Edited version of private ruling

Authorisation Number: 1011723955149

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Ruling

Subject: Fringe Benefits Tax - exempt benefits

Question 1

Where you and a non-related entity (the Joint Operators) jointly operate the child care centre known as the Centre, will the provision of child care for the children of your employees in the Centre be exempt benefits under subsection 47(2) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes

Question 2

Where the Joint Operators jointly operate the Centre, will the provision of child care in the Centre for the employees of your two subsidiaries, each a related company to you, be exempt benefits under subsection 47(2) of the FBTAA?

Answer

Yes

Question 3

If you solely operated the Centre, will the provision of child care for the children of your employees in the Centre be exempt benefits under subsection 47(2) of the FBTAA?

Answer

Yes

Question 4

If you solely operated the Centre, will the provision of child care in the Centre for the children of employees of your subsidiaries, each a related company to you, be exempt benefits under subsection 47(2) of the FBTAA?

Answer

Yes

Question 5

If child care so provided in the Centre for the children of your employees will be exempt benefits, are the arrangements under which the child care will be provided arrangements entered into to obtain a tax benefit as described in section 67 of the FBTAA?

Answer

No

Question 6

If child care so provided for the children of your employees will be exempt benefits, will the provision of the child care give rise to an obligation under the pay as you go provisions in Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer

No

This ruling applies for the following period

01 April 2011 - 31 March 2012

01 April 2012 - 31 March 2013

01 April 2013 - 31 March 2014

01 April 2014 - 31 March 2015

01 April 2015 - 31 March 2016

The scheme commenced on

01 April 2011

Relevant facts and circumstances

The Joint Operators jointly operate the child care centre known as the Centre, to provide childcare for children of their respective employees and of employees of your related companies within the meaning of section 158 of the FBTAA (related companies).

The companies that will be included in the arrangements to provide child care that are related companies within the meaning of section 158 of the FBTAA are two subsidiaries wholly owned by you.

Private rulings in relation to this arrangement have been applied for, and subsequently issued by the Commissioner of taxation, for the FBT years up to the recent year.

The Joint Operators have determined to continue to jointly operate the child care centre. You expect that the provision of affordable child care will continue to result in:

· improved return to work ratios following parental leave

· reduced staff turnover in the longer term and associated costs and loss of institutional knowledge

· improving ability to attract and retain staff

· enhanced employee satisfaction and work/life balance, and

· positive employer branding and perception to employees.

The existing leasehold interest is due to expire and with it the terms of the existing child care arrangements. However, the Joint Operators' desire to continue these arrangements and to that end have reached agreement to extend the existing lease and licence arrangements, and continue to engage a childcare provider to manage the centre on their behalf.

To effect this, the Joint Operators will enter into replacement/amended transaction documents with the intention of continuing to provide child care at the Centre for the children of their employees, and for the children of employees of related companies within the meaning of section 158 of the FBTAA.

In short, these documents will result in the current child care arrangements continuing in substantively identical terms for a further term of approximately 5 years.

The Centre on the site is licensed to provide care for a number of children on a daily basis and can receive two or more children who are under six years of age.

Places at the site will be made available to the children of current employees of the Joint Operators and your related companies under effective salary sacrifice arrangements which conform to Taxation Ruling TR 2001/10 Income Tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements.

Reasons for decision

Question 1

Where the Joint Operators jointly operate the child care centre known as the Centre, will the provision of child care for the children of your employees in the Centre be exempt benefits under subsection 47(2) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

In general terms, an employer is liable to pay fringe benefits tax when it provides a fringe benefit to its employees. A fringe benefit is defined in subsection 136(1) of the FBTAA. Exempt benefits are not subject to fringe benefits tax because they are excluded from the definition.

The benefit to be provided to your employees under the proposed arrangement will be the provision of child care for their children. The provision of the child care will be an exempt benefit if the requirements of subsection 47(2) of the FBTAA are met.

The requirements to be satisfied are that:

(a) the benefit provided is a residual benefit,

(b) the benefit is provided to a current employee,

(c) the benefit consists of the care of children of the employee,

(d) the facility at the Centre site satisfies the definition of childcare facility in subsection 136(1) of the FBTAA, and

(e) the childcare facility is located on your business premises.

a) Residual benefit

A benefit is a residual benefit under section 45 of the FBTAA if the benefit does not fit into any of the specific categories of benefits under a provision of Subdivision A of Divisions 2 to 11 of the FBTAA.

You will be providing the child care services to the employees as part of a salary sacrifice arrangement. You will incur the expense in respect of child care fees and will have the obligation to pay those fees to the manager under the management agreement.

As the employee will not have an obligation to pay those fees, the payment will not be an expense payment fringe benefit. Nor will the benefit fit into any other category of benefit. The benefit will be a residual benefit.

b) Provided to a current employee

A 'current employee' is defined in subsection 136(1) of the FBTAA as "a person who receives, or is entitled to receive, salary or wages."

You will provide the child care benefits to the employees under salary sacrifice arrangements. As these arrangements require the person to be entitled to receive salary or wages, the benefit will be provided to current employees.

c) The benefit consists of the care of the employee's children

It is stated in the documents under which the proposed arrangement will operate that children of staff employed by the Joint Operators and your related companies will be given priority access to places in the childcare centre on the Centre site. The purpose of the arrangement is to provide child care to children of staff employed by the Joint Operators and your related companies.

d) The care of children is 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.

The childcare facility located on the Centre site satisfies this definition.

e) Will the child care facility be located on your business premises?

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...".

This definition contains a two-fold test for determining whether the premises are business premises for the purposes of the FBTAA. 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.

Taxation Ruling TR 2000/4 Fringe Benefits Tax: meaning of 'business premises' considers the question of what constitutes business premises for the purposes of the FBTAA.

Paragraphs 11 and 12 of TR 2000/4 state that 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 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'.

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 this issue 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.

Paragraph 20 of TR2000/4 states that 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 51 of TR 2000/4 explains that the fact that particular premises are 'business premises' of a person does not necessarily preclude the premises from being 'business premises' of another person for the purposes of the FBTAA. The paragraph elaborates on this point in adopting the view of Merkel J in the Esso Case by stating that:

there is a practical limit to how many persons could concurrently establish that given premises are their 'business premises'. But again, 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 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.

It is concluded that the present arrangement is not of the type described in paragraphs 52 and 53 of TR 2000/4. The Centre site would be your business premises.

As you will jointly lease the premises with a non-related entity or solely lease the premises if the non-related entity terminates its involvement, they will have the requisite possessory entitlement of the premises, provided that the premises are being used for their business operations.

The meaning of business operations is discussed in paragraphs 9 and 10 of TR 2000/4. In addition to including activities undertaken by a person in the ordinary course of carrying on a business, they also include those activities that, although not undertaken in the ordinary course of carrying on a business, are nevertheless undertaken in the course of carrying on a business.

Paragraph 42 of TR 2000/4 states:

Where a business exists, the term 'business operations' would include a wide range of activities undertaken by the person carrying on the business. Support for this view can be found in the judgment 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.

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.

The ruling clarifies that the operations of facilities as child care facilities, are operations that would be business operations. Paragraph 43 of TR 2000/4 states:

As indicated in this Ruling, the provision of benefits to employees in the form of child care would be an important factor in recruiting, retaining and otherwise rewarding employees. Having regard to the views expressed above, activities undertaken in connection with the provision of those benefits (or indeed the provision of recreational, car parking or health care facilities) 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'.

The fact that the Joint Operators will lease premises solely for the purpose of provision of a childcare facility does not preclude the operation of the childcare facility from being regarded as their business operations. Paragraph 44 of TR 2000/4 states "... 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.

In situations where an employer, either by itself or jointly with one or more other employers, engages an independent child care operator under a management agreement to care for employee's children, paragraph 57 of TR 2000/4 provides that the following requirements should be incorporated into the 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.

· 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.

Paragraph 58 of the ruling states that if these requirements are not satisfied it is unlikely that the employer will be able to demonstrate that it has the requisite possessory entitlement and degree of control. An employer in this situation will have difficulty establishing that the care of the children was being carried out on its premises and that any of the relevant activities amount to one of its business operations.

Under the joint venture arrangements to be made between the Joint Operators, the Centre premises will be used exclusively to conduct child care operations through an independent child care operator. This will enable you to provide child care benefits to your current employees in the ordinary course of carrying on your business. Accordingly, the child care operations will be your business operations on your business premises.

The joint venture parties' actions and activities on the premises will be consistent with normal business practices. The requirements set out in paragraph 57 of TR 2000/4 are the minimum requirements expected to be incorporated in arrangements such as those between the joint venture parties and the manager. This is to demonstrate that the joint venture parties have the requisite possessory entitlement and degree of control, and to establish that the care of the children is being carried out on the premises of the joint venture parties. It also demonstrates that the relevant activities on the premises amount to one of the business operations of the joint venture parties. Consistent with these requirements:

· the Management Deed operates on an ordinary and arm's length basis

· the term of the Management Deed will not exceed the consecutive terms of the sublease(s), subject to early termination or extension

· the Management Deed can be terminated on normal commercial grounds

· on termination of the Management Deed, the joint operators may on normal commercial terms engage a replacement manager for the centre

· the sublease operates on normal commercial terms and the joint operators will be tenants in common

· the termination of the Management Deed does not require termination of the sublease nor affect the rights of the joint operators under the sublease (eg amount of rental, conditions of occupancy) in any way. There is no provision in the sublease for the sublessor to terminate the sublease other than through default of the Joint Operators

· the Management Deed and the sublease operate independently of each other

· the calculation of the rent under the sublease and the child care fees will be commercially determined and independent of each other

· the manager will be entitled to market value child care fees as calculated under the Management Deed. The joint operators have the power to benchmark to market value the child care fees calculated by the manager

· the risks held by the joint operators and the manager will be consistent with the premises being those of the joint operators

· the joint operators, not the manager, will hold the sublease of the premises

· the joint operators' rights of control over the manager are on a normal commercial basis

· the joint operators have overall responsibility for the premises

· the joint operators have broad powers to direct the manager to do anything the joint operators consider reasonably necessary or desirable for the performance of the services and conduct of the centre (eg to protect the children at the centre, the employees or the joint operators)

· the manager will be required to indemnify the joint operators against actions by the manager or its staff for negligence

· the manager may subcontract the performance of any material part of the services under the Management Deed but only with the prior written approval of the joint operators (not to be unreasonably withheld), and

· in filling the guaranteed places, the manager will admit joint operators' employees' children ahead of any others, but if there is excess capacity, the manager may admit other children. Priority of access guidelines have been agreed by the joint operators.

Conclusion

Where the childcare centre located on the Centre site is operated jointly with a non-related entity, the provision by you of a residual benefit, namely the care of children of a current employee in the childcare facility located on the Centre site, will be an exempt benefit pursuant to subsection 47(2) of the FBTAA.

Question 2

Where the Joint- Operators jointly operate the Centre, will the provision of child care in the Centre for the employees of your subsidiaries, each a related company to you, be exempt benefits under subsection 47(2) of the FBTAA?

Subsection 47(2)(b) of the FBTAA states as follows:

the recreational facility or child care facility, as the case may be, is located on the 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.

Section 158 of the FBTAA states as follows:

158 (1) [Where companies related]

For the purposes of this Act, a company shall be taken to be related to another company if:

(a) one of the companies is a subsidiary of the other company; or

(b) each of the companies is a subsidiary of the same company.

For the purposes of this section, a company (in this subsection referred to as the (``subsidiary company'') shall be taken to be the subsidiary of another company (in this subsection referred to as the ``holding company'') if:

(a) all the shares in the subsidiary company are beneficially owned by:

(i) the holding company;

(ii) a company that is, or 2 or more companies each of which is, a subsidiary of the holding company; or

(iii) the holding company and a company that is, or 2 or more companies each of which is, a subsidiary of the holding company; and

Accordingly, further to the reasoning in question 1, the child care centre is located on the business premises of a company related to the employer.

Therefore, the provision of child care in the Centre for the employees of your subsidiaries, each a related company to you, will be an exempt benefit pursuant to subsection 47(2) of the FBTAA.

Question 3

If you solely operated the Centre, will the provision of child care for the children of your employees in the Centre be exempt benefits under subsection 47(2) of the FBTAA?

As per the reasoning in question 1, whether the childcare centre located on the Centre site is operated jointly with a non-related entity or solely by you, the provision by you of a residual benefit, namely the care of children of a current employee in the childcare facility located on the Centre site, will be an exempt benefit as you satisfy the requirements of subsection 47(2) of the FBTAA.

Question 4

If you solely operated the Centre, will the provision of child care in the Centre for the children of employees of your subsidiaries, each a related company to you, be exempt benefits under subsection 47(2) of the FBTAA?

As per question 3, by solely operating the Centre, you will be providing childcare benefits to your current employees which are exempt benefits pursuant to section 47(2) of the FBTAA.

Under the arrangement, your sudsidiaries will also be providing, under a salary sacrifice arrangement, childcare to the children of their current employees at the Centre which is located on your business premises.

As your subsidiaries are related companies to you as defined in section 158 of the FBTAA, then the provision of childcare at the Centre for the children of current employees of your subsidiaries will be an exempt benefit pursuant to section 47(2) of the FBTAA.

Question 5

If child care so provided in the Centre for the children of your employees will be exempt benefits, are the arrangements under which the child care will be provided arrangements entered into to obtain a tax benefit as described in section 67 of the FBTAA?

Section 67 of the FBTAA is the general anti-avoidance provision in the FBTAA.

Subsection 67(1) of the FBTAA applies where a person or one of the persons who entered into or carried out an arrangement or part of an arrangement under which a benefit is or was provided to a person, did so for the sole or dominant purpose of enabling an eligible employer or the eligible employer and another employer or other employers to obtain a tax benefit.

For the purposes of section 67 of the FBTAA a tax benefit is an amount that would have been included in the employer's aggregate fringe benefits amount if the arrangement had not been entered into.

On an objective review of the surrounding circumstances of the child care facility arrangement it is concluded that the sole or dominant purpose in carrying out the arrangement or part of the arrangement does not constitute a purpose to purely obtain a tax benefit. The dominant purpose of the arrangement is to engage and retain staff within the corporate structure of each company involved.

Section 67 of the FBTAA is not applicable to the child care facility arrangement of yourself and your related companies on the facts outlined in this ruling.

Question 6

If child care so provided for the children of your employees will be exempt benefits, will the provision of the child care give rise to an obligation under the pay as you go provisions in Schedule I to the Taxation Administration Act 1953 (TAA)?

Under section 14-5 in Division 14 of the Taxation Administration Act 1953 (TAA), an employer would be required to make a payment to the Commissioner before a non cash benefit is provided to an employee if, instead of providing a benefit, the employer paid an amount of money to the employee equal to the value of the benefit.

This ensures that employers that provide benefits to employees and employers that pay money to employees will be in the same position in regard to their PAYG obligations and prevents employers from avoiding their PAYG withholding obligations under Division 12 of the TAA.

This requirement does not apply to certain types of benefit and paragraph 14-5(3)(b) excludes from the requirement a benefit that is an exempt benefit under the FBTAA.

As the child care benefits to be provided by you to your employees are exempt benefits under subsection 47(2) of the FBTAA, there will not be a PAYG withholding obligation in respect of those benefits.

Income tax consequences for employees

Under sections 6-5 and 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) assessable income consists of ordinary income and statutory income.

Under section 6-15 of the ITAA 1997 exempt income is not assessable income.

Subsection 23L(1A) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that a benefit (other than certain reimbursed car expenses) is exempt income of a taxpayer if it is an exempt benefit and, therefore, excluded from the definition of 'fringe benefit' by paragraph 136(1)(g) of the FBTAA.

Where child care benefits provided to employees are exempt benefits under subsection 47(2) of the FBTAA, the benefits will be exempt income of the employees under subsection 23L(1A) of the ITAA 1936.

Being exempt income, those benefits will not be included in assessable income of the employees so the employees would not have to pay income tax on them.

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