Edited version of private ruling

Authorisation Number: 1011669639022

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Ruling

Subject: Fringe benefits tax - childcare facilities

Question

Will the provision of the care of an employee's child in the child care centre that is being built on premises that you own be an exempt benefit under subsection 47(2) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes.

This ruling applies for the following periods:

Year ending 31 March 2012

Year ending 31 March 2013

Year ending 31 March 2014

Year ending 31 March 2015

Year ending 31 March 2016

Year ending 31 March 2017

Year ending 31 March 2018

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You wish to provide childcare facilities to your employees to assist with retaining and recruiting staff.

To this end you are in the process of constructing a purpose built childcare centre on land that you own.

As you are not licensed to provide childcare services, you propose to have the childcare centre managed on your behalf by a specialist childcare provider.

You propose to enter into two separate agreements with a child care operator:

§ a lease agreement; and

§ a management agreement.

The two agreements are interlinked in the sense that one will automatically terminate on termination of the other.

Broadly you will provide the land and premises, including all structural fit-out items necessary for its operation. You will also provide ongoing supervision of the centre through your involvement in a management advisory committee.

The child care operator will manage the day-to-day operations of the centre, reporting at least quarterly to the management advisory committee. The child care operator will also be responsible for procuring all permits, licenses and approvals required to be taken out in connection with the provision of childcare services, and all moveable equipment, such as furniture, toys and cots.

Once the centre is operational, your employees will be able to salary-sacrifice from their gross salaries the childcare fees charged by the centre.

Children of your employees will have priority of access to all places in the childcare centre.

You have provided a draft copy of the management agreement and the lease agreement.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 sub-section 47 (2).

Reason for Decision

Will the provision of the care of an employee's child in the child care centre that is being built on premises that you own be an exempt benefit under subsection 47(2) of the FBTAA?

Under the terms of the Agreements childcare will be provided for children of your employees in the childcare centre.

Subsection 47(2) of the FBTAA provides that this will be an exempt benefit where:

(a) a residual benefit provided to a current employee in respect of his or her employment consists of -

(i) ..................;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,

Therefore, the provision of the child care will be an exempt benefit under subsection 47(2) if the following conditions are satisfied:

§ the benefit is a residual benefit;

§ the benefit is provided to a current employee;

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

§ the care of the children is in a child care facility; and

§ the child care facility is located on the business premises of the employer (or a related company if the employer is a company).

Is the benefit a residual benefit?

Section 45 of the FBTAA defines a residual benefit as:

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 Division 2 to 11 (inclusive).

As the provision of child care services does not come within any other category of benefit, it will be a residual benefit.

Will the benefit be provided to a current employee?

Under the terms of the Agreements you will only pay for the cost of providing childcare to children of employees who have entered into a salary sacrifice agreement. To provide the benefit as part of a salary sacrifice arrangement requires the employee to be a current employee. Therefore, the benefit will be provided to a current employee.

Will the benefit consists of the care of the children of the employee

The benefit consists of the care of children of employees.

Will the children be cared for in a child care facility

A child care 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

Under the terms of the Management Agreement the manager is required to obtain the necessary licences to enable the centre to operate as a childcare centre. In addition, the Lease Agreement provides that the premises can only be used as a childcare centre. Therefore, it is accepted that the facility will be one that is ready to receive two or more children under the age of six for the purpose of minding, caring or educating them. Further, the facility will not be the place of residence of any of the children.

Will the child care facility be located on the business premises of the employer (or a related 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,

The question of what constitutes business premises for the purposes of the FBTAA was considered in Taxation Ruling TR 2000/4 Fringe benefits tax: meaning of business premises.

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 the ruling 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 employers actions and activities on the premise with those of normal business practices.

Paragraph 13 of the ruling 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 your premises?

Paragraph 7 of MT 2000/4 states:

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.

In applying this paragraph, the premises could be said to be your premises as you are the owner of the premises. However, the premises could also be considered to be premises of the child care operator as it has exclusive occupancy rights as lessee of the premises. In discussing such an outcome, paragraph 50 of MT 2000/4 states:

It should be noted that situations do arise where a person has ownership of premises, while at the same time another person has exclusive occupancy rights as lessee of the premises, and so the premises could be described as premises of each of those persons. In other words, the premises could, in a particular period, be described as the premises of the owner and the premises of the lessee. However, while the Ruling at paragraphs 6 to 8 above may allow the identification of two persons, each of whom could satisfy the 'of the person' requirement, it does not automatically follow that each of those persons would satisfy the requirement that the premises be used for their 'business operations'.

Therefore, it is necessary to determine whether the premises will be used for your business operations.

Will the premises be used for your business operations?

In determining whether the child care activities amount to your business operations 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 employees 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. In considering these requirements:

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

Your agreement with the Child care service Provider is contained within the Management Agreement. The Management Agreement sets out the Managers Obligations, the establishment of a Management Advisory Committee and its functions, Owner priority of Childcare Places, Licensing and Accreditation, Termination rights and consequences among other things.

In considering whether this agreement operates in the manner that would be expected where the child care centre is your child care centre it is relevant to note:

§ the management of the centre is overseen by a management advisory committee to which you appoint two of the four representatives;

§ one of your representatives chairs the management advisory committee;

§ the child care operator is bound to comply with a series of service and performance guidelines that you have set;

§ you set the opening hours for the centre;

§ the child care operator is required to provide you with a written report that outlines performance at least 10 business days before each meeting of the Management Advisory Committee;

§ you have determined the priority of child care places that is to be given to children of employees;

§ you have the right to terminate the Management Agreement in circumstances that would be expected where the Management Agreement operates on an ordinary and arms length basis; and

§ on termination of the Management Agreement the child care provider is required to provide you with all records, manuals, documents and other information required for a smooth handover, assign or novate all contracts, agreements and licences necessary for the continued operation of the centre and transfer all approvals and permits to you.

These factors are consistent with the Management Agreement operating on an ordinary and arms length basis.

However, it is also noted that the child care operator is solely responsible for the collection of all childcare fees and is liable for the payment of operating costs. That is, it the operating risks are borne by the child care operator, rather than by you. Further, the child care operator leases the premises from you at a commercial rate. These factors are indicative of the operations being those of the child care operator.

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

The Management Agreement can be terminated due to several events, including a breach by the Manager 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.

The Management Agreement provides that the child care operator is required to provide you with all records, manuals, documents and other information required for a smooth handover, assign or novate all contracts, agreements and licences necessary for the continued operation of the centre and transfer all approvals and permits to you.

Further, if the Management Agreement is terminated, the lease will also automatically be terminated.

These factors indicate that if the Management Agreement is terminated there will not be an impediment to another child care operator being engaged to manage and operate the facility.

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

As you own the premises it is accepted the document granting you tenure operates on normal commercial grounds.

The termination of the management agreement should not require the termination of the employers 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.

As you own the premises your occupancy rights will not be affected by the termination of the Management Agreement.

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

As you are the owner of the premises your rights over the property are independent of the Management Agreement. 

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.

As you are the owner of the premises, you are not required to pay rent. In this situation, it is the child care provider who is paying rent. The rent that is paid by the child care operator is commercially based. 

The childcare fees to be charged will be determined by the child care operator. In setting the fees the child care operator will take the rent and other costs into account in the same manner as it would with any other premises that it leases on an arms length basis.

Under the arrangement you will not pay any management fees to the child care operator for operating the centre. Rather, the child care operator will receive all the child care fees.

Therefore, although the rental charged to the child care provider and the child care fees are commercially based and independent of each other this does not provide support for the child care centre being your child care centre as these factors will equally apply to an arrangement where the child care centre is the child care operator's centre. However, it is noted that the lease payments are phased in over the first eighteen months of operations while the centre is being established. This clause would not normally be present if the arrangement was purely between a landlord and a tenant.

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 risks borne by the child care provider include all the operating risks, such as the risk that fees received do not cover operating costs. By contrast, your risks are restricted to those risks that will be borne by a landlord. For example, the insurance of the premises.

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

The occupancy rights are provided by the employer through the Lease Agreement.

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.

As set out above:

§ the management of the centre is overseen by a management advisory committee to which you appoint two of the four representatives;

§ one of your representatives chairs the management advisory committee;

§ the child care operator is bound to comply with a series of service and performance guidelines that you have set;

§ you set the opening hours for the centre;

§ the child care operator is required to provide you with a written report that outlines performance at least 10 business days before each meeting of the Management Advisory Committee;

§ you have determined the priority of child care places that is to be given to children of employees;

§ you have the right to terminate the Management Agreement in circumstances that would be expected where the Management Agreement operates on an ordinary and arms length basis; and

§ on termination of the Management Agreement the child care operator is required to provide you with all records, manuals, documents and other information required for a smooth handover, assign or novate all contracts, agreements and licences necessary for the continued operation of the centre and transfer all approvals and permits to you.

These factors indicate that you have a level of control over the child care provider which is consistent with the child care operator managing the centre on your behalf. Further, the Management Agreement provides the circumstances in which you are able to terminate the services of the child care provider. These circumstances are consistent with those that would be expected in an agreement that operates on a normal commercial basis.

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 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 that is being rented 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 management agreement with the child care operator operates on an ordinary and arm's length basis;

§ the management agreement is able to be terminated on normal commercial grounds;

§ if the agreement with the Manager is terminated there is no impediment to another operator being engaged to manage and operate the centre;

§ the document granting you tenure or occupancy rights operates on normal commercial grounds;

§ the termination of the management agreement does not require the termination of your tenure or occupancy rights;

§ the management agreement and tenure or occupancy rights agreement operate independently of each other;

§ the tenure and occupancy rights as they affect the child care facility come from the employer; and

§ the composite rights of control over the service provider are consistent with the child care operator managing the centre on your behalf.

Although the operating risks borne by the child care operator and the commercial rate of rent that is paid by the child care operator are indicative of the child care provider operating the child care centre on premises leased from you, the control that you have over the operations of the centre through the management committee and reporting requirements is sufficient is sufficient to accept that the premises are your business premises.

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