Edited version of private advice

Authorisation Number: 1052085501708

Date of advice: 23 March 2023

Ruling

Subject: FBT - provision of childcare facilities

Question 1

With regard to employees of the organisation, is the entity eligible for an exemption under s47(2) of the FBTAA 1986 where a discount on the daily childcare fee is given to a member of staff for the care of their child at an EE or OOSH centre?

Answer

Yes.

Question 2

In addition to Q1, is the entity eligible for an exemption under s47(2) of the FBTAA 1986 if the employee salary sacrifices their childcare fees either in lieu of, or in addition to, a discount being offered at an EE or OOSH centre?

Answer

Yes.

Question 3

With regard to employees of XXXX, what is the value of the benefit provided to an employee under s49 of the FBTAA 1986 by way of discount on their session fee for the care of their child at an OOSH Centre, if the exemption under s47(2) does not apply?

Answer

The value of the benefit provided under s49 of the FBTAA is an amount equal to 75% of the notional value of the recipient's current benefit.

Question 4

As an alternative to Q3, what is the value of the benefit provided to an employee under s49 of the FBTAA 1986 if the employee salary sacrifices their session fees at an OOSH centre, if the exemption under s47(2) does not apply?

Answer

The taxable value of an in-house residual fringe benefit provided under a salary packing arrangement is its notional value at the comparison time, reduced by any recipient's contribution.

This ruling applies for the following periods:

31 March 20xx

31 March 20xx

31 March 20xx

31 March 20xx

The scheme commenced on:

1 April 20xx

Relevant facts and circumstances

The organisation is an agency of the XXXXXXXX who operate a number of Early Education (EE) and Out of School Hours (OOSH) services throughout the XXXX footprint.

At present, the organisation operates XX sites and employs approximately XXX staff across both EE and OOSH with plans to open a further XXEE centres over the next X years.

For the EE there are approximately XXXX spaces available daily across the XX centres and at present approximately XX spaces are taken by employee's children. All of the EE centres cater for children under 6 years of age.

For OOSH there are up to nearly XXXX licensed places available daily across XX services and at present approximately X spaces are taken by employee's children. All OOSH services cater for school age children, which include children under 6 years of age.

In order to attract and retain staff it is proposed that a discount be offered to employees of the organisation who have their children enrolled for care in one of our EE or OOSH services. This discount would apply to both EE and/or OOSH fees for placements at an EE or OOSH centre (as relevant to the employee).

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 subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 section 49

Reasons for decision

Issue

Fringe Benefits Tax: Exempt benefits - provision of childcare facilities

Question 1

With regard to employees of the organisation, is the entity eligible for an exemption under s47(2) of the FBTAA 1986 where a discount on the daily childcare fee is given to a member of staff for the care of their child at an EE or OOSH centre?

Summary

Yes. The organisation is exempt under s47(2) of the FBTAA for the provision of childcare to its employees.

Detailed reasoning

Subsection 47(2) provides an exemption from fringe benefits tax for the provision of childcare 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 childcare facility; and

(b)     the recreational facility or childcare 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.

Childcare facility is defined to 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.

The provision of childcare facilities to a current employee is an exempt benefit under subsection 47(2).

To qualify for the exemption the following conditions must be satisfied:

•         A residual benefit is provided to a current employee.

•         A childcare facility is made available to employee.

•         The facility is located on the business premises of the employer or an associate.

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 purposes 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 childcare services to employees under salary sacrifice arrangement does not fit within any of the specific benefits in Subdivision A of Divisions 2 to 11 (inclusive) of the FBTAA.

The proposed composition of the FBT exemption arrangement entails a discount and is not a reimbursement as per the expense payments benefits condition stated under Division 5, FBTAA. It's also proposed that the employee is entering into an effective salary sacrifice arrangement with their employer in accordance with TR2001/10.

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

Accordingly, this condition is satisfied.

Is the benefit 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." Therefore, residual benefits provided to an associate of a current employee, a former employee or a future employee is not eligible for the exemption.

A residual benefit provided "in respect of" the employment of a current employee includes by reason of, by virtue of, or for or in relation directly or indirectly to, that employment. This is a necessary prerequisite for the existence of a fringe benefit and therefore its use here is to ensure that the exemption cannot apply to a benefit provided to a person who is simply a current employee of any employer.

Therefore, this condition is satisfied.

Childcare facility

The residual benefit consists of the care of children of the employee in a childcare facility (s47(2)(a)(ii)).

The childcare benefits are provided to current employees and the childcare benefits consist of the care of children.

A childcare facility is defined within 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 Explanatory Memorandum to the Fringe Benefits Tax Assessment Bill 1986 provides that:

By sub-clause 47(2) the provision recreational or childcare 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, stepchild or ex-nuptial child of the employee. 'Childcare facility' is also defined in that sub-clause, and, broadly, means a facility where children under the age of 5 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 childcare facility must be one that provides childcare to children. Therefore, an entity may not qualify as a childcare 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 childcare centre and a pre-school kindergarten by stating:

A childcare 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.

Location of the facility

The facility is located on the business premises of s47(2)(b):

(i)      the employer, or

(ii)     a company that is related to an employer provided the employer is also 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..."

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

a)    The first requirement is that the premises or part of premises are of the person.

b)    The second requirement is that the premises or part of premises must be used by the person, in whole or in part, for the purposes of their business operations.

Business premises of a person

Taxation Ruling TR 2000/4 considers the question of what constitutes business premises for the purposes of the FBTAA.

Pursuant to paragraph 12 of TR 2000/4, 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 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:

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 childcare 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 childcare activities amount to its 'business operations' on its premises.

The organisation has the exclusive occupancy rights and control of XX sites. Accordingly, it is submitted that the XX sites are the business premises of the organisation conformably with TR 2000/4 and the decision in Esso.

Is the premise being used for the employer's 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 childcare would be an important factor in recruiting, retaining and otherwise rewarding employees. Activities undertaken in connection with the provision of these benefits to employees would be business operations of the employer.

The ruling clarifies that the operations of facilities as childcare facilities, are operations that would be business operations. Paragraph 43 states:

As indicated in this Ruling, the provision of benefits to employees in the form of childcare 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 childcare facility on the premises, that activity would be regarded as 'business operations'.

The fact that if an employer subleases 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 childcare 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 childcare 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 childcare 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 childcare 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 childcare 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 childcare 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 is able to demonstrate that it has the requisite possessory entitlement and degree of control.

The arrangement meets the requirements under paragraph 57 of TR 2000/4. The premises are used in the business operations of the employer.

The facts provide that the organisation operates XX childcare centres is 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.

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

The provision of childcare services to current employees is considered to be an exempt benefit as:

•         For the Early Education, the organisation approximately has XXX spaces available daily across the XX centres and at present approximately XX spaces are taken by employee's children.

•         For the Out of School Hours centres, the organisation has nearly XXXX licensed places daily across XX services and at present approximately X spaces are taken by employee's children.

•         The childcare facility is not located at the place of residence of any of the children under the age of six.

•         The facility is located on the business premises of the organisation.

Question 2

In addition to Q1, is the entity eligible for an exemption under s47(2) of the FBTAA 1986 if the employee salary sacrifices their childcare fees either in lieu of, or in addition to, a discount being offered at an EE or OOSH centre?

Summary

The provision of childcare as part of a salary sacrifice arrangement is an exempt benefit in accordance with subsection 47(2).

Detailed reasoning

Definition of 'salary packaging arrangement' for FBT purposes

A salary packaging arrangement is defined in s136(1) to mean an arrangement where an employee, or an associate of an employee, receives a benefit:

a.    in return for a reduction in salary or wages that would not have happened apart from the arrangement, or

b.    in circumstances where it is reasonable to conclude that the employee's salary or wages would be greater if the benefit were not provided.

The definition requires there to be an arrangement, a benefit and salary or wages must be less than it would otherwise be.

An 'arrangement' is broadly defined to mean any agreement, whether or not enforceable by legal proceedings and includes any scheme or course of conduct.

A 'benefit' is defined to include any right, privilege, service or facility provided under an arrangement for or in relation to the performance of work.

'Salary or wages' is defined to mean certain payments from which an amount is required to be withheld (even if no amount is actually withheld) under PAYG withholding.

Paragraphs 19 - 20 of Taxation Ruling TR 2001/10 discuss what is meant by 'salary sacrifice arrangement'.

Paragraph 19. 'Salary sacrifice arrangement' (SSA) - in this Ruling, the term salary sacrifice arrangement means an arrangement under which an employee agrees to forego part of his or her total remuneration, that he or she would otherwise expect to receive as salary or wages, in return for the employer or someone associated with the employer providing benefits of a similar value. The main assumption made by the parties is that the employee is then taxed under the income tax laws only on the reduced salary or wages and that the employer is liable to pay FBT, if any, on the benefits provided.

Paragraph 20. The type of benefits provided in SSAs by employers to employees includes superannuation contributions, the provision of motor vehicles and expense payment fringe benefits, such as payment of school fees, childcare costs or loan repayments.

Paragraph 28 of TR 2001/10 provides that an employee will not be liable to pay income tax on benefits received as part of an effective salary sacrifice arrangement. An effective salary sacrifice arrangement, as defined in paragraph 21 of TR 2001/10, involves an employee agreeing to receive part of his or her remuneration as benefits before the employee has earned the entitlement to receive that amount as salary or wages.

The organisation's employees may elect for a reduction in their salary via a salary sacrifice arrangement. As this will be done before the employees have performed their services, it is accepted that the provision of childcare will be a benefit to which the provisions of s47(2) of the FBTAA apply.

Question 3

With regard to employees of the organisation, what is the value of the benefit provided to an employee under s49 of the FBTAA 1986 by way of discount on their session fee for the care of their child at an EE or OOSH centre, if the exemption under s47(2) does not apply?

Summary

The value of the benefit provided under s49 of the FBTAA is an amount equal to 75% of the notional value of the recipient's current benefit.

Detailed reasoning

Paragraph 18.3 of Fringe benefits tax - a guide for employers' states: For valuation purposes, there are two types of residual fringe benefits: in-house residual fringe benefits and external residual fringe benefits. Each type has specific valuation rules.

The taxable value of a residual fringe benefit is the GST-inclusive value of the residual benefit (determined according to the appropriate valuation rule), less any employee contribution.

You calculate the taxable value of a residual benefit in accordance with the valuation rules explained in sections 18.4 to 18.6. These rules are summarised in the following table:

Valuation rules

Table 1: Valuation rules

Will the taxable value of the in-house residual fringe benefit be calculated under section 49 of the FBTAA?

The taxable value of an in-house residual fringe benefit will be calculated under section 49 of the FBTAA where the benefit is provided during a period. Alternatively, where the benefit is not provided during a period, the taxable value will be determined under section 50 of the FBTAA.

Section 49 of the FBTAA provides that a benefit shall be taken to be provided during a period if the benefit is provided or subsists during a period of more than one day and is not deemed by a provision of the FBTAA to be provided at a particular time or on a particular day.

Therefore, as the entitlement to a childcare facility will be provided on an ongoing basis for the period that the recipient is an employee, section 49 of the FBTAA is the relevant section for determining the taxable value.

Section 49 of the FBTAA states:

Subject to this Part, the taxable value of an in-house period fringe benefit in relation to a year of tax is:

(aa) if the benefit was provided to the recipient under a salary packaging arrangement - an amount equal to the notional value of the benefit at the comparison time; or

(ab) if paragraph (aa) does not apply and the benefit is an airline transport fringe benefit - an amount equal to 75% of the stand-by airline travel value of the benefit at the comparison time; or

(a) if neither paragraph (aa) nor (ab) applies and, at or about the comparison time, identical overall benefits were provided by the provider:

(i) in the ordinary course of business to members of the public under an arm's length transaction or arm's length transactions; and

(ii) in similar circumstances and subject to identical terms and conditions (other than as to price) as those that applied in relation to the provision of the recipient's overall benefit;

an amount equal to 75% of the lowest amount paid or payable by any such member of the public in respect of the current identical benefit in relation to an identical overall benefit so provided; or

(b) in any other case - an amount equal to 75% of the notional value of the recipient's current benefit;

reduced by the amount of the recipient's contribution insofar as it relates to the recipient's current benefit.

Subsection 136(1) of the FBTAA defines 'notional value' and 'identical overall benefit' to mean:

Notional value

in relation to the provision of property or another benefit to a person, means the amount that the person could reasonably be expected to have been required to pay to obtain the property or other benefit from the provider under an arm's length transaction.

Identical overall benefit

a benefit that is the same in all respects as the recipient's overall benefit (except for any differences that are minimal or insignificant and do not affect the value of the benefit).

Will the taxable value of the in-house residual fringe benefit be reduced under section 62 of the FBTAA?

Section 62 of the FBTAA states:

62(1) Where one or more in-house fringe benefits in relation to an employer in relation to a year of tax relate to a particular employee of the employer, the taxable value of that fringe benefit, or the sum of the taxable values of those fringe benefits, as the case may be, in relation to that year shall be reduced by:

(a) if the taxable value or the sum of the taxable values does not exceed $1,000 - an amount equal to the taxable value or the sum of the taxable values; or

(b) in any other case - $1,000.

62(2) Subsection (1) does not apply to an in-house fringe benefit provided under a salary packaging arrangement.

Subsection 136(1) of the FBTAA defines 'in-house fringe benefit' to mean:

(a) an in-house expense payment fringe benefit;

(b) an in-house property fringe benefit; or

(c) an in-house residual fringe benefit.

Aggregate $1,000 reduction in table value of in-house fringe benefits

The taxable value of in-house fringe benefits that relate to a particular employee are subject to an aggregate $1,000 reduction (s62).

To qualify for a reduction in taxable value the following conditions must be satisfied:

1.    The benefit is an eligible fringe benefit.

2.    The reduction applies to the total of the benefits provided to the employee and his/her associates.

Each of the above conditions is further explained below together with the amount of the reduction in the taxable value of the benefit.

In-house fringe benefits

The fringe benefit must be an in-house fringe benefit.

An in-house fringe benefit (s136(1)) means an in-house property fringe benefits, in-house residual fringe benefits, in-house property expense payment fringe benefits and in-house residual expense payment fringe benefits. However, in-house fringe benefits provided on or after 22 October 2012 under a salary packaging arrangement cannot be included (s62(2)) unless the transitional provisions apply.

Broadly, an in-house fringe benefit is one that relates to goods or services provided to an employee or associate that are identical or similar to those supplied to the public in the ordinary course of business of the employer. For example, the sale of products manufactured by an employer and sold to employees at concessional prices is a typical example of when this reduction will have application.

Employees and associates

One or more eligible fringe benefits in relation to an employer in relation to a year of tax that relate to a particular employee of the employer are provided under s62(1).

The eligible fringe benefits are therefore only required to "relate" to a particular employee. Accordingly, the reduction applies in respect of the total benefits provided to each employee and his/her associates in a particular year and is not restricted to benefits provided to employees only (Miscellaneous Taxation Ruling MT 2044).

Section 62 does not contain any provision for averaging the reduction over all employees, carrying forward any amount for use in a future FBT year or record keeping. In relation to the latter, the ATO states in the Fringe benefits tax - a guide for employers that taxpayers do not need to keep specific records of in-house benefits provided to individual employees if the $1,000 threshold is not expected to be exceeded.

Reduction in taxable value

The sum of the taxable value of benefits provided to any one employee and his or her associate is reduced by the lesser of s62(1):

(a)         the amount of the taxable value, or

(b)         $1,000.

It is considered that section 47(2) would treat the provision of care by an employer to its employee as an exempt benefit. However, if section 47(2) does not apply then section 49 would apply to value the benefits.

As the benefit is not provided under a salary sacrifice arrangement and s47(2) does not apply, the value of the benefit is an amount equal to 75% of the notional value of the recipient's current benefit reduced by the amount of the contributions.

Therefore, the relevant paragraph is paragraph (b).

Question 4

As an alternative to Q3, what is the value of the benefit provided to an employee under s49 of the FBTAA 1986 if the employee salary sacrifices their session fees at an OOSH centre, if the exemption under s47(2) does not apply?

Summary

The taxable value of an in-house residual fringe benefit provided under a salary packing arrangement is its notional value at the comparison time, reduced by any recipient's contribution.

Detailed reasoning

In question 3 under issue 1, we have discussed in detail the calculation of the taxable value if the benefit is an in-house residual fringe benefit provided under a salary packaging arrangement.

As the benefit is an in-house residual benefit which is provided under a salary packaging arrangement, section 62(2) of the FBTAA will apply and does not reduce the taxable value.

Although the organisation provides childcare to members of the public under an arm's length transaction, paragraph (a) will not apply if the organisation does not provide identical services to members of the public on the same basis.

Therefore, the relevant paragraph is paragraph (aa) which calculates the taxable value of the in-house residual fringe benefit as the amount equal to the notional value of the benefit at the comparison time.

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