Edited version of private advice

Authorisation Number: 1051799997300

Date of advice: 3 February 2021

Ruling

Subject: Exempt residual benefits - child care services provided by local council

Question

Does the provision of child care services to employees of the Local Council under a salary sacrifice arrangement constitute an exempt residual benefit pursuant to subsection 47(2) of the Fringe Benefits Tax Assessment Act 1986?

Answer

Yes.

This ruling applies for the following period:

1 April 20XX to 31 March 20XX

The scheme commences on:

1 April 20XX

Relevant facts and circumstances

The Local Council ('the Council') is a local government body which owns and operates a number of child care centres situated within the local council's boundary.

Current employees of the Council (the employer) are provided with child care services at these facilities under a salary sacrifice arrangement. These employees receive, or are entitled to receive, salary or wages from the Council.

The child care services are provided in respect of the employee's employment.

Each of the Council's child care centres:

•         are located on premises that the Council either owns or has exclusive occupancy rights under a lease

•         are a facility where a person receives, or is ready to receive, two or more children under the age of six, 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

•         are regulated by the Australian Children's Education and Care Quality Authority under the National Quality Framework (NQF) (which provides a national approach to regulation, assessment and quality improvement for early childhood education and care and outside school hours care services across Australia)

•         are a child care service provider approved under the NQF, as administered by the applicable State or Territory Government

•         comply with the Education and Care Services National Law and the Education and Care Services National Regulations

•         adhere to the guidelines, practices and regulations surrounding the National Quality Standards

•         follow a national approved learning framework, and

•         are operated with a strong focus on 'play-based learning' and are not operated in a school-like manner with structured classes involving regular and systematic instruction.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 45

Fringe Benefits Tax Assessment Act 1986 Section 47

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Reasons for decision

Question

Does the provision of child care services to employees of the Council under a salary sacrifice arrangement constitute an exempt residual benefit pursuant to subsection 47(2) of the Fringe Benefits Tax Assessment Act 1986?

Summary

The provision of child care services to employees of the Council under a salary sacrifice arrangement constitute an exempt residual benefit pursuant to subsection 47(2) of the FBTAA.

Detailed reasoning

Subsection 47(2) of the FBTAA provides an exemption from Fringe Benefits Tax (FBT) for the provision of child care when certain conditions are satisfied. It 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 an company that is related to the employer,

the benefit is an exempt benefit.

Therefore, the provision of child care will be an exempt benefit under subsection 47(2) of the FBTAA if all of 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 in a 'child care facility'.

4.    The child care facility is located on the business premises of the employer.

Each of these conditions are examined in detail below with respect to the Council's circumstances.

1. Is the benefit a residual benefit?

Section 45 of the FBTAA defines a 'residual benefit' as follows:

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).

The provision of child care services to employees under a salary sacrifice arrangement does not fit within any of the specific benefits in Subdivision A of Divisions 2 to 11 (inclusive) of the FBTAA.

Therefore, such a benefit constitutes a residual benefit pursuant to section 45 of the FBTAA.

Accordingly, this condition is satisfied.

2. Is the benefit provided to a current employee?

Subsection 136(1) of the FBTAA defines a 'current employee' as 'a person who receives, or is entitled to receive, salary or wages.'

The facts provide that the benefit (the provision of child care services) is provided to the Council's current employees who receive, or are entitled to receive, salary or wages.

Therefore, this condition is satisfied.

3. Does the benefit consist of the care of children in a 'child care facility'?

Subsection 136(1) of the FBTAA defines a 'child care facility' 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 Explanatory Memorandum to the Fringe Benefits Tax Assessment Bill 1986 provides that:

By sub-clause 47(2) the provision of recreational or child care facilities on an employer's premises for the benefit of employees will not give rise to a taxable fringe benefit.

For these purposes, 'child' is defined in sub-clause 36(1) to include an adopted child, step-child or ex-nuptial child of the employee. 'Child care facility' is also defined in that sub-clause and, broadly, means a facility where children under the age of 6 are provided with care or education, but not with residential care.

The intention of the Explanatory Memorandum is that, to be exempt from FBT, the child care facility must be one that provides child care to children. Therefore, an entity may not qualify as a child care facility as intended in the Explanatory Memorandum where it primarily involves the provision of formal education to pre-school aged children in a school like manner.

Furthermore, paragraph 145 of Taxation Ruling TR 2013/2 Income tax: school or college building funds differentiates between a child care centre and a pre-school kindergarten by stating:

A child care centre is not a school...as it lacks the element of regular, ongoing and systematic instruction and lacks the purpose of systematically imparting a course of education as such. However, a pre-school kindergarten may qualify as a school where it involves regular and systematic instruction and these are its primary function or essential purpose.

The facts provide that the Council-operated child care centres are an approved (and regulated) facility where a person receives, or is ready to receive, two or more children under the age of six, 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.

The Commissioner accepts that the Council-operated child care centres are operated with a focus on 'play-based learning' and are not operated in a school-like manner.

Therefore, the Council's child care centres are considered to meet the definition of a 'child care facility' (as defined in subsection 136(1) of the FBTAA).

As the residual benefit provided by the Council involves the care of children in a child care facility, this condition is satisfied.

4. Are the child care facilities located on the Council's business premises?

Subsection 136(1) of the FBTAA defines 'business premises' to mean premises, including part of premises, used in whole or in part for the purposes of business operations.

Paragraph 4 of Taxation Ruling TR 2000/4 Fringe benefits tax: meaning of 'business premises' (TR 2000/4) states that:

premises are only 'business premises' in relation to a person if two requirements are met. 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.

With regard to the first requirement, paragraph 7 of TR 2000/4 states that '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'.

The facts provide that the Council either owns, or has exclusive occupancy rights under a lease to, each of the premises on which its child care facilities are located. As such, these child care facilities would be considered to be premises 'of' the Council pursuant to paragraph 7 of TR 2000/4, thus satisfying the first requirement in paragraph 4 of TR 2000/4.

In relation to the second requirement, paragraph 9 of TR 2000/4 provides that 'business operations' encompass a wide range of activities. These include activities undertaken by a person in the ordinary course of business, and also 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.

Further, paragraphs 10 and 16 of TR 2000/4 state the following:

10. Important to this Ruling is the question of whether the operations of facilities, such as child care facilities, are operations that would fall within 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.

16. Further to the views expressed in paragraph 10, if an employer uses premises for operating a child care facility for current employees, the operations would be regarded as its 'business operations'. To be the employer's 'business premises', the employer must also be the person who has a right to possession of the premises, at least to the extent necessary to enable the conduct of the relevant business operations.

The Council owns, or has exclusive occupancy rights to, the premises on which its child care facilities are located, and the Council uses these facilities to provide (child care) benefits to its current employees. As such, the Commissioner considers that these activities would form part of the broader business operations of the Council pursuant to paragraphs 10 and 16 of TR 2000/4, thus satisfying the second requirement in paragraph 4 of TR 2000/4.

Therefore, as both of the requirements in paragraph 4 of TR 2000/4 are satisfied, the Council's child care facilities are considered to be located on the Council's 'business premises' (pursuant to the definition of this term in subsection 136(1) of the FBTAA).

Accordingly, this condition is satisfied.

Conclusion

As all of the conditions in subsection 47(2) of the FBTAA are satisfied, the provision of child care services to employees of the Council under a salary sacrifice arrangement would constitute an exempt residual benefit.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

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