Edited version of your written advice

Authorisation Number: 1013137027872

Date of advice: 17 March 2017

Ruling

Subject: GST and extra-curricular programs provided to children in child care centres

Question 1

Is the entity making a GST-free supply when it provides extra-curricular programs to children whilst cared for in child care centres, and receives payment directly from the parents/guardians?

Answer

No, when the entity receives payment directly from parents/guardians, it is not making a GST-free supply of extra-curricular programs provided to children whilst cared for in child care centres. The entity's supplies are taxable.

Question 2

If the entity's extra-curricular activities are GST-free, is the entity entitled to a refund of overpaid GST under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA) or Division 142 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

As the extra-curricular programs are taxable, and the entity has always treated the supplies as taxable, the entity has not overpaid any GST and is not entitled to any refund.

Relevant facts and circumstances

1. The entity is registered for GST.

2. The entity provides extra-curricular programs for children between 2 and 8 years old.

3. The programs teach children fundamental skills and techniques, while also highlighting the importance of teamwork and simultaneously improving coordination, balance, agility, and gross and fine motor skills. The programs are run by qualified instructors with working with children checks and first aid certificates.

4. The entity runs after-school and weekend programs and child care centre programs.

5. The programs are conducted on the child care centre's premises and are optional for children in attendance.

6. Each of the child care centres are approved child care services within the meaning of section 3 of the A New Tax System (Family Assistance) (Administration) Act 1999. Supplies of child care at these centres are GST-free pursuant to section 38-145 of the GST Act.

7. From discussions with child care centre owners, the entity understands that there are a few typical reasons why child care centres use the services of external companies for extra-curricular programs:

a. Given strict educator/child ratios, it is extremely difficult for them to run their own extra-curricular activities.

b. The entity's instructors are qualified sport coaches and the entity provides all equipment.

c. The children's co-ordination, skills and focus within class are improved as a result of incorporating extra-curricular programs into the curriculum.

d. Many parents also appreciate programs being held at their centre as they are too busy to take them to sessions outside of school hours.

e. It is good for the child care centre's image to provide programs by qualified instructors, with proper equipment. They will often add the entity's information to their parent newsletters/websites.

8. Historically, the entity and the child care centres did not enter into any formal written contracts. The programs were arranged via email correspondence and verbal discussions.

9. More recently, the entity has formalised its contracts with child care centres, to reflect their mutual understanding of the arrangements between the parties for the past and the future.

10. The entity has provided two examples of a one page statement, signed and dated by the Director of the particular child care centre, which reflects the current practice between the entity and child care centres for parent funded extra-curricular activities.

11. Relevant anonymised extracts from those two examples are:

a. I (the Director of the child care centre) acknowledge that our centre, (insert name of Centre), has engaged the services of the entity to provide their extra-curricular activities to children at our centre on our behalf.

b. The weekly program is run on our centre premises in accordance with the day and time that we have allocated for extra-curricular activities.

c. Our centre has engaged in the services of the entity in order to incorporate exercise into our weekly program and develop basic skills and coordination, and foster social and emotional skills.

d. Such services could not otherwise be fulfilled by our own staff given our student/educator rations and the qualifications that the entity's coaches possess.

e. Given that the entity's sessions are run on our premises, our centre understands that the ultimate responsibility for the children is that of the centre.

f. The fees payable from the date of commencement of the services on (insert date of commencement) are $x per child/$x per sibling (with a free lesson or chosen merchandise when x sessions are paid in advance), paid directly by the child's parents or caregivers to the entity. Any changes in the fees will be notified in advance.

g. We confirm that our supplies of child care services are GST-free.

12. These two sample written statements were both signed and dated by the child care centre Directors with a retrospective application.

13. The entity expects that any liability in respect of any incident is to be covered by the centre's public liability insurance. The entity has its own public liability insurance policy for programs that are conducted at locations outside child care centres. The entity does not have any public liability insurance for programs run inside child care centres.

14. The entity's programs are arranged and paid for in a number of ways:

a. For the after school and weekend programs, and most of the child care centre programs, a parent/guardian registers the child by completing the entity's registration form and pays the session fees directly to the entity.

b. A small proportion of the child care centres have entered into an arrangement with the entity where the entity charges the centre, and the centre either directly or indirectly on-charges the parents/guardians through the child care fees.

15. Since registering for GST, the entity has treated supplies of these programs as taxable. The entity has calculated its GST payable as 1/11th of the fees charged to parents/guardians.

16. The entity has kept its fees the same in an effort to keep its program affordable and to remain competitive in the market.

17. Following registration, the entity bore the new GST cost itself so that parents would not be charged more.

18. The entity has provided three sample invoices issued to parents/guardians for programs provided to children at child care centres.

19. The invoices show that the entity charged the same price to parents/guardians for its program before and after GST-registration.

20. The invoices are made out to the parent/guardian. In the supply description field, the invoices detail the relevant child care centre, number of lessons provided and GST inclusive amount payable.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Division 142

section 9-5

section 38-155

subsection 38-20(3)

section 38-140

section 38-145

section 38-150

Taxation Administration Act 1953

Schedule 1, section 105-65

A New Tax System (Family Assistance) (Administration) Act 1999

section 3

Issue 1

GST status of supplies by the entity that are provided to children in child care centres

Question 1

Is the entity making a GST-free supply when it provides extra-curricular activities to children whilst the children are cared for in child care centres, and receives payment directly from the parents/guardians?

Summary

No, when the entity receives payment directly from parents/guardians, it is not making a GST-free supply of extra-curricular activities provided to children whilst the children are cared for in child care centres. The entity's supplies are taxable.

Detailed reasoning

Section 38-155 of the GST Act sets out those supplies that are GST-free because they are directly related to child care that is GST-free.

Section 38-155 states:

A supply is GST-free if it is a supply that is directly related to a supply of child care that is:

(a) GST-free because of section 38-140, 38-145 or 38-150; and

(b) supplied by, or on behalf of, the supplier of the child care.

What is the supply in question?

Before contemplating whether the specific requirements in section 38-155 are met, we will consider what supplies are being made between the entity, the child care centres and the parents/guardians; and which is the 'supply in question'.

The entity and the child care centres arrange for the entity to deliver extra-curricular activities to children whilst they are attending the child care centre. Interested parents contact the entity directly, complete a registration form and enter into a payment arrangement. Parents pay the entity directly and are invoiced by the entity directly. On these facts, we consider that the entity makes a supply of extra-curricular activities directly to parents/guardians of children at the child care centres. The consideration for this supply is the fee paid by parents/guardians to the entity. This is the 'supply in question'.

Are the requirements in section 38-155 of the GST Act met?

Each of the child care centres at which the entity provides extra-curricular activities to children, are approved child care services within the meaning of section 3 of the A New Tax System (Family Assistance) (Administration) Act 1999. Supplies of child care at those centres are GST-free under section 38-145 of the GST Act.

The entity must meet two remaining conditions from section 38-155 of the GST Act for their supply to be GST-free. They are:

a) is the supply in question directly related to a supply of child care?

b) if yes to (a) is the supply in question supplied by, or on behalf of, the supplier of the child care?

Is the supply by the entity to the parents of the children at the child care centre 'directly related to a supply of child care'?

The phrase 'directly related' is not defined in the GST Act and therefore takes on its ordinary meaning. The Macquarie Dictionary defines 'directly' to mean 'in a direct line, way or manner; immediately; absolutely'. The term 'related' means 'associated; connected or allied by nature'.

The meaning of 'directly related' in relation to the supply of an education course is discussed in GSTR 2001/1. It states:

72. The meaning of the phrase (in the context of being 'directly related to employment' for income tax purposes) was also considered in FC of T v. Dixon (1952) 86 CLR 540, at 553-554:

'A direct relation may be regarded as one where the employment is the proximate cause of the payment, an indirect relation as one where the employment is a cause less proximate, or, indeed, only one contributory cause'.

73. Therefore, administrative services must be in a direct line or immediately associated or connected with the supply of the education course.

The Ruling contains a non-exhaustive list of administrative services that are considered to be 'directly related' to an education course, including things like: enrolment services, replacement student cards and record-keeping.

The phrase 'directly related' is also relevant to subsection 38-20(3) of the GST Act which governs when supplies of goods 'directly related' to GST-free hospital treatment are also GST-free. This is discussed further at issue 3.c of the Health Industry Partnership - issues register (Issues Register). It states:

The goods must be 'in a direct line or immediately associated or connected with' the supply of the GST-free hospital treatment. That is, the goods must be integral to, and provided solely for the purpose of, the GST-free hospital treatment and, whilst they may be used subsequent to the GST-free hospital treatment, cannot be solely for use subsequent to the GST-free hospital treatment.

… Goods that are for consumption after the hospital treatment lose the direct connection with hospital treatment and will be indirectly related to, or one step removed from, the actual supply of hospital treatment.

The Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 (EM) provides some insight into the purpose of section 38-155 of the GST Act. It states:

5.65 Child care is GST-free if provided at facilities that receive government funding or if the child care provider is a registered carer for the purposes of the Childcare Rebate.

5.66 Child care includes the provision of all the goods and services that are directly related to the child care. For example, supplies of food, electricity, bed linen and nappy wash services are covered by the exemption. Section 38-155.

In ATO ID 2003/997, it was held that when a provider of GST-free child care supplied additional activities as part of its outside hours school care and vacation care program (for example swimming as part of its regularly scheduled 'activity days'), the supply of those activities was GST-free under section 38-155 of the GST Act.

In ATO ID 2004/155 it was held that the supply of organising social activities by a government school to students studying a GST-free education course, was not a GST-free excursion or field trip under section 38-90 of the GST Act, because the social activities were not 'directly related' to the curriculum of the education course as they were not part of the course and did not have a direct relationship to the course.

The entity contends that because its supplies of programs are made to children whilst in child care at the child care centre premises, those supplies are directly or immediately associated or connected with the supply of the child care services and therefore, are 'directly related'.

The Dictionary definition of the terms 'directly' and 'related' refer to an association or connection that is immediate, in a direct line direct or absolute. A supply is not 'directly related' to something just because it takes place at the same physical premises. There must be a more 'proximate cause' between the child care and the extra-curricular activity. As per issue 3.c of the Issues register, the extra-curricular activity must be integral to, and provided solely for the purpose of, the GST-free child care.

Participation in the program is an optional activity for children who are already in receipt of child care - it is not part of any compulsory curriculum activity provided by the child care centre (unlike the situation in ATO ID 2003/997 where the swimming activity was provided by the child care provider to all children as part of its regular program). Whilst the entity's program may compliment the child care centre curriculum, it is not part of that curriculum because it is not provided to all of the children in care (this is similar to the situation in ATO ID 2004/155).

The supply of the child care is separate and discreet to the entity's additional, optional, program. Child care is provided to all children regardless of whether they participate in the entity's program. The benefits of the program may coincide with some of the aims of the child care curriculum but the fact that the program is not provided to all of the children in care indicates that those curriculum elements would be achieved regardless of whether children participated in the program.

Further support for the view that the extra-curricular activities program is not directly related to the child care is found in the EM. The examples of things that are considered in the EM to be directly related to child care and GST-free under 38-155 are components most likely supplied by the child care centre, that are far more directly integral to the supply of the child care itself (like nappies and food) rather than an additional, optional extra such as the entity's program.

Therefore, the supply by the entity of the extra-curricular program is not directly related to the supply of the child care. It is not GST-free under section 38-155 of the GST Act.

For completeness, we will consider if the remaining element in section 38-155 of the GST Act is met.

Is the supply of the program by the entity a supply by, or on behalf of, the supplier of the child care?

The entity is not the supplier of the child care and does not make any supplies of child care that are GST-free under sections 38-140, 38-145 or 38-150.

The phrase 'on behalf of' is not defined in the GST Act. 'On behalf of' is defined in the Oxford Dictionary as:

● as a representative of

● as a spokesperson for

● for

● in the name of

● with the power of attorney for

● in place of

● on the authority of

● at the behest of

● appearing for

● representing

● in the interest of.

'Behalf' is defined in the Macquarie Dictionary as:

● on someone's behalf

● as a representative of

● in the interest of

● in aid of.

The ATO view on the meaning of the phrase 'on behalf of' is found in issue 3.c. of the Issues Register in the context of the definition of 'hospital treatment'. It states:

The phrase 'on behalf of' in subsection 38-20(3) has been interpreted to mean the provision of goods to a patient by the supplier of the 'hospital treatment' where that supplier has arranged for the goods to be provided, on its behalf, by a third party.

'On behalf of' does not extend the GST-free status to those goods that are supplied to a hospital treatment supplier by that third party.

Where goods are supplied to a patient 'on behalf of' a hospital by a third party, it is still the hospital that is supplying the goods to the patient. The third party is providing or delivering the goods to the patient but is not supplying the relevant goods to the patient.

The focus of the GST-free status of the goods that have been supplied 'on behalf of the hospital' by that third party is on the supply to the patient and not on the third party who supplied the goods 'on behalf of' the hospital.

The entity is providing its program to children whilst they are in care at child care centres. The entity enters into an agreement with child care centres that supply GST-free child care, to provide programs to children in care at the centre. The child care centre makes it known to parents that the optional classes are available to their children. Interested parents then contact the entity directly and register their child in a particular class at their child care centre and agree to the entity's terms and conditions, including an agreement that the entity bears no legal liability for any accidents that may occur during the program. The parents are then invoiced directly by the entity and make payment for the class directly to the entity.

The entity is making a direct supply to the parents of children at the child care centre and does not do so either as agent for, or on behalf of, the child care centre. Whilst the program may be beneficial to the children and fit the objects and purpose of the centre as outlined in the example statement, this does not equate to the supply being done by or on behalf of the centre. The entity contracts with parents directly in its own name - there is no evidence to suggest that the child care centre is being represented by the entity in any capacity or that the entity is doing anything on the child care centre's behalf.

Further, applying the view from issue 3.c. of the Issues Register and section 38-155 of the GST Act means that only supplies of classes by the child care centre to parents, that are provided on its behalf by the entity (either as an agent or as some other representative) could be GST-free (if those classes were 'directly related' to the child care - which could be the case if the classes were provided to all of the children as part of the child care). Whereas supplies by the entity in its own right, to either the child care centre or directly to the parents, are not GST-free under section 38-155 of the GST Act.

Issue 2

Refund of overpaid GST

Question 1

If the entity's programs are GST-free, is the entity entitled to a refund of overpaid GST under section 105-65 of Schedule 1 to the TAA or Division 142 of the GST Act?

Summary

As the entity's programs are taxable, and the entity has always treated the supplies as taxable, the entity has not overpaid any GST and is not entitled to any refund.

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