Edited version of private ruling

Authorisation Number: 1011567788415

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Ruling

Subject: Fringe benefits tax: Exempt benefits - provision of childcare facilities

Question

Is the provision of childcare facilities to employees under the arrangement an "exempt benefit" under sub-section 47(2) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)?

Answer

Yes.

This ruling applies for the following period:

1 April 2009 to 31 March 2011

The scheme commences on:

The FBT year ended 31 March 2008

Relevant facts and circumstances

You say in your private binding ruling application that in relation to the previous private binding ruling there has not been any variation to the arrangement since the issuance of the latest ruling except for the changes in the guaranteed number of childcare places between each age group for your employees in accordance with the Management Agreement.

As the facts of the previous private binding ruling are unchanged (according to the statement in your private binding ruling application) they are repeated as follows:

You are a large organisation. To enhance your ability to attract and retain staff, you are exploring providing a child care centre for the young children of your employees, and are planning to open the centre sometime during or after the 2007 year.

You currently lease a number of floors. The current lease does not provide you with an option to extend and there is a possibility that you may have to relocate when the lease expires. Given the current lease situation, the intended manager of the childcare centre has taken the initiative to lease a floor from the landlord for a period of 10 years. The intended manager will in turn sub-lease the floor to yourself and will be charging you the same lease rental rates the intended manager is paying with no mark-up.

You will operate the childcare centre (the centre) from a floor, and will appoint a service provider to manage the day-to-day provision of childcare services at the centre.

Your employees will be offered childcare places at the centre subject to availability, with the full costs of the provision of childcare being met by yourself.

Employees using the centre may elect for a reduction in their salary via a salary sacrifice arrangement by an amount equal to the agreed daily rate for childcare at the centre multiplied by the number of days they are provided with childcare at the centre. The total amount of salary sacrificed is intended to meet all of the expenses of the centre, with any shortfall due to increases in cost or drop in occupancy to be met by yourself.

The centre will be operated predominantly for the benefit of children of your employees, with priority given to children of your employees. The service provider is to ensure that you are provided with your childcare entitlement.

However, in addition to your employees who are parents of children who may be offered child care places, you will allow your employees who are grandparents of children to be cared for at the centre. These employees will be charged an ordinary commercial rate. It is also intended that children of former employees, your contractors, and the general public may be cared for at the centre. This group will also be charged an ordinary commercial rate. You accept that child care provided to the grandchildren of current employees, and to children or grandchildren of former employees or non-employees will not be exempt from fringe benefits tax (FBT).

You have entered into:

· a sub-lease agreement with the intended manager, and

· a management agreement with the service provider.

You have provided copies of your sub-lease agreement and management agreement.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 subsection 136(1) and

Fringe Benefits Tax Assessment Act 1986 subsection 47(2).

Reasons for decision

Summary

Paragraph 5 of Taxation Ruling TR 2000/4 states it is a question of fact and degree as to whether particular premises are business premises of a person. In making a conclusion it is necessary to consider all of the relevant facts.

In applying TR 2000/4 to the facts of your situation it is accepted you will have the necessary control over the premises. However, as indicated in paragraph 19 of TR 2000/4, for the premises to be accepted as your business premises it is necessary to be able to distinguish your circumstances from the circumstances that exist where a member of the public approaches a community or commercial child care centre and enrols one or more of their children.

In seeking to distinguish your circumstances, the following factors support the child care activities being part of your business operations:

· the occupancy of the premises by the service provider is determined by the Management Agreement,

· if the agreement with the service provider is terminated there is no impediment to another operator being engaged to operate the centre,

· the conditions imposed on the service provider are consistent with the conditions that would be expected to be imposed on an independent child care operator engaged to operate a person's child care centre,

· you have a direct involvement with the operations of the centre, and

· your employees have a priority of access to the positions.

Therefore, as the premises on which the child care services are conducted are considered to be your business premises, the provision of the child care services to your employees (that are the parents of the children) under a Salary Sacrifice Arrangement will be exempt from Fringe Benefits Tax under subsection 47(2) of the FBTAA 1986.

Detailed reasoning

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 within subsection 136(1) of the FBTAA 1986 as being a benefit:

· provided to an employee or associate;

· by the employer, an associate, or under an arrangement with the employer, or associate;

· in respect of the employment of the employee

· unless the benefit is one of the benefits that are specifically excluded from the definition.

You, the employer, are providing a benefit to your employees in respect of their employment. The benefit provided to your employees under the proposed arrangement is the provision of child care for their children, or grandchildren. As the provision of the child care service does not come within any other category of benefit, it will be a residual fringe benefit, unless the benefit is an exempt benefit.

Taxation Ruling TR 2001/10 Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements, provides guidelines for determining whether the employee will be liable to pay income tax on the cost of childcare provided to their children.

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.

Your 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 child care will be a benefit to which the provisions of the FBTAA 1986 apply.

Is the provision of childcare facilities under the proposed arrangement an exempt benefit under subsection 47(2) of the FBTAA 1986?

Subsection 47(2) of the FBTAA 1986 provides that:

'Where -

a residual benefit provided to a current employee in respect of his or her

employment consists of:

(ii) the care of children of the employee in a child care facility; and

(b) the …child care facility, …, is located on business premises of -

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.'

Therefore the provision of a child care benefit by you will be an exempt benefit under subsection 47(2) of the FBTAA if all of the following conditions are satisfied:

the benefit is provided to a current employee;

the benefit consists of the care of children of the employee;

the site satisfies the definition of child care facility ;

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

Will the benefit be provided to current employees?

A "current employee" is defined in subsection 136(1) of the FBTAA 1986 as a person who receives, or is entitled to receive, salary or wages.

The child care centre is set up principally for the children, or grandchildren, of current employees. As current employees, these employees may use the child care centre for the care of their children, or grandchildren, by a reduction in their salary via a salary sacrifice arrangement.

It is also intended that children of former employees, your contractors, and the general public may be cared for at the centre. As they will not be your current employees, they will not be parties to a salary sacrifice arrangement, and will be charged an ordinary commercial rate. Extending provision of child care facilities beyond current employees will not alter the exemption from FBT (FBT) for benefits provided to current employees, in accordance with paragraph 65 of Taxation Ruling TR 2000/4 Fringe benefits tax: meaning of 'business premises', as follows:

To satisfy the test in subsection 47(2) it is not necessary for the employer, on

whose 'business premises' the child care facility is located, to restrict the care provided in the child care facility to children of the employees of the employer. Children of employees of an unrelated employer (or children of a member of the public, for that matter) could attend the child care facility without jeopardising the exemption available to the first mentioned employer who has the 'business premises' on which the child care facility is located. In that situation, the child care benefits provided by the first mentioned employer to its employees would be exempt. The benefits provided by the second employer would be exempt if the second employer satisfied in its own right the respective requirements of 'premises of the person' and 'used … for the purposes of business operations' in the definition of 'business premises'.

Hence, the benefit of child care will be provided to your current employees, and this condition of exemption is satisfied.

Will the benefit consist of the care of children of employees?

The benefit is the provision of child care for the children, and grandchildren, of current employees. The exemption from FBT will be satisfied in relation to the provision of child care to the children of current employees.

The provision of child care to grandchildren of current employees will not be exempt from FBT. The provision of child care to former employees, contractors and the general public will also not be exempt.

Will the children be cared for in a child care facility?

A child care facility is defined within subsection 136(1) of the FBTAA 1986 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 Lease and Management Agreements and these facilities are consistent with a child care centre set up for the purpose of minding, caring for and educating children under the age of 6 for a day, or part of a day.

This condition of exemption is satisfied.

Will the child care facility be located on the business premises of the employer?

The term 'business premises' is defined in subsection 136(1) of the FBTAA 1986 as being:

in relation to a person, means premises, or part of premises, of the person used, in whole or in part, for the purposes of business operations of the person, …

The question of what constitutes business premises for the purposes of the FBTAA 1986 was considered in TR 2000/4.

Paragraph 4 of TR 2000/4 states that two requirements need to be met for premises to be business premises of a person. 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.

Paragraphs 11 and 12 of TR 2000/4 provide 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 premise 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'.

Will the premises, or part of the premises, be premises of the employer?

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 out on the premises are not truly 'business operations' of the person.

Merkel J in Esso Australia Ltd v. FC of T 98 ATC 4953 at 4958; (1998) 40 ATR 76 at 80-81; 157 ALR 652, at 656-657 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 of non-exclusive possession.

You have entered into a sub-lease with a manager which grants you the right to access, (24 hour entry to premises) and all other obligations in relation to the premises on which the childcare centre is located.

This sub-lease provides you with the necessary right of possession and control over the use of the premises.

Are the premises being used for the business operations of the employer?

Although the premises are premises of the employer, it is also necessary for the premises to be used for the business operations of the employer.

Paragraph 17 of TR 2000/4 states:

Clearly then, an employer must conduct the child care operations on its own account (or through an agent) on its premises to be eligible for the exemption.

Paragraph 20 of TR 2000/4 states:

…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…

In determining whether the child care activities amount to your business activities 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.

In situations where an employer engages an independent child care operator under a management agreement to care for employee's children, paragraph 57 of TR 2000/4 provides the minimum requirements which should be incorporated into the arrangement for the operations to be considered the business operations of the employer. These are discussed in order.

The management agreement with the child care operator should operate on an ordinary and arm's length basis.

Your agreement with the service provider is contained within the Management Agreement.

The Management Agreement with the service provider details:

· a committee to act as liaison between the service provider and yourself, with equal numbers from the service provider and yourself to review whether your business objectives in relation to the management of the Childcare Facility are being met.

· the Management Fees to be paid to the service provider for each Childcare Place that you are entitled to and a review of the Management Fees.

· the duties and requirements of the service provider are set out.

· the service provider is fully responsible for its employees, contractors and subcontractors.

· the service provider is fully responsible for payment and provision of services listed. Any cost overruns cannot be passed onto you unless you and the service provider agree to an increase in the Management Fees.

· ownership of assets purchased by either the service provider or yourself shall belong to the owner alone, and the other party will have no right, title or interest in them.

· you are authorised to conduct audits to ensure that the service provider is complying with its obligations under the Management Agreement.

· the termination rights, including termination without notice if the service provider breaches its duties.

The Management Agreement enables you to terminate the Lease Agreement with the manager, and terminate the Management Agreement and require the service provider to comply with a Transition plan fulfilment.

You will meet the full costs of childcare. The amount salary sacrificed is based on an agreed daily rate for childcare at the childcare centre. In considering whether these agreements are on an ordinary and arm's length basis it is accepted that the fees paid to the service provider in relation to your employees' children, or grandchildren, reflect the market rate and that many of the conditions would be present in an ordinary agreement.

The management agreement should be able to be terminated on normal commercial grounds.

The Management Agreement can be terminated due to several events, including insolvency of either party, or a breach of the service provider relating to their duties.

It is accepted that the Management Agreement can 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.

Where the Management Agreement is terminated, the service provider will ensure that there is a smooth transition to another child care operator providing child care services without delay. Hence, this condition is met.

The document granting the employer or employers tenure or occupancy rights should operate on normal commercial grounds.

The Lease Agreement grants you, the employer and lessee, to sub-lease the premises for the purpose of a child care facility, to occupy and use the premises for that purpose, and pay commercial rent and the Development Fee under the lease.

It is accepted that the sub-lease operates on normal commercial grounds.

The termination of the management agreement should not require the termination of the employer's or employers' 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.

Termination of the Management Agreement does not terminate the Lease or Sub-Lease Agreement which you hold with the manager, and therefore does not affect your occupancy rights of the premises.

The management agreement and tenure or occupancy rights agreement should operate independently of each other.

The Management Agreement with the service provider may be terminated in the event of a breach, and you are able to continue the Childcare Facility with a new service provider. Hence, if a service provider is replaced, you do not have to vacate the premises.

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 Lease Agreement sets out the rental payable. This is accepted as comparable to market rental rates for premises of similar size in the area.

The Management Agreement is independent of the Lease Agreement and sets out the Management and Child care Fees paid to the service provider. The Management Fee is subject to annual review. Your employees who use the child care facility will use a salary sacrifice arrangement, with the salary sacrificed intended to cover the expenses of the child care provider, and therefore are commercially based.

It is accepted that Management Fees are designed to be consistent with commercial rates. Where non-employees use the facility, they will be charged an ordinary commercial rate.

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).

Risks borne by you include:

· being liable for any shortfall due to increases in costs, or drop in occupancy.

· keeping current a public liability insurance policy.

· releasing the Lessor, the Head Lessor and the Manager from any liability from any incident on the premises, unless due to their direct negligence.

· indemnifying the Lessor, the Head Lessor and the Manager against all direct liabilities which they suffer to the extent caused by your omission except to the extent caused by their negligence.

· the sole risk, cost and expense of any act you are permitted to do under the Lease.

The tenure and occupancy rights as they affect the child care facility should come from the employer or employers, rather than from the operator.

Occupancy rights are transferred to the child care provider through the Management Agreement, without which the service provider will be unable to provide child care services on the premises.

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.

The Management Agreement provides for the establishment of a Child Care Committee which will consist of an equal number of representatives of the service provider and yourself, but not more than six persons. This committee acts as a liaison between the service provider and yourself, with several purposes, including:

· dealing with issues concerning the provision of Childcare Services,

· verifying whether Childcare Services are being adequately provided in accordance with the Management Agreement,

· review any operating plans prepared jointly by yourself and the service provider,

· whether your business objectives in relation to the management of the Childcare Facility are being met,

· the quality of the Childcare Services, and the service provider's personnel, and

· any breaches of the Management Agreement.

The Management Agreement provides several conditions that you are able to terminate the services of the child care provider and discusses the requirements of the child care provider in handing over the services to a new child care provider.

Conclusion

Paragraph 5 of TR 2000/4 states it is a question of fact and degree as to whether particular premises are business premises of a person. In making a conclusion it is necessary to consider all of the relevant facts.

In applying TR 2000/4 to the facts of your situation it is accepted you have the necessary control over the premises. However, as indicated in paragraph 19 of TR 2000/4, for the premises to be accepted as your business premises it is necessary to be able to distinguish your circumstances from the circumstances that exist where a member of the public approaches a community or commercial child care centre and enrols one or more of their children.

In seeking to distinguish your circumstances, the following factors support the child care activities being part of your business operations:

· the occupancy of the premises by the service provider is determined by the Management Agreement,

· if the agreement with the service provider is terminated there is no impediment to another operator being engaged to operate the centre,

· the conditions imposed on the service provider are consistent with the conditions that would be expected to be imposed on an independent child care operator engaged to operate a person's child care centre,

· you have a direct involvement with the operations of the centre, and

· your employees have a priority of access to the positions.

Therefore as the premises on which the child care services are conducted are considered to be your business premises, the provision of the child care services to your employees (that are the parents of the children) under a Salary Sacrifice Arrangement will be exempt from Fringe Benefits Tax under subsection 47(2) of the FBTAA 1986.