Edited version of private advice

Authorisation Number: 1052095971369

Date of advice: 30 March 2023

Ruling

Subject: FBT - capping threshold

Question 1

Is the Hospital considered a 'public hospital' for the purposes of paragraph (c) of Step 2 of the method statement in Subsection 5B(1E) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No.

Question 2

Is the Hospital a rebatable employer for the purposes of paragraph (d) of Step 2 of the Method Statement in subsection 5B(1E) of the FBTAA?

Answer

No.

Question 3

Should the aggregate non-exempt amount for the Hospital for the current and subsequent FBT years be worked out under Step 3 of the Method Statement in subsection 5B(1E) of the FBTAA?

Answer

Yes.

This ruling applies for the following periods:

Year ended 31 March 20xx

Year ended 31 March 20xx

Year ended 31 March 20xx

Year ended 31 March 20xx

The scheme commenced on:

1 April 20xx

Relevant facts and circumstances

The organisation is a not-for-profit hospital and registered with the Australian Charities and Not-for-Profits Commission (ACNC), with the charity subtypes that include "Advancing Health" and "Public Benevolent Institution" (PBI).

Given their current charity registration status with the ACNC, a PBI cannot be "a political party or a government entity" with accordance to the ACNC's PBI factsheet.

The Hospital does not provide any services for no consideration.

The Hospital is funded substantially by patients on a "fee for service" basis with much of that by way of reimbursement from private health funds, together with out-of-pocket costs funded by the patients themselves. The remaining funding is government funding provided under service contracts voluntarily entered into by the Hospital.

Additionally, the Hospital is party to the "Public-Private Pandemic Support Plan" put in place by the state government during the COVID-19 pandemic. The public health services were funded by the government under service contract voluntarily entered into by the Hospital.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Subsection 5B(1E)

Fringe Benefits Tax Assessment Act 1986 Subsection 57A

Fringe Benefits Tax Assessment Act 1986 Subsection 65J

Fringe Benefits Tax Assessment Act 1986 Section 123C

Reasons for decision

Question 1

Is the Hospital considered a 'public hospital' for the purposes of paragraph (c) of Step 2 of the Method Statement in subsection 5B(1E) of the FBTAA?

Answer

No

Summary

The Hospital is not considered to be a 'public hospital' for the purposes of paragraph (c) of Step 2 of the Method Statement in subsection 5B(1E) of the FBTAA.

Detailed reasoning

Under section 57A of the FBTAA, benefits provided by the following employers in respect of the employment of an employee are exempt from Fringe Benefits Tax (FBT) up to a specified cap:

•         registered Public Benevolent Institutions (PBI) endorsed under section 123C of the FBTAA

•         registered health promotion charities

•         public and not-for-profit hospitals

•         government employers whose employees work in public and not-for-profit hospitals, and

•         public ambulance services.

Benefits provided by the employers listed above will be exempt where the total grossed-up value of certain benefits (which are benefits not otherwise exempt) provided to each employee during the FBT year is equal to, or less than, the relevant capping threshold. If the total grossed-up value of certain benefits provided to an employee is more than that capping threshold, the employer will need to pay FBT on the excess.

Meaning of a 'public hospital' and a 'private hospital'

The term 'public hospital' is not defined in the FBTAA. No cases have considered the meaning of 'public hospital' in the context of the FBTAA. Authorities dealing with the meaning of 'public hospital' in other statutes have held the determination is a question of fact. These authorities include Little Company of Mary (SA) Incorporated v Commonwealth [1942] HCA 26 (Little Mary) and Australian Hospital Care (Latrobe) Pty Limited v Commissioner of Taxation [2000] FCA 1509 (Latrobe). Relevantly, the High Court held in Latrobe and Little Mary that not-for-profit hospitals carried on by religious orders were not 'public hospitals'. Those authorities considered the ordinary or common meaning of the term and equivalence between legislation in the same jurisdiction.

In particular, the Court in Little Mary ruled that the hospital was not a 'public hospital', despite being non-profit, as:

•         it was under denominational control, being the Sisters in the State of South Australia of the Congregation of the Little Company of Mary, a congregation of nursing sisters of the Roman Catholic Church

•         there was no public control

•         the majority of patients paid for their medical treatment, and there was no offer of free or publicly funded services

•         it did not rely on public funding or grants, instead generating revenue from the fees it charged.

The principles in Little Mary were followed in Latrobe, which despite providing public health care services, was ruled not to be a 'public hospital' based on the following factors:

•         The hospital was privately-owned and run to profit its members.

•         Whilst the hospital had obligations to provide free public health services to the public, and was controlled by the State, these controls arose out of voluntary undertakings under contracts entered into by the hospital.

•         Whilst the hospital received state funding, this funding was primarily in the form of payments for the free health services it was providing under contract.

A range of indicia emerge from these cases that can assist in considering whether a hospital satisfies the ordinary meaning of a 'public hospital', which include:

•         the ownership of the hospital and whether it is run for profit

•         the level of public/government control over the hospital's operations (and whether any control is regulated or arises voluntarily by contract)

•         whether the hospital offers free/public-funded services to the public, or if it charges fees for its services

•         whether the hospital is funded by public grant or is self-funded.

However, despite these indicia of a 'public hospital', the Full Federal Court in Commissioner of Taxation v Hunger Project Australia [2014] FCAFC 69 has, in the context of the FBTAA, abstained from approaching a question about the ordinary or common meaning of a word or expression '... as a legal question to be dealt with by the mechanical application of past authority, irrespective of the present current understanding of the expression in the currently spoken English language...' or whether its meaning could be gleaned from other statutes which may use the same term.

Whilst acknowledging the Full Federal Court's comments, it is noted that Commonwealth legislation has, since at least 1953, distinguished between a 'public hospital' and a 'private hospital'. More recently, paragraph 121-5(8) of the Private Health Insurance Act 2007 requires that the Minister for Health's declaration that a facility is a 'hospital' must also include a statement as to whether the hospital is a public hospital or private hospital. The Australian Institute of Health and Welfare's Glossary, accessed 14 June 2021, contains the following definitions:

Public hospital: A hospital controlled by a state or territory health authority. Public hospitals offer free diagnostic services, treatment, care, and accommodation to all eligible patients.

Private hospital:A privately (non-government) owned and operated institution catering for patients who are treated by a doctor of their own choice. Patients are charged fees for accommodation and other services provided by the hospital and relevant medical and paramedical practitioners. Acute care and psychiatric hospitals are included in this category as are private free-standing day facilities.

The term 'private hospital' is not used in the FBTAA, and such hospitals may be operated by not-for-profit or for-profit entities. The FBTAA does not provide any concessional treatment by way of a per-employee exemption cap for a for-profit entity that operates a private hospital.

Aside from any legal meaning of a 'public hospital', there exists a dichotomy between 'public' ('jointly funded by the Commonwealth and the states and territories') and 'private' ('funded through private health insurance and individual out-of-pocket payments') health in Australia's health system. Such health services are provided through 'public' and 'private' hospitals, thus espousing a current ordinary or common understanding of those terms.

Endorsement by Commissioner as public benevolent institution (PBI)

Section 123C of the FBTAA deals with the endorsement of a PBI, which states that:

(1)             The Commissioner must endorse an entity as a public benevolent institution if:

(a)  the entity is entitled to be endorsed as a public benevolent institution (see subsection (2)); and

(b)  the entity has applied for that endorsement in accordance with Division 426 in Schedule 1 to the Taxation Administration Act 1953.

(2)             An entity is entitled to be endorsed as a public benevolent institution if the entity:

(a)  is a registered public benevolent institution; and

(b)  has an ABN; and

(c)   is not an employer in relation to which step 2 of the method statement in subsection 5B(1E) applies.

Application to your circumstances

As a private hospital, the Hospital is charging fees for its services (thus being self-funded). Patients are treated by a doctor of their own choice and fees are paid by the patient directly to the doctor for their services. The vast majority of the funding for the Hospital is from payments received for providing private health services on a "fee for service" basis, which are funded either by way of reimbursement from a private health fund of the patient or paid by the patient directly.

In relation to the Hospital provides some public health services under the existing "Public-Private Pandemic Support Plan" agreement with the Victorian government, this agreement was freely negotiated by the hospital and voluntarily entered into. Any public health services provided to patients of the Hospital are paid for on a "fee for service" basis via the agreements entered into with the Victorian government. In limited cases private health services are paid for via third parties including Workcover, TAC and DVA.

The Hospital is owned by a state government body who can appoint and dismiss members of the board of the Hospital. However, the state government body does not control the Hospital's day-to-day operations. Board members of the Hospital are not representing the state government body as such in their position. As such, there is no government control of the operation of the Hospital.

The Hospital is not considered to be 'public hospital' for the following reasons:

•         The Hospital charges fees for the majority of its services;

•         The Hospital is self-funded; and

•         The level of public/government control is minimal.

Therefore, The Hospital is not a 'public hospital' under the common meaning of the term and does not meet the definition of a 'public hospital' for the purposes of paragraph (c) of Step 2 of the method statement in Subsection 5B(1) of the FBTAA.

Also, the Hospital is a registered PBI endorsed under section 123C of the FBTAA. A registered PBI cannot be endorsed as a PBI if it, amongst other things, is a 'public hospital'.

Accordingly, the Hospital is not a public hospital under Step 2 paragraph (c) of the Method statement in subsection 5B(1E) of the FBTAA.

Question 2

Is the Hospital a rebatable employer for the purposes of paragraph (d) of Step 2 of the Method Statement in subsection 5B(1E) of the FBTAA?

Answer

No.

Summary

The Hospital is not considered a rebatable employer for the purposes of paragraph (d) of Step 2 of the Method Statement in subsection 5B(1E) of the FBTAA.

Detailed reasoning

Paragraph (d) of Step 2 of the Method Statement in subsection 5B(1E) of the FBTAA provides that:

the employer is a hospital described in subsection 57A(4) (which is about hospitals carried on by societies and associations that are rebatable employers)."

Section 57A (4) states:

A benefit provided in respect of the employment of an employee is an exempt benefit if the employer of the employee is a hospital carried on by a society or association that is a rebatable employer.

Rebatable employers are taxpayers that are not entitled to an income tax deduction for FBT paid in respect of their employees. Section 65J of the FBTAA outlines the criteria required to be satisfied in order for an employer to be considered a rebatable employer. An employer is a rebatable employer if the employer:

•         is exempt from income tax at any time during the FBT year, and

•         satisfies the special conditions (if any) refer to the table set out under section 65J.

The types of employers set out in the table under section 65J can be summarised as:

•         Registered charities;

•         Scientific institutions;

•         Public educational institutions;

•         Specific societies, associations or clubs established for certain purposes; and

•         Specific trades or unions.

Application to your circumstances

The Hospital is a non-for-profit hospital which is registered as a charity with the ACNC. Therefore, it meets the first-mentioned type of employers of being considered under section 65J.

In order to be considered a rebatable employer, the Hospital is also required to satisfy the specific conditions required for this particular employer type (i.e. registered charities). As outlined in the table under section 65J:

The registered charity is nota rebatable employer for the year of tax if it:

(a) is a registered public benevolent institution; or

(b) is a registered health promotion charity; or

(c) is an institution of the Commonwealth, a State, or a Territory; or

(d) has not been endorsed under subsection 123E(1); or

(e) is not an institution."

As stated in Relevant Fact and Circumstances above, the Hospital is an endorsed PBI with the ACNC. Therefore, the Hospital does not meet the criteria under section 65J and will not be considered as a rebatable employer.

Accordingly, the Hospital is not a rebatable employer for the purposes of paragraph (d) of Step 2 of the Method Statement in subsection 5B(1E).

Question 3

Should the aggregate non-exempt amount for the Hospital for the current and subsequent FBT years be worked out under Step 3 of the Method Statement in subsection 5B(1E) of the FBTAA?

Answer

Yes.

Summary

Step 3 of the Method Statement in subsection 5B(1E) of the FBTAA would apply such that the individual grossed-up non-exempt amount of benefits provided to each employee would be reduced by the higher FBT exemption cap of $30,000 (but not below nil).

Detailed reasoning

The exempt amount is determined by reference to the employer's 'aggregate non-exempt amount' in accordance with the Method Statement in subsection 5B(1E) of the FBTAA, which states:

Step 2. If:

(b)  the employer is a government body and the duties of the employment of one or more employees are as described in paragraph 57A(2)(b) (which is about duties of employment being exclusively performed in or in connection with certain hospitals); or

(c)   the employer is a public hospital; or

(ca) the employer provides public ambulance services or services that support those services, and the employee is predominantly involved in connection with the provision of those services; or

(d)  the employer is a hospital described in subsection 57A(4) (which is about hospitals carried on by societies and associations that are rebatable employers);

subtract $17,000 from the individual grossed-up non-exempt amount for each employee of the employer referred to in paragraph (c), (ca) or (d), or each employee referred to in paragraph (b), for the year of tax. However, if the individual grossed-up non-exempt amount for such as employee is equal to or less than $17,000, the amount calculated under this step for the employee is nil.

Step 3. If step 2 does not apply in respect of one or more employees of the employer, reduce the individual grossed-up non-exempt amount for each such employee by $30,000, but not below nil.

Application to your circumstances

With the application of Steps 2 of the Method Statement in subsection 5B(1E), the exemption is subject to a capping threshold on grossed-up taxable benefit of $17,000, if the employer is:

•         a government body,

•         a public hospital,

•         a public ambulance service, or

•         a not-profit hospital.

As outlined in our analysis for Question 1 and Question 2 above, the Hospital is not:

•         a public hospital for the purposes of paragraph (c) of Step 2 of the Method Statement in subsection 5B(1E) of the FBT Act; nor

•         a rebatable employer for the purposes of paragraph (d) of Step 2 of the Method Statement in subsection 5B(1E) of the FBT Act.

In addition, as outlined in our analysis above, the Hospital :

•         is not a government body for the purposes of paragraph (b) of Step 2 of the Method Statement in subsection 5B(1E) of the FBT Act; and

•         does not provide public ambulance services or services that support public ambulance services for the purposes of paragraph (ca) of Step 2 of the Method Statement in subsection 5B(1E) of the FBT Act.

•         is a registered PBI endorsed under section 123C of the FBTAA

Therefore, as per Steps 2 and 3 of the Method Statement in subsection 5B(1E) of the FBTAA, registered PBIs which do not operate a public hospital and are not rebatable employers have a higher FBT exemption cap of $30,000 grossed-up value (that is, the value of the benefit plus the notional FBT liability) per employee, while a $17,000 per-employee FBT exemption cap applies to employees of government and non-government public hospitals, and hospitals run by rebatable employers (relevantly, charities that are not PBIs).

It is considered that Step 3 of the Method Statement in subsection 5B(1E) of the FBTAA apply in the current circumstances and the exemption capping threshold is $30,000. This means that the individual grossed-up non-exempt amount of benefits provided to each employee would be reduced by the higher FBT exemption cap of $30,000 (but not below nil).

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