16‑160 and to report under s 16‑153(2) and to notify under s 389‑5 where s 8 applies. Thus, the instrument modifies the practical reporting footprint of a payer in relation to particular payments, but only within the structure of Schedule 1.

Interaction with the Income Tax Assessment Act 1997

• Definitions and numeric caps. Section 4 adopts certain ITAA 1997 definitions as relevant for this instrument (for example, business kilometres, car expense, travel allowance expense, quarter, religious practitioner) and s 6(2) cross‑references ITAA provisions for rates and kilometre caps (ss 28‑25(2) and (4) and ss 900‑50 and 900‑55). The instrument therefore relies on the ITAA to define the nature and numeric limits of the allowances that qualify for nil withholding.

• Substantive tax treatment remains under the ITAA. The instrument does not alter the tax consequences of allowances or payments for income tax purposes: it deals only with withholding and reporting. Deductions, assessable income treatments, substantiation and other ITAA mechanisms remain applicable when determining taxable income and allowable deductions for a religious practitioner.

Interaction with Commissioner instruments and administrative determinations

• Normal withholding rates for the financial year are set in a separate legislative instrument under s 15‑25 in Schedule 1 to the Act, which the instrument acknowledges (note to s 6). The instrument’s practical operation therefore depends on that separate instrument for the benchmark withholding rates used where normal withholding applies.

• The Commissioner’s role in setting “reasonable” amounts for travel allowances under the ITAA is folded into the eligibility test in s 6(2)(b)-(c). Where the Commissioner issues updated guidance or determinations on reasonable domestic or overseas travel allowance amounts, that will change the set of payments that qualify for nil withholding under this instrument.

Administrative and compliance interplay

• Single Touch Payroll (STP) and other reporting systems. The instrument’s s 9 exemptions remove obligations under particular reporting sections. In practice, payroll systems and STP setups are often configured to meet statutory reporting requirements. The exemptions therefore require operational changes to payroll and reporting practices for payers who qualify. Care must be taken because the exemption is limited (only for payments to which s 8 applies) and other reporting obligations or broader tax information requests by the Commissioner may still require disclosure.

• Repeal of prior instrument. Schedule 1,Repeals explicitly repeals the earlier instrument titled “Pay as you go withholding - Variation and exemption of withholding requirements for certain payments made to religious practitioners.” That operation replaces prior regulatory text with the current instrument; any transitional rules from the prior instrument are not included in the text provided.

Limits and scope

• The instrument does not alter other Commonwealth, state or territory obligations that might apply to payers or religious practitioners (employment law, superannuation, workers compensation, or state payroll taxes are not mentioned). Those obligations remain governed by their respective laws.

• The instrument references definitions in Schedule 1 to the Act which “have the same meaning as in the Income Tax Assessment Act 1997 (see section 3AA of the Act).” That layered definitional structure means the instrument’s interpretation depends on those statutory cross‑references.

In sum, the instrument sits inside the existing PAYG withholding and income tax architecture, modifying withholding and reporting requirements for limited categories of payments while leaving substantive income tax rules and other legal regimes intact. It depends on and will be affected by the Commissioner’s determinations and by the linked legislative instruments that define withholding rates and “reasonable” travel allowances.

This instrument contains its amendment history explicitly and is itself an instrument made on a stated date; the text provides the following amendment chronology and related facts.

• Instrument creation. The instrument is titled the Taxation Administration (Withholding Variation for Certain Payments to Religious Practitioners) Legislative Instrument 2026. The instrument is dated 12 March 2026 and signed by Will Day, Deputy Commissioner of Taxation (the instrument’s first page). It commences the day after it is registered on the Federal Register of Legislation (s 2).

• Authority for making the instrument. The instrument is made under specified provisions in Schedule 1 to the Taxation Administration Act 1953: sections 15‑15, 16‑153 and 16‑180 and subsection 389‑10(1) (s 3). Those citations are the legal authority enabling the Commissioner (or Deputy Commissioner) to make legislative instruments varying withholding and reporting obligations.

• Repeal of previous instrument. The instrument includes Schedule 1,Repeals, which states: “Pay as you go withholding - Variation and exemption of withholding requirements for certain payments made to religious practitioners. 1 The whole of the instrument: Repeal the instrument.” Thus the prior instrument of that title is repealed in full and replaced by the present instrument.

• No other amendments recorded. The instrument’s own “Schedules” clause (s 5) says that each instrument specified in a Schedule is amended or repealed as set out; in this instrument only the one repeal is included. No other instruments or Acts are amended by the text provided.

• Temporal staging of thresholds. The instrument itself applies a temporal amendment approach to the chaplaincy/counselling thresholds in s 8(2), setting one set of thresholds for payments made on or before 30 June 2026 and another set for payments made on or after 1 July 2026. That is an express internal amendment of substantive thresholds as of a fixed date.

What the instrument does not include in the amendment history

• No transitional provisions in the text provided. The instrument does not contain explicit transitional provisions dealing with payments straddling the repeal of the prior instrument, or with historical payments made under the prior instrument. The Schedule 1 repeal is unconditional in the text provided.

• No prior amendment trail is given. The instrument’s Schedule 1 repeals a prior instrument by title but the text does not include any background or amendment history of that prior instrument. The single action is repeal.

Practical consequence of the amendment history

• Replacing prior instrument. The current instrument both introduces the new set of nil‑withholding and reporting exemption rules and removes the previous instrument, so practitioners and payers should treat this text as the operative regulatory position from its commencement date going forward.

• Timing effects within the year. The step change for chaplaincy/counselling thresholds at 1 July 2026 is an explicit schedule built into the instrument, which allocates one set of thresholds to the tail of the 2025-26 financial year and a higher set of thresholds from the 2026-27 financial year onwards.

The instrument does not record or cite any litigation. The text contains no references to judicial decisions, no mention of disputes, and no case law citations. The instrument is an administrative legislative instrument made under Schedule 1 to the Taxation Administration Act 1953; it is not framed as the outcome of litigation nor does it reference litigation in its text.

What is present in the instrument that pertains to dispute and review pathways

• Administrative law and taxation dispute mechanisms remain available outside the instrument. Although not elaborated in the instrument, the underlying Taxation Administration Act and the general law provide objection, review and judicial review channels for disputes about the application of tax law and administrative decisions. The instrument itself does not specify how disputes about the application of its conditional tests (for example, whether a payer “reasonably expected” deductible expenses at least equal to an allowance) should be resolved; such disputes would therefore be pursued by ordinary objection and judicial review processes under the taxing statutes and administrative law.

• Potential grounds for dispute are implicit in the text. The instrument creates fact‑based criteria (reasonable expectation; accounting records; Commissioner‑determined reasonable amounts) and numeric thresholds. Disagreements over whether those criteria were met would be typical sources of dispute, although the instrument does not identify or limit legal remedies or review routes.

No reported litigation

• Because the instrument text contains no cases or litigation references, there is no litigation history to summarise from the instrument itself. Any litigation arising from the instrument would occur after its commencement and would be reported in judicial databases, not in the instrument.

Guidance for practitioners anticipating disputes

• Document decisions and reasoning. Given the reasonable‑expectation test and record‑keeping preconditions, payers should maintain contemporaneous evidence supporting the application of a nil withholding variation. Those materials constitute the primary evidentiary basis if the Commissioner later queries the variation.

• Expect reliance on Schedule 1 enforcement provisions. Any enforcement action or recalculation of withholding obligations arising from misapplication would be taken under the Taxation Administration Act 1953 and Schedule 1 enforcement and penalty provisions.

In short, the instrument itself has no litigation history in the text provided. Any litigation that may arise will concern the factual application of its conjunctive eligibility criteria and will be litigated under the ordinary taxation dispute mechanisms.

The instrument is narrowly drafted, but that narrowness creates a number of practical traps and attention points for payers, payroll administrators, and advisers. The following are concrete “gotchas” drawn from the instrument’s text.

1. “Reasonably expects” is a legal standard with no bright line. Section 6(1)(b) requires the entity to “reasonably expect” that the practitioner will incur deductible work expenses at least equal to the allowance. The instrument gives no guidance on what evidence satisfies that standard. In practice, this means: contemporaneous documentary bases (written estimates, standard expense profiles, historical substantiation) will likely be required to justify the position on audit. Absent such evidence, the payer is exposed to a challenge.

2. Separate accounting entries are not optional. Section 6(1)(c) conditions the nil variation on the payer’s accounting records “showing the amount and nature of the payment separately.” If payroll systems or general ledgers treat the payment as part of a bundled wage item, the nil variation may not be available. Updating payroll chart of accounts and bookkeeping processes is necessary to rely on s 6.

3. Kilometre and rate ceilings are anchored to ITAA sections and are granular. The car allowance qualification in s 6(2)(a) requires the allowance to be calculated by multiplying a set per‑kilometre rate (not exceeding the rate determined for the income year under s 28‑25(4) ITAA 1997) and for the kilometre total to be within the business kilometres cap in s 28‑25(2) ITAA 1997. That requires payers to apply the exact ITAA rates and caps - using a higher per‑km rate or exceeding the kilometre total triggers normal withholding on the excess.

4. “Reasonable amount” for travel allowances is administrative. For domestic and overseas travel allowances, the instrument ties eligibility to what the Commissioner “considers reasonable” under ss 900‑50 and 900‑55 of the ITAA 1997 (s 6(2)(b)-(c)). That is an administrative determination and may change over time. Payers need to check the Commissioner’s current rates/determinations for the relevant income year.

5. Locum services rule is cumulative by quarter and by prior payments. Section 7 conditions nil withholding on services in a quarter not exceeding two days, and on the total days of services in that quarter for which the payment and any previous withholding payment were made not exceeding two. Payers must track days paid across multiple payments within a quarter; failing to do so may lead to ineligibility for nil withholding in later payments.

6. Definition of “entity” and “religious institution” matters. Section 8’s exemptions apply only where the “entity is not a religious institution.” The instrument leaves the applicable statutory definitions to Schedule 1 to the Act and the ITAA 1997. Misclassification of the payer could lead to incorrect application of s 8 and misapplied reporting exemptions.

7. Reporting exemption is narrower than it may appear. Section 9’s exemptions from payment summaries and certain reporting obligations apply only to payments to which s 8 applies. Payments qualifying under s 6 or s 7 do not receive the s 9 reporting exemptions (the instrument’s language ties s 9 to s 8). That means payers relying on s 6 or s 7 still must consider payment summaries and reporting obligations under Schedule 1 unless those are addressed elsewhere.

8. Thresholds change on 1 July 2026. The chaplaincy/counselling thresholds increase from 1 July 2026 (s 8(2)). Payroll systems must apply the correct threshold based on the payment date. Misapplying the wrong threshold leads to incorrect withholding.

9. Partial qualification and excess amounts. The instrument’s notes indicate that “normal withholding rates apply to the part of a payment related to a specified allowance that exceeds a limit specified” (note to s 6). Practically, a payment can be partly exempt and partly subject to withholding; payers must be able to split payments and apply withholding to the excess portion.

10. Repeal of prior instrument may cause transitional confusion. The instrument repeals the prior instrument in full (Schedule 1,Repeals). The repealed instrument might have governed earlier practice; payers need to ensure they are compliant with the new text from commencement and consider whether payments made under the old instrument require retrospective adjustment (the instrument provides no transitional directions in the text supplied).

11. Absence of guidance on evidence and form. The instrument does not prescribe the form of records or evidence that will satisfy the “reasonable expectation” and separate accounting requirements. That increases the risk of ATO challenge unless payers maintain robust contemporaneous bookkeeping and supporting documentation.

12. Interaction with other obligations. The instrument does not address any effect on superannuation guarantee, payroll tax, workers’ compensation or employment law entitlements. Payers must separately consider these obligations; the absence of mention in the instrument is not a statement of exemption from other statutory duties.

13. STP and systems configuration. The s 9 reporting exemptions modify statutory reporting obligations but payroll software and STP feeds may need reconfiguration to stop automatic reporting for payments that qualify under s 8. Failure to reconfigure correctly could either lead to unnecessary reporting or missed reporting (and associated administrative error).

These “gotchas” are concrete operational frictions built into the instrument’s eligibility criteria, record‑keeping conditions, administratively determined thresholds, and reporting carve‑outs. Addressing them requires operational adjustments, contemporaneous documentation and careful payor classification.

To apply the instrument correctly and manage exposure to ATO review, payers and advisers should follow a stepwise practical compliance approach derived from the instrument’s conditions and cross‑references.

1. Identify whether the recipient is a “religious practitioner.” Section 4 cross‑references the definition of “religious practitioner” in s 995‑1 of the ITAA 1997. Confirm the recipient’s status under that statutory definition before applying any of the nil withholding variations.

2. Classify the payer entity. Determine whether the paying entity is a “religious institution” for the purposes of the instrument (s 8(1)(a) and s 7). The instrument’s application of the s 8 variation and s 9 reporting exemptions depends on that classification.

3. Establish which variation applies. For a given payment, decide whether the payment is:

   • An allowance of the kinds specified in s 6(2) (car km allowance that meets the ITAA km rate and cap; domestic travel allowance within the Commissioner’s reasonable amount for s 900‑50; overseas travel allowance within the Commissioner’s reasonable amount for s 900‑55); or

   • A locum services payment for which the religious practitioner temporarily relieved another (s 7), or

   • A payment for other work or services where the payer is not a religious institution and the payment either is not chaplaincy/counselling or is chaplaincy/counselling below the relevant monetary thresholds (s 8(1)-(2)).

4. For allowances (s 6), verify the numeric and method criteria

   • Car allowances: ensure the allowance is calculated as a fixed rate per kilometre multiplied by the total business kilometres, the per‑km rate does not exceed the rate determined under s 28‑25(4) ITAA 1997 for the income year, and the total business kilometres in the financial year do not exceed the cap in s 28‑25(2) ITAA 1997 (s 6(2)(a)(i)-(iii)).

   • Domestic and overseas travel allowances: check the Commissioner’s current reasonable amounts for the applicable income year under ss 900‑50 and 900‑55 ITAA 1997, and ensure the allowance payment does not exceed those reasonable amounts (s 6(2)(b)-(c)).

   • Keep copies of the ITAA‑referenced rates or Commissioner determinations used to justify eligibility.

5. Form a documented “reasonable expectation” (s 6(1)(b)). Before applying nil withholding for an allowance, create contemporaneous documentation that records the factual basis for expecting taxable deductible work expenses will at least equal the allowance. Useful materials include:

   • Written estimates provided by the practitioner or based on historic expense substantiation.

   • Standard expense schedules for activities performed.

   • Signed declarations or declarations incorporated into engagement letters or service agreements.

   • Evidence of prior years’ deductions for similar activities, if available.

   Maintain this documentation as part of the payer’s compliance file.

6. Ensure separate accounting records (s 6(1)(c)). Configure payroll and accounting systems to show the amount and nature of qualifying allowance payments as separate ledger items. This may require:

   • Establishing dedicated paycodes or nominal ledger accounts for qualifying allowances.

   • Producing payroll reports that separate allowance amounts from salary/net wage items.

   • Retaining transaction‑level evidence that links the allowance entry to the relevant pay period and payee.

7. For locum services (s 7), track days per quarter. Implement an internal register that records each locum day and any payments related to those days. Apply the quarter‑by‑quarter cap: nil withholding applies only where the payment relates to locum services for not more than two days in the quarter and total days in the quarter in respect of which payments (including prior withholding payments) were made do not exceed two. Where a subsequent payment in the same quarter would cause the cumulative total to exceed two days, apply normal withholding to the excess.

8. For s 8 payments by non‑religious entities, apply thresholds carefully

   • Determine whether the work performed is chaplaincy or counselling. If it is chaplaincy/counselling, confirm whether the per‑pay‑period amount is below the applicable threshold in s 8(2).

   • Apply the correct threshold based on the date of payment: pre‑30 June 2026 thresholds apply to payments made on or before 30 June 2026; the higher thresholds apply to payments on or after 1 July 2026.

   • For non‑chaplaincy non‑counselling work, s 8(1)(b)(i) provides for nil withholding without applying the monetary thresholds, but only if the payer is not a religious institution.

9. Use the s 9 reporting exemptions correctly and retain records. If s 8 applies to a payment and the entity wishes to rely on the s 9 exemption from issuing payment summaries and certain reporting obligations, document the factual basis for s 8’s application and retain supporting records. Although s 9 removes specified reporting duties, the ATO may still seek records in an audit or information request.

10. Prepare for partial withholding and split payments. Where parts of a payment exceed statutory caps (for example, the allowance exceeds ITAA rates or kilometres), be ready to split the payment into the qualifying exempt portion and the excess portion subject to normal withholding rates. Ensure systems and pay slips record these splits.

11. Reconcile payroll software and STP feeds. Coordinate with payroll vendors or IT teams to ensure the software can:

• Record separate allowance entries where required.

• Apply nil withholding on qualifying payments and capture the reasons for the variation in internal audit trails.

• Exclude s 8 payments from automatic STP payment summary/reporting mechanisms, while retaining the ability to produce records for audit.

12. Monitor Commissioner instruments and ITAA updates. Because the instrument references Commissioner determinations for “reasonable” travel allowance amounts and uses ITAA rates and caps, payers should periodically check for updated determinations or changes to ITAA sections that affect eligibility.

13. Maintain an audit file. For each payment that relies on a nil withholding variation, maintain a compliance folder containing:

• The calculation used (including rates, km totals, and pay period).

• Evidence supporting the reasonable expectation.

• Payroll ledger entries showing separate amounts and nature.

• Any agreements, timesheets or proof of services for locum days or work/services.

• Notes on entity classification (religious institution or not).

14. Seek advice where classification is uncertain. If the payer is unsure whether it is a “religious institution” or whether a service is “chaplaincy” or “counselling” for the instrument’s purposes, obtain legal or tax advice before applying the nil variation.

15. Plan for potential retrospective adjustment. If a subsequent ATO review denies the nil variation, the payer may be liable for unwithheld sums, interest and penalties under the Taxation Administration Act. Retain reserves where material amounts are involved, and document decision processes to mitigate risk.

Following these steps aligns operational practice with the instrument’s conjunctive conditions and reduces the risk that a payer will apply nil withholding without the documentary and accounting underpinnings the instrument makes explicit.