Edited version of private ruling

Authorisation Number: 1011504945563

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Ruling

Subject: FBT - Childcare exemption

Question

Will the taxpayer be exempt from fringe benefits tax (FBT) for the provision of childcare in the Centre operated by the childcare provider under subsection 47(2) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes.

This ruling applies for the following period

30 November 2009 - 27 September 2010

The scheme commences on:

September 2006

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it.

The fact sheet has more information about relying on your private ruling

Management Agreement

A Management Agreement was entered into by the taxpayer, an unrelated entity and the childcare provider.

A copy of the Management Agreement was provided with the ruling application.

Licence Agreement

The taxpayer and an unrelated entity as Licensor and the childcare provider as Licensee are parties to the Licence Agreement.

A copy of the Licence Agreement was provided with the ruling application.

Sub-lease Agreement

The head lease holder holds a licence over the outdoor area, with a head lease over the building.

Parties to the sub-lease are the head lease holder as sub-lessor and the taxpayer and an unrelated entity as sub-lessee.

A copy of the sub-lease agreement was provided with the ruling application.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 45.

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

Fringe Benefits Tax Assessment Act 1986 section 136.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'Part IVA general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you understand how we reached our decision.

Question

Summary

The taxpayer has a right of possession and control over the premises and the premises are used for its business operations. The Commissioner concludes that the provision of childcare benefits by the taxpayer to its employees under the terms of the relevant agreements are exempt benefits pursuant to subsection 47(2) of the FBTAA.

Detailed reasoning

Section 47(2) of the FBTAA states:

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.

In respect of the childcare benefit exemption, subsection 47(2) of the FBTAA requires the following conditions to be satisfied:

· the benefit provided is a residual benefit

· the benefit is provided to a current employee

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

· the care of children is in a child care facility

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

The benefit provided is a residual benefit

Section 136(1) of the FBTAA states:

"residual benefit" a benefit that that is a residual benefit by virtue of section 45.

Section 45 of the FBTAA states:

A benefit is a residual benefit for the purpose of this Act if the benefit is not a benefit by virtue of a provision of Subdivision A of Divisions 2 to 11 (inclusive).

Under the arrangement, the childcare provider will invoice the taxpayer directly for the cost of child care services covered by the Management Agreement. As the benefit does not fall under Divisions 2 to 11 of the FBTAA, it will be a residual benefit.

The Commissioner agrees with your contention that the provision of childcare services will be a residual benefit as defined for the purposes of the FBTAA.

The benefit is provided to a current employee

The childcare service benefits are provided under the Management Agreement to current employees only. The Commissioner concludes that the requirement that a benefit is provided to a current employee is satisfied.

The benefit consists of the care of children of the employee

Under the FBTAA, a child of a person includes an adopted, step and ex-nuptial child. This is consistent with the definition of [Entity] Children in the Management Agreement.

The Management Agreement covers [Entity] Children which are defined in Clause 1 to mean a natural, adopted, step or ex-nuptial child of any an [Entity] Employee. Broadly speaking, paragraph 4.1(a) of the Management Agreement states that the Child Care Provider will provide child care services to [Entity] Children in accordance with the terms and conditions of the agreement.

Clause 7 of the Management Agreement states that high quality individualised care, developmentally appropriate education, good quality and nutritional food in adequate quantities are to be provided to [Entity] Children. Further, baby formula, nappies and associated products will also be provided by the Child Care Provider. The objectives of the Child Care Provider as stated in Schedule 1 of the Management Agreement also provide an indication of the care to be provided to [Entity] Children.

Given all of the above, the Commissioner concludes that the benefit consists of the care of children of the employee.

The care of children is in a child care facility

Subsection 136(1) of the FBTAA states:

"child care facility" means 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.

Initially 15 child care places were made available for [Entity] Employees at the child care centre under subclause 6.1 of the Management Agreement. Schedule 2 of the Management Agreement shows this will increase to 30 places and then to 50 places. Schedule 2 of the Management Agreement also breaks down the total number of places per age group. Relevantly, the age groups to be catered for under the Management Agreement are the 0-2 years, 2-3 years and 3-6 years. The requisite purpose of minding, caring for or educating the children is evident in Clause 7 and Schedule 1 of the Management Agreement.

The child care centre is not a residence of any of the children that will receive care under the Management Agreement.

Given the above, the Commissioner concludes that the care of children is in a child care facility as defined in subsection 136(1) of the FBTAA.

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

Subsection 136(1) of the FBTAA states:

"business premises" in relation to a person, means premises, or a part of premises, of the person used, in whole or in part, for the purposes of business operations of the person…

Therefore, two requirements need to be met for premises to be business premises:

· the premises or part of the premises are 'of' the person; and

· the premises or part of the premises must be used by the person, in whole or in part, for the purposes of their business operations.

Taxation Ruling 2000/4

Taxation Ruling TR 2000/4 (TR 2000/4) provides the Commissioner's view on what constitutes business premises. 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. This can only be resolved by making a common sense judgment about the facts of each case and not by adopting any absolute rule.

Premises of the person

Paragraph 7 of TR 2000/4 states:

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

Paragraph 8 of TR 2000/4 states:

…where a person has non-exclusive possession of premises, the person satisfies this requirement if they have a right to possession of the premises, at least to the extent necessary to enable the conduct thereon of their business operations.

Paragraph 25 of TR 2000/4 states:

The question of whether 'premises, or a part of premises' are premises 'of the person' is to be determined having regard to the nature of the person's interest in the premises, evidenced by the person's rights and obligations in relation to the premises.

Paragraph 32 of TR 2000/4 quotes Merkel J in Esso Australia Ltd v. FC of T 98 ATC 4953, at 4958; (1998) 40 ATR 76, at 80-81; 157 ALR 652, at 656-657:

It seems to me that, under s 47(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 whether that entitlement is one of ownership, exclusive possession or non-exclusive possession.

Business operations

While the term 'business operations' is defined in the FBTAA, the definition has no relevance to this case. Therefore, the term takes its ordinary meaning.

Paragraph 9 of TR 2000/4 states:

The term 'business operations'…includes a wide range of activities.

Paragraph 10 of TR 2000/4 states:

…child care facilities are operations that would fall within the term 'business operations'…the provision of benefits to current employees in the form of child care would be an important factor in recruiting, retaining and otherwise rewarding employees.

Paragraph 41 of TR 2000/4 states:

…the term 'business operations' has a broad meaning. In our view 'business operations'…would include both passive and active dealings, including isolated transactions of a person, without the need to establish that the person was carrying on business, provided the dealings were undertaken for the purpose of making a profit by way of a business operation or a commercial transaction.

Paragraph 43 of TR 2000/4 states:

…the provision of benefits to employees in the form of child care would be an important factor in recruiting, retaining and rewarding employees…activities undertaken in connection with the provision of those benefits…to employees would be 'business operations' of the employer who carried on the business or carried out the profit making undertaking. Thus, if that employer were to use its premises for operating a child care facility on the premises, that activity would be regarded as 'business operations'.

Combining the two requirements

Paragraph 45 of TR 2000/4 states:

…it is a question of fact and degree as to whether premises are 'business premises' of a person…Consequently, there is no absolute or conclusive test of whether particular premises are 'business premises' of a person.

Paragraph 46 of TR 2000/4 states:

…the following matters are of particular importance in determining whether each of the respective requirements of the definition is satisfied:

(a) the control the employer has over the premises; and

(b) the consistency of an employer's actions and activities on the premises with those of normal business practices

Paragraph 47 of TR 2000/4 states:

However, no one factor is decisive, and there is often significant overlap between the factors.

Control the employer has over the premises?

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 out on the premises are not truly 'business operations' of the person.

Paragraph 51 of TR 2000/4 states:

…the fact that particular premises are 'business premises' of a person does not preclude the premises from being 'business premises' of another person for the purposes of the FBTAA…That said, there is a practical limit to how many persons could concurrently establish that given premises are their 'business premises'…this is a question of fact and degree, which can only be resolved by making a common sense judgment about the facts of each case and not by adopting any absolute rule.

Paragraph 52 of TR 2000/4 states:

In some arrangements an employer, as one of many employers, merely pays a service fee to a service provider for the child care services that have been provided at particular premises, with only limited rights to terminate the arrangement. In these situations, questions arise as to whether the employer has a sufficient right to possession of the premises to satisfy the requirement that the premises be premises of the employer.

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.

Paragraph 54 of TR 2000/4 states:

The control question requires a consideration of both the form and the substance of the arrangement: objectively, which, if any, of the respective employers, has a sufficient interest in the premises to carry on its business operations.

Paragraphs 81 to 84 of TR 2000/4 provide an example where one of three unrelated corporate employers seeks the childcare benefit exemption:

Three unrelated corporate employers, X Co, Y Co and Z Co, lease premises from an arm's length lessor under a three year lease, with options for three further terms each of three years. The premises are leased jointly and severally, and the employers enjoy exclusive possession of the premises. Together, the three employers establish a child care centre on the premises for the benefit of employees of the three companies. In addition, the employers jointly enter into a separate arm's length agreement with an independent children's services provider to furnish and supervise the child care services to be provided at the premises. Each of the employers is liable for one third of the costs of providing the facility. Employees of each of the respective companies are entitled to enrol their children at the child care centre…

Upon review of all of the facts, we accept that it is apt to describe the leased premises as X Co's 'business premises'. Consequently, X Co is eligible for the exemption…

As stated above in TR 2000/4, the provision of child care facilities to employees on employer premises would be considered to be business operations of an employer. Whether the childcare benefits are business operations of the taxpayer will be discussed later in the ruling after the Commissioner has determined whether the taxpayer has the necessary right of possession and control over the premises.

The taxpayer must have a right of possession and control over the use of the premises during the course of its business operations. The head lease holder, sub-leased the premises to the taxpayer and the unrelated entity for the permitted purpose of conducting a childcare facility. The taxpayer and the unrelated company (collectively referred to as the "Licensor") granted a licence to the childcare provider to enter and use the premises for the purpose of providing childcare management services. The taxpayer and the unrelated company then entered into a Management Agreement with the childcare provider

The relevant terms of the Licence Agreement have been provided in full earlier in the ruling. Relevantly, the agreement provides the Licensor with access rights to carry out its business operations and to check compliance with the terms of the Licence Agreement. The Licensor is also able to terminate the licence for convenience upon six months written notice.

The relevant terms of the Management Agreement have been provided. Relevantly, the Management Agreement provides for the establishment of a Child Care Committee. The Child Care Committee consists of one representative from each of the taxpayer, the unrelated company and the childcare provider. The Child Care Committee will consider and monitor the parties and the agreement including, but not limited to, termination of the Agreement. The childcare provider cannot sub-contract or assign any of its obligations under the Management Agreement without the consent of the taxpayer and the unrelated company.

Nothing in either the Licence Agreement or the Management Agreement limits the possessory entitlement of the taxpayer as a sub-lessee. The Commissioner concludes that the taxpayer has a right of possession over the premises during the course of its business operations, albeit now on a non-exclusive basis.

The taxpayer must also have control over the use of the premises during the course of its business operations. Determining control requires consideration of the form and substance of the arrangement to objectively determine whether an employer has a sufficient interest in the premises to carry out its business operations.

You state that the taxpayer and the unrelated company entered into the childcare facility agreement together as it was, and remains, commercially practical to do so as neither party separately would be able to use the childcare facility to its full capacity.

You further state that even though there is no common ownership between the entities, they have continued to regularly liaise with each other in terms of staff benefits and overall efficiencies of processes. Each party has a representative on the childcare management committee (and together have majority voting power). You contend that as both entities' interests are aligned in terms of providing the childcare facility as a benefit to their staff, you consider they would act together in terms of quality of the childcare services and ability to dismiss the childcare provider if the need arose.

The form and substance of the arrangement has been outlined previously. Briefly, it involves the entering into of a sub-lease over premises, the granting of a licence to a childcare provider and the entering into of a management agreement with the childcare provider. The only permitted activity under all agreements on the premises is that of childcare services. The taxpayer is listed as a separate party to each contract/agreement. There is nothing within the Licence Agreement or the Management Agreement that would restrict the access of the taxpayer to the premises.

As the taxpayer and the unrelated company were previously related companies, they effectively controlled the Child Care Committee. The role of the Child Care Committee has been detailed previously and will not be reproduced here. Post change in ownership, the taxpayer does not control and is not capable of controlling the Child Care Committee in its own right.

That being said, the taxpayer is only required to have a sufficient interest in the premises to carry on its business operations. Even though there has been a change in ownership of the taxpayer, it is an employer in its own respective right. As such, it is the Commissioner's view that this scenario still fits within the principle established in the Esso Case and is in line with the example provided in TR 2000/4 at paragraphs 81 through 84.

The Commissioner concludes that on balance the taxpayer would have a sufficient interest in the premises to carry out its business operations. Consequently, the taxpayer has possession and control over the premises during the course of its business operations.

Are the actions and activities on the premises consistent with those of normal business practices?

While the Commissioner has determined that the taxpayer has a right of possession and control over the premises, The taxpayer must also use the premises for its business operations.

Paragraph 17 of TR 2000/4 states:

…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 TR 2000/4 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…

Paragraph 55 of TR 2000/4 states:

An employer will have difficulty in showing premises are its 'business premises' if its conduct in relation to the premises departs from normal business practices. Premises are clearly not 'business premises' of an employer if the employer's actions and activities are merely carried out as a part of some artificial or contrived legal form.

Paragraph 56 of TR 2000/4 states:

For example, in relation to the child care exemption, an employer may, either by itself or jointly with one or more other employers, engage an independent child care operator under a management agreement to care for employees' children. Naturally, an employer who is party to such an arrangement would be concerned to know whether the premises upon which the care of employees' children is taking place are its 'business premises'.

In this case, the taxpayer along with an unrelated party have engaged a childcare provider to provide childcare services under a Management Agreement. TR 2000/4 provides a list of requirements that should be incorporated into the agreement between the taxpayer and the childcare provider for the operations to be considered the business operations of the employer.

Paragraph 57 of TR 2000/4 states:

In this regard, we would ordinarily expect an employer, either by itself or jointly with one or more other employers, to incorporate the following minimum requirements into its arrangements, viz., that:….

Paragraph 57 of TR 2000/4 then goes on to provide a list of minimum requirements that should be incorporated into the agreement. These requirements are discussed below:

· the management agreement with the child care operator operates on an ordinary and arm's length basis

The relevant clauses and schedules of the Management Agreement detail the obligations of the childcare provider, the child care fees, variation to child care fees, the nature of the relationship between the parties to the agreement, and the rights of termination.

Each of the above aspects of the Management Agreement is on an ordinary and arm's length basis. The Commissioner therefore accepts that the Management Agreement operates on an ordinary and arm's length basis.

· the management agreement be able to be terminated on normal commercial grounds

Broadly speaking, the Management Agreement can be terminated if a party breaches the agreement, on the occurrence of certain commercial or legal events or by the taxpayer and the unrelated entity without cause with six months notice.

Relevantly, there is nothing in the Licence Agreement or the Sub-Lease Agreement which limits the ability for the Management Agreement to be terminated. Specifically, attention is drawn to clause 12 of the Licence Agreement which provides the right to terminate the Licence Agreement where there has been a material default of the Management Agreement and Sub-Lease Agreement.

The Commissioner considers the termination provisions of the management agreement are on normal commercial grounds.

· where the management agreement is terminated, there is no impediment to another child care operator being engaged to manage and operate the facility on the particular premises

Subclause 12.1 of the Sub-Lease Agreement states that the sub-lessees cannot transfer the Lease or otherwise part with possession of the premises. The taxpayer granted a licence to the childcare provider to operate the childcare facility. The licence can be terminated in accordance with clause 12 of the Licence Agreement. The Management Agreement states under what circumstances the Management Agreement can be terminated in clause 22 and details the handover process should the Management Agreement be terminated in clause 19.

The Commissioner is satisfied that should the Management Agreement be terminated, no impediment to another child care operator being engaged exists.

· the document granting the employer or employers tenure or occupancy rights operates on normal commercial grounds

The terms of the sub-lease detailing the occupancy rights of the taxpayer have been outlined in full earlier in this ruling. The Commissioner is satisfied that the tenure or occupancy rights operate on normal commercial grounds.

· the termination of the management agreement does not require termination of the employer's or employers' tenure or occupancy rights, nor should the rights under the tenure or occupancy rights agreement be affected in any way

There are no clauses in the Management Agreement that requires the termination of the Sub-lease Agreement with the head lease holder in the event of the termination of the Management Agreement with the childcare provider. The Commissioner is satisfied that this requirement is met.

· the management agreement and tenure or occupancy rights agreement operate independently of each other

Clause 22 of the Management Agreement details the rights of termination and confirms that the management agreement and the Sub-Lease Agreement operate independently of each other. The Commissioner is therefore satisfied that the agreements operate independently of each other.

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

The payments under the Management Agreement are commercially based in order to give the childcare provider a commercial return from the operation of the childcare centre.

The Commissioner is satisfied that the rent, the management fees and the childcare fees are commercially based and independent of each other.

· the risks held by the various parties be consistent with the relevant premises being those of the employer or employers

The taxpayer as a sub-lessee is at risk for public liability and OH&S as a result of its control over the premises and is therefore required to obtain insurance to cover such risks. The childcare provider is responsible for public liability and work cover insurance to cover the operation as detailed in clause 24 of the Management Agreement.

The Commissioner concludes that the risks held by the various parties are consistent with the relevant premises being those of the taxpayer as a sub-lessee. The Commissioner concludes that this requirement is satisfied.

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

The granting of the licence to the childcare provider under the Licence Agreement provides that entity with the right to conduct childcare operations on the premises. Without the granting of the licence, the childcare provider would be unable to provide childcare services on the premises.

The Commissioner concludes that this requirement is satisfied.

· the composite rights of control over the service provider be on a normal commercial basis

TR 2000/4 elaborates on this point by stating that:

…For example, clauses in management agreements that have the effect that an operator may only be removed in the most extraordinary or extreme circumstances give rise to the inference that the activity is not 'business operations' of the employer or employers.

Clause 22 of the Management Agreement details the grounds for termination. Generally speaking, the Management Agreement can be terminated where the agreement is breached; certain events occur or without cause where six months notice is given.

Clause 14 of the Management Agreement states that the Child Care Committee will consider and monitor, among other things, the power to terminate the Management Agreement pursuant to clause 22. While the taxpayer alone does not have the power to terminate the Management Agreement alone given it is but one of three members on the committee, the termination clause in the Management Agreement does not provide for the childcare provider to only be removed in extraordinary or extreme circumstances.

The Commissioner concludes that this requirement is satisfied.

Conclusion

The taxpayer has a right of possession and control over the premises and the premises are used for its business operations.

The Commissioner concludes the provision of childcare benefits by the taxpayer to its employees under the terms of the relevant agreements are exempt benefits pursuant to subsection 47(2) of the FBTAA.

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