Edited version of private ruling

Authorisation Number: 1011739194329

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Child Care Facilities

Question 1

Is the provision of child care to your employees exempt from fringe benefits tax in accordance with subsection 47(2) of the Fringe Benefits Tax Assessment Act 1986?

Answer

Yes

Question 2

If the provision of child care to your employees is exempt under subsection 47(2) of the FBTAA, will the exemption apply if the child care facility is used by an employee of another government agency?

Answer

Yes

This ruling applies for the following periods:

01 April 2010 - 31 March 2011

01 April 2011 - 31 March 2012

01 April 2012 - 31 March 2013

01 April 2013 - 31 March 2014

01 April 2014 - 31 March 2015

The scheme commences on:

01 April 2010

Relevant facts and circumstances

You executed a contract with the child care provider (the Contractor) for the provision of childcare services in the child care centre, located on your premises. After having operated the centre for a number of years you re-contracted for a further period.

A copy of the current contract between yourself and the Contractor has been provided.

The contract between you and the Contractor included the following:

· You are the lessee of the premises upon which the Centre is located. When the current lease ends, you have an option to extend the lease.

· The care provider is granted a licence to occupy and use part of your business premises.

· The licensed premises are to be used by the Contractor for the purpose of providing the operation and management of a number of full time equivalent childcare places.

· The Contractor is not permitted to enter into a subcontract for the provision of childcare without your consent.

· The benefit of the on-site centre is provided to both children of your employees and those of non-employees. There is no set number of places allocated specifically to your staff, however your employees receive priority in allocating places.

· The fees for child care are negotiated between you and the Centre, taking into account market rates. There is no difference between the fees paid by your employees and other parents. Any increase in child care fees is also be negotiation. Where there is a failure to reach an agreement, the fees are the previous financial year fees, indexed by the Consumer Price Index applicable to childcare services.

· Your employees are able to salary package the services.

· The Contractor will charge you for the cost of the child care provided to your employees, and you will use the amounts sacrificed by your employees to fund the cost of the child care

· An annual licence fee is payable to you for the occupation of the child care centre by the Contractor.

· An annual fee is payable to you by the Contractor as a contribution towards upkeep of the Centre premises.

· You provide the Contractor with an area, comprising a number of cot rooms, numerous play rooms, a kitchen, toilet block and outside play area, but do not charge the Contractor an amount for the area of your building used for child care purposes.

· A fee is payable to you by the Contractor as rent of a space for one motor vehicle at your parking facility.

· You do not pay for all outgoings, and

· The Contractor is required to pay for all cleaning, gardening and telecommunications costs at the Centre and is responsible for all non-fixed equipment and consumables.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 20.

Fringe Benefits Tax Assessment Act 1986 section 45.

Fringe Benefits Tax Assessment Act 1986 subsection 47(2).

Fringe Benefits Tax Assessment Act 1986 subsection 136(1).

Reasons for decision

Question 1

Is the provision of child care to your employees exempt from fringe benefits tax in accordance with subsection 47(2) of the FBTAA?

Detailed reasoning

Under the terms of your salary sacrifice arrangements an employee is able to have child care provided to their children in the childcare centre by agreeing to a reduction in the amount of salary he or she would otherwise have received.

In establishing the child care centre you have entered into an agreement with the Contractor for the operation of the Centre.

Subsection 47(2) of the FBTAA provides that where certain conditions are met the provision of child care will be an exempt benefit.

Subsection 47(2) of the FBTAA states that:

Where:

(a) a residual benefit provided to a current employee in respect

of his or her employment consists of:

(i)  the provision, or use, of a recreational facility; or

(ii) the care of children of the employee in a child care facility;

and

(b) the recreational facility or child care facility, as the case may

be, is located on business premises of:

(i)  the employer; or

(ii) if the employer is a company, of the employer or of a

company that is related to the employer;

the benefit is an exempt benefit.

Therefore, the provision of the child care will be an exempt benefit under subsection 47(2) if the following conditions are satisfied:

· the benefit is a residual benefit

· the benefit is provided to a current employee

· the benefit consists of the care of the children of the employee

· the care of the children is in a child care facility, and

· the child care facility is located on the business premises of the employer ( or a related company if the employer is a company).

Is the benefit a residual benefit?

Section 45 of the FBTAA defines a residual benefit as:

A benefit is a residual benefit for the purposes of this Act if the benefit is not a benefit by virtue of a provision of Subdivision A of Division 2 to 12 (inclusive).

Under the terms of the salary sacrifice agreement you will agree to provide childcare in the centre for the children of an employee. As the benefit being provided is the care of children rather than the paying or reimbursement of child care costs by the employee, the benefit will be a residual benefit.

Is the benefit provided to a current employee?

As the child care is being provided under the terms of a salary sacrifice agreement the benefit will be provided to a current employee.

Does the benefit consist of the care to the employee's children?

The contract provides that the Contractor will provide child care services to the children of your employees.

Is the care of children in a child care facility?

A child care facility is defined in subsection 136(1) of the FBTAA as:

a facility at which a person receives, or is ready to receive, 2 or more children under the age of 6, not being associates of the person, for the purpose of minding, caring for or educating them for a day or part of a day without provision for residential care but does not include a facility at the place of residence of any of those children.

This requirement is satisfied as the facility provides care for numerous children in a non residential childcare centre.

Will the child care facility be located on the business premises of the employer (or a related company if the employer is a company)?

The term "business premises" is defined in subsection 136(1) of the FBTAA as being:

"…premises, or part of premises, of the person used, in whole or in part, for the purposes of business operations of the person...".

Guidelines on what constitutes a business premises for the purposes of the FBTAA are provided in Taxation Ruling TR 2000/4 Fringe Benefits Tax: meaning of 'business premises' (TR 2000/4).

Paragraph 4, of TR 2000/4 states two requirements need to be met for premises to be business premises of a person. The first requirement is that the premises or part of premises are of the person. Secondly, the premises or part of premises must be used by the person, in whole or in part, for the purposes of their business operations.

Paragraphs 11 and 12 of the ruling provide that there is no absolute or conclusive test as to whether premises are business premises. In determining whether the premises are premises of the employer and are used for the business operations of the employer, it is relevant to consider:

· the control the employer has over the premises, and

· the consistency of an employer's actions and activities on the premises with those of normal business practices.

Paragraph 13 of TR 2000/4 states:

Having regard to the above, where a person is carrying on 'business operations' on premises, the premises are their 'business premises' where in form and substance the person bears the rights and risks of possession of the premises associated with the conduct of the 'business operations'.

Will the premises, or part of the premises be premises of the employer?

Paragraph 48 of TR 2000/4 states:

The employer must have a right of possession and control over the use of the premises during the course of its business operations. The absence of a right of possession and control may indicate the premises are not 'of the person', or the activities being carried on the premises are not truly 'business operations' of the person.

Merkel J in Esso Australia Ltd v. Federal Commissioner of Taxation 40 ATR 76; (1998) 157 ALR 652; 98 ATC 4953 (the Esso Case) considered the issue of a business premises, and stated:

It seems to me that, under s47(2), for the relevant business premises to be those of an employer, the employer must have a right to possession of the premises, at least to the extent necessary to enable the conduct thereon of the relevant recreational or child care facility. If the employer has the requisite possessory entitlement in respect of the premises it does not appear to matter that entitlement is one of ownership, exclusive possession or non-exclusive possession.

You have entered a leasing agreement with the owner of the building for the whole area that you occupy, including the area occupied by the Child Care Centre.

As set out in paragraph 7 of TR 2000/4:

If a person has…., or has exclusive occupancy rights as lessee of premises, the premises would ordinarily be described as premises of the person.

The agreement that you entered into with the Contractor does not affect the exclusive occupancy rights that arise under the lease agreement as the Contractor is only provided with a licence to access as provided for under the contract. Therefore the premises are the premises of the employer.

Will the premises be used for the business operations of the employer?

Although the premises are premises of the employer, it is also necessary for the premises to be used for the business operations of the employer.

Paragraph 17 of TR 2000/4 states:

Clearly then, an employer must conduct the child care operations on its own account (or through an agent) on its premises to be eligible for the exemption.

Paragraph 20 of TR2000/4 states:

What is important for an employer seeking to establish that premises are its 'business premises' is that the employer's child care activities amount to its 'business operations' on its premises.

In determining whether the child care activities amount to your business activities, paragraph 53 of TR 2000/4 states:

There are also questions as to whether the premises or any part of the premises are being used for the business operations of the employer. It may be that the activities actually taking place on the premises would more properly be described as business operations of the service provider. Consequently, the facts may give rise to the inference that the premises are not the 'business premises' of the employer.

In situations where an employer engages an independent child care operator under a management agreement to care for employee's children, paragraph 57 of TR 2000/4 provides the minimum requirements which should be incorporated into the arrangement for the operations to be considered the business operations of the employer.

· The management agreement with the child care operator should operate on an ordinary and arm's length basis.

The Contract between you and the Contractor details:

· the fees to be paid to the Contractor for the care of the children of your employees. The fees are set with regard to corresponding rates in the market for the provision of child care services in your State

· states the requirements to be met by the Contractor

· the nature of the relationship, and

· the general termination rights

· provides the Licence Fee and annual payment requirements.

In considering these clauses it is accepted that the agreement operates in a manner that would be expected where an employer engages a child care operator to manage the employer's child care centre.

· The management agreement should be able to be terminated on normal commercial grounds.

The agreement can be terminated in the following situations:

· where the Contractor commits a breach of security, or

· commits any other breach of the agreement, or

· commits a persistent breach of the performance standards, or

· becomes insolvent.

These are accepted as being on normal commercial grounds.

· Where the management agreement is terminated there should not be any impediment to another child care operator being engaged to manage and operate the facility on particular premises.

This condition is met. Should the Contactor fail to provide the services in accordance with the performance standards you can engage a third party to provide the services. The Contractor must return all your material and contract material as well as provide all reasonable assistance and information to assist in the transitioning of your new services arrangements.

· The document granting the employer or employers tenure or occupancy rights should operate on normal commercial grounds.

This condition is met as you have a lease over the entire building. The lease is separate from your arrangement with the Contractor.

· The calculation of rentals under the tenure or occupancy rights agreement, management fees and child care fees should be commercially based and independent of each other.

The rental calculation is through a lease with a third party and is separate from the contract with the Contractor. The Contractor has access to the area set aside for child care services for a licence fee and provides child care services to the children of your employees. As stated above the child care fees reflect the market rate and the same fee is charged for the care of non-employee children.

· The risks held by the various parties should be consistent with the relevant premises being those of the employer or employers (for example, risks in respect of the flow of funds, insurance etc).

From the information provided, this condition is met.

· The tenure and occupancy rights as they affect the child care facility should come from the employer or employers, rather than from the operator.

The employer's occupancy rights are from the lease agreement, not from the Contractor.

· The composite rights of control over the service provider should be on a normal commercial basis. For example, clauses in management agreements that have the effect that an operator may only be removed in the most extraordinary or extreme circumstances will give rise to the inference that the activity is not the business operations of the employer or employers.

The contract details that if required by you a management committed must be formed which will be chaired by your representative and comprise of at least one representative from each party.

The purpose of the Committee would be to monitor and review each parties performance of the agreement, consider ways in which the child care services may be improved, assess any deficiencies, develop changes to processes and resolve complaints or issues raised by either party.

In addition to the management committee you:

· may give the Contractor directions about any aspect of the Contractors performance of the agreement

· you decide in absolute discretion, that if a conflict of interest arises that is relevant to the agreement, whether the Contractor may undertake the conflicting work or not

· you will advise the Contractor of any training to be undertaken by the Contractors' personnel

· the Contractor must ensure that their personnel attend the required training

· if you are dissatisfied with the performance of particular personnel you may request the Contractor remove that personnel and replace them with another person with the appropriate skills, qualifications and experience

· if the Contractor is unable to provide acceptable replacement personnel, you may terminate this contract

· you negotiate and monitor the fees payable to the Contractor

· the Contactor and their personnel must comply with your procedures and directions relating to security

· you have an unfettered discretion to terminate the agreement

· you will cover the reasonable cost of utilities, including water, rent electricity and general waste removal

· you also cover the cost of the fit-out, including the outdoor play area, repairs, maintenance and minor capital works which you instigate

· children of your employees are given priority in allocation of child care places.

Paragraph 5 of TR 2000/4 states it is a question of fact and degree as to whether particular premises are business premises of a person. In making a conclusion it is necessary to consider all of the relevant facts.

In applying TR 2000/4 to the facts of your situation it is accepted you will have the necessary control over the premises. However, as indicated in paragraph 19 of TR 2000/4 for the premises to be accepted as your business premises it is necessary to be able to distinguish your circumstances from the circumstances that exist where a member of the public approaches a community or commercial child care centre and enrols on or more of their children.

The following factors support the child care activities being part of your business operations:

· the occupancy of the premises by the Contractor is determined by the Licence and the contract

· if the agreement with the Contractor is terminated there is no impediment to another child care provider being engaged to provide child care services

· the conditions imposed on the Contractor are consistent with the conditions that would be expected to be imposed on an independent child care provider engaged to operate a person's child care centre

· your employee's have priority access to the child care positions

· you have the right of access to the premises and records for inspection purposes

· the Contractor is required to ensure its personnel attend training required by you

· you have the right to request the removal of personnel whose performance you are dissatisfied

· the Contractor is required to provide you with biannual reports and business plans, and

· the Contractor is required to meet with you at regular intervals to discuss the performance under the agreement and the management of the operation of the child care centre.

Conclusion

We therefore consider that the provision of child care to your employees is part of your business operations conducted on your business premises and is therefore exempt from fringe benefits tax under subsection 47(2) of the FBTAA.

Question 2

If the provision of child care to your employees is exempt under subsection 47(2) of the FBTAA, will the exemption continue to apply if the child care facility is used by an employee of another agency?

Detailed reasoning

You have advised that there are currently children of employees from other agencies that attend your child care facility.

Paragraph 65 of TR 2000/4 states that:

To satisfy the test in subsection 47(2) it is not necessary for the employer, on whose 'business premises' the child care facility is located, to restrict the care provided in the child care facility to children of the employees of the employer. Children of employees of an unrelated employer (or children of a member of the public, for that matter) could attend the child care facility without jeopardising the exemption available to the first mentioned employer who has the 'business premises' on which the child care facility is located. In that situation, the child care benefits provided by the first mentioned employer to its employees would be exempt. The benefits provided by the second employer would only be exempt if the second employer satisfied in its own right the respective requirements of 'premises of the person' and 'used ... for the purposes of business operations' in the definition of 'business premises'.

As explained in paragraph 65 above, the exemption from fringe benefits tax applies to the provision of child care to the children of your employees. The use of the child care centre by employees of other agencies will not affect this exemption.

Further issues for you to consider

Depending upon the arrangement, it may be possible for the 47(2) exemption to apply if another agency enters into an agreement for child care to be provided to children of its employees. However, this exemption will not apply to an arrangement in which the employee incurs the child care expenses which are subsequently paid or reimbursed by the employer.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).