Edited version of private ruling

Authorisation Number: 1011555998425

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Ruling

Subject: Fringe Benefits - exemption for childcare

Question

Will the fees paid to the Contractor for the care of employee's children in the Child Care Centre located within the Employer's leased premises be an exempt benefit under subsection 47(2) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Advice/Answer

Yes

Relevant facts

The following description of the scheme is based on information provided by the applicant. The following documents, or relevant parts of them, form part of and are to be read with the description:

· Correspondence from the applicant requesting a private ruling and including:

· A copy of the Management Agreement between the Employer and the Contractor including appendixes.

Scheme

The applicant was previously issued with a favourable private ruling on this issue and is seeking an extension of the previous ruling to coincide with the end of the Management Agreement with the current service provider.

A child care centre (the Child Care Centre) is located within premises leased by the Employer.

The Child Care Centre is managed by a specialist child care provider in accordance with the Management Agreement between the Employer and the selected provider (the Contractor).

The Contractor was selected through a tender process in accordance with the Employer's Procurement Guidelines.

A proposal is in place that enables employees to incorporate the care of their children into their salary sacrifice arrangement. Under the proposal the Contractor invoices the Employer each fortnight for the care of their employee's children at the Centre. The Employer pays the Contactor direct and recovers the costs of the fees via the salary sacrifice arrangement.

The Management Agreement includes the following terms and conditions:

The Management Agreement runs for five years with an option to extend for a further three years.

Clause X provides the contractor the right to use the premises to provide the child care services. However, clause X specifies:

Nothing in this Contract constitutes a relationship of landlord and tenant between the Employer and the Contractor.

During the term of the Management Agreement the Contractor has sole responsibility for the operation of the Child Care Centre, including ensuring the Centre complies with all state and Commonwealth Government legislation, statutes, guidelines and standards.

The Contractor is required to provide the following:

· ensure they are provided to the standards specified in schedule X;

· pay you the annual licence fee unless you reduce the fee for a particular year. This fee will be put back into the Centre as improvements and repairs;

· comply with any reasonable directions you give;

· assist you and your consultants in dealing with the Developer and other Employer contracts in relation to the premises;

· ensure that all promotional material and signage relating to the Child Care Services and the Child Care Premises is submitted to you for its prior approval;

· cooperate with you in undertaking reviews of the Child Care Services and Child Care Premises, including providing all requested information and documentation;

· elect and maintain public liability insurance, professional indemnity insurance, workers compensation and property damage insurance;

· advise you of any complaints or investigations relating to any alleged or actual breach of regulatory requirements in relation to the delivery of the Child Care Services;

· comply with your Environmental Management Practices as outlined at schedule X;

· ensure the Child Care Services are charged to users of the Child Care Centre in accordance with the Child Care Fee Structure;

· pay for all utilities, including water, electricity and gas;

· pay any rates and taxes associated with the Child Care Centre including the annual licence fee, the purchasing of any third party contractor services for waste management, cleaning, telecommunications, gardening, minor maintenance, additional security, sanitary disposal, nappy service, laundry services, non-fixed equipment, staffing, insurance and consumables;

· manage the allocation of child care places in accordance with your Priority of Access Policy.

· ensure the maximum number of child care places is available whenever the Child Care Centre is operating;

· provide Child Care Services for 51 weeks each year excluding the period 25 December to 1 January;

· operate the centre between the hours of 7:30 am and 6:00 pm Monday to Friday, except for public holidays;

· maintain the following business and financial management services:

· regular contact with your Contract Manager and provide detailed operational and financial reports;

· prepare and present an Annual Business Plan;

· establish and operate a fee payment and receipting system including the management of salary packaging for child care fees;

· comply with the Child Care Act 1972 and Department of Family and Community Services requirements;

· application and registration with the National Childcare Accreditation Council to participate in the Quality Improvement and Accreditation System;

· establish and maintain an advisory committee which will include representatives of families/parents, staff, the Employer and the Contractor;

· provide appropriately experienced and qualified child care workers and Centre Director;

· employ a 3-4 year trained early childhood preschool teacher to deliver a preschool program to children in the preschool room;

· develop and deliver a range of stimulating and educational programs;

· provide the opportunity for face to face consultation and feedback to parents/families;

· in consultation with the advisory committee review and if necessary amend the Centre's philosophy and Child Care Policies;

· provide, maintain and replace equipment and resources;

· maintain the Child Care Centre in a clean, tidy and safe condition;

· establish problem resolution procedures;

· conduct family/parent satisfaction surveys;

· observe and abide by the information privacy principles contained in the Privacy Act 1988;

· indemnify, hold harmless and defend the Employer, its officers and employees from and against any loss or liability, including but not limited to:

o loss of, or damage to, property of the Employer;

o claims by any person in respect of personal injury or death;

o claims by any person in respect of loss of, or damage to any property;

o costs and expenses including the costs of defending or settling any claim, arising out of, or as a consequence of a breach of the Agreement by the Contractor, or negligence on the part of the Contractor, its officers, employees, agents or subcontractors;

· satisfy all relevant occupational health and safety environmental and hygiene requirements; and

· provide all equipment and consumables associated with the provision of the required services.

You on behalf of the Employer are required to:

· pay any rent due to the Developer in respect of the Child Care Premises;

· comply with any other obligations the Employer has to the Developer in respect of the Child Care Premises;

· provide the building fit-out, outdoor play area and undertake cyclic maintenance and repairs. This includes:

o internal walls;

o flooring;

o plumbing;

o joinery;

o kitchen equipment;

o environment control;

o lighting;

o landscaping;

o security;

o waste management;

o signage;

o fire Protection; and

o allocate one care space for use by the Director of the Child Care Centre.

The Contractor is not permitted to assign, in whole or in part, or novate its rights and obligations under the Management Agreement without first obtaining the written consent of the Employer.

Your Contract Manager will be responsible for administering the Management Agreement on behalf of the Employer and may authorise functions to be carried out on his behalf.

The Contractor is required to comply with the reasonable directions of the Contract Manager or Project Officer.

By virtue of clause X:

· the contractor, its officers, employees, servants and any other persons engaged in connection with the Management Agreement will not by virtue of the Management Agreement become in the service or employment of the Employer;

· the contractor must be responsible for all matters requisite as employer in relation to persons engaged in connection with the Management Agreement;

· nothing in the Management Agreement constitutes or is taken to constitute a partnership, or form of agency between the Commonwealth and the Contractor; and

· neither the Commonwealth, not the Contractor has the authority to bind the other.

You are able to terminate the Management Agreement by giving 90 days written notice without the need to show cause. Alternatively, you are able to terminate the Management Agreement immediately if the Contractor commits a breach that is not remedied within ten business days of receipt of the required notice.

As part of the contract you have set service standards and performance and reporting requirements which the Contractor is required to meet together with required environmental management practices within the Child Care Centre. You have also determined the Child Care Centre's philosophy and objectives.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Subsection 47(2)

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Reasons for decision

Question 1

Summary

The fees paid to the Contractor for the care of employee's children in the Child Care Centre located within the Employer's leased premises will be an exempt benefit under subsection 47(2) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA).

Detailed reasoning

Subsection 47(2) of the FBTAA provides an exemption for the provision of the care of children of the employee in a child care facility located on business premises of the employer.

Subsection 47(2) states:

Where:

(a) a residual benefit provided to a current employee in respect of his or her employment consists of -

(i) …………..; or

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

(b) the childcare facility is located on business premises of -

(i) the employer; or

(ii) if the employer is a company, of the employer or of an company that is related to the employer,

the benefit is an exempt benefit.

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

1. the benefit is a residual benefit;

2. the benefit is provided to a current employee;

3. the benefit consists of the care of the children of the employee;

4. the care of the children is in a child care facility; and

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

Is the benefit a residual benefit?

The arrangement involves you paying the Contractor on a fortnightly basis for the care of employee's children in the Child Care Centre. As you are incurring the expense, it will not be an expense payment benefit. Rather, as the benefit does not come within any other category of benefit, it will be a residual benefit.

Will the benefit be provided to a current employee?

This condition is satisfied as the child care benefits will be provided as part of a salary sacrifice arrangement.

Does the benefit consist of the care of children of your employees?

The benefit will consist of the care of employee's children.

Will the children be cared for in a child care facility?

A child care facility is defined within sub section 136(1) of 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.

The Child Care Centre will satisfy this definition as it is a Child Care Centre and is not the residence of any of the children.

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, but does not include ….

Guidance for considering whether the Child Care Centre will be your business premises is provided by Taxation Ruling TR 2000/4.

Paragraph 4 of TR 2000/4 states the premises will be business premises if two requirements are met:

1. the premises or part of the premises are `of' the person; and

2. the premises are used by the person in whole or in part for the purposes of their business operations.

Premises of the person

Par 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.

In applying this test paragraphs 7 and 8 state:

7. 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; and

8. in other circumstances, for example, 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.

Paragraphs 11 and 12 provide there is no absolute or conclusive test of 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 the employer's actions and activities on the premises with those of normal business practices.

In considering these factors it is relevant to note:

· the Child Care Centre will be located on premises leased by the Employer;

· clauses 4.1 and 4.2 of the Management Agreement only provide the contractor with the right to use the premises to provide the Child Care Services. Clause X specifically provides that the Management Agreement does not constitute a relationship of landlord and tenant; and

· you have retained control over the use of the premises as the Management Agreement enables you to terminate the Management Agreement and control the activities of the Contractor on the premises.

These factors indicate you will have the requisite right of possession of the premises.

Will the premises be used in whole or in part for the purpose of your business operations?

The term `business operations' is defined in subsection 136(1) of the FBTAA in relation to a government body or a non-profit company to include any operation or activity carried out by that body or company.

Consequently, as set out in paragraph 9 of TR 2000/4, business operations can include a wide range of activities. Paragraph 41 indicates it is wider than `carrying on a business' and can include both passive and active dealings. It can include an activity that although not undertaken in the ordinary course of carrying on a business is undertaken in the course of carrying on a business. As an example of this principle paragraph 10 states:

Important to this Ruling is the question of whether the operations of facilities, such as child care facilities would fall into the term `business operations'. In this context, 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. Activities undertaken in connection with the provision of those benefits to employees would be `business operations' of the employer.

Paragraph 44 further states:

A consequence of this is that premises would be `used … for the purposes of business operations' where they are used exclusively for the operations of a child care facility. This was the express view of Merkel J in Esso Australia Ltd v. FC of T 98 ATC 4953 at 4957; (1998) 40 ATR 76 at 80; 157 ALR 652 at 656:

Once it is accepted that the provision of benefits to employees in the form of child care at business premises of an employer is an important factor in recruiting, retaining and otherwise rewarding employees and, as such, is part of the business operations of the employer, it does not seem to be relevant whether the child care facilities are located at the premises where the employer carries out other business operations, or are located at premises of the employer which have been procured solely for the purpose of the provision of a child care facility thereon. Common sense would dictate that in many instances basic requirements for child care facilities may be such that it is inappropriate for the facilities to be located upon the same premises where the other business operations of an employer are conducted.

In situations where an employer engaged an independent child care operator under a management agreement to care for employee's children, paragraph 57 of TR 2000/4 provides a list of the minimum requirements expected to be incorporated into any such arrangement:

· the Management Agreement with the Child Care Operator should operate on an ordinary and arm's length basis;

· the Management Agreement should be able to be terminated 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;

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

· the termination of the Management Agreement should not require the termination of the employer's tenure or occupancy rights and the rights under the tenure or occupancy rights agreement (for example, the amount of rental, conditions of occupancy) should not be affected in any way;

· the Management Agreement and tenure or occupancy rights agreement should operate independently of each other;

· 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 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);

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

· 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 Management Agreement satisfied these requirements as:

· the Management Agreement with the Contractor operates on an ordinary and arm's length basis;

· you are able to terminate the Management Agreement on normal commercial grounds;

· as you separately lease the premises from a third party there is no impediment to another child care operator being engaged to manage and operate the facility if the Management Agreement is terminated;

· the lease document granting you tenure or occupancy rights is separate to the Management Agreement and operates on normal commercial grounds;

· the termination of the Management Agreement will not affect your occupancy rights;

· the Management Agreement operates separately from your lease of the premises;

· the calculation of the rentals under the lease agreement is independent to the calculation of the management fees and child care fees;

· the risks held by both parties are consistent with the premises being your premises;

· the tenure of the Contractor come from you; and

· the composite rights of control are on a normal commercial basis.

These factors indicate the premises are being used for the purposes of your business operations.

Therefore, as both requirements are met the Child Care Centre is considered to be your business premises and the benefit will be an exempt benefit under subsection 47(2) of the FBTAA.

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