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Authorisation Number: 1012134881742

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Advice

Subject: Fringe benefits tax - public hospitals

Question 1

If the proposed Health body becomes the employer of the employees who perform their employment duties in the proposed Health bodies will a benefit provided to an employee be an exempt benefit under subsection 57A(3) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer: No

Question 2

Alternatively, if the benefit is not an exempt benefit under subsection 57A(3) of the FBTAA will it be an exempt benefit under subsection 57A(2) of the FBTAA if the benefit is provided to an employee whose duties of employment are exclusively performed in, or in connection with one of the other health bodies?

Answer: Yes

This advice applies for the following periods:

Year ended 31 March 2013

Year ended 31 March 2014

Year ended 31 March 2015

Year ended 31 March 2016

Relevant facts and circumstances

You are proposing to establish five new bodies which will replace the existing public hospitals.

One of the bodies will employ all of the employees and conduct some of the activities that were formerly conducted by one of the abolished public hospitals.

You have provided details of the services to be provided by each of the bodies.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Subsection 57A(2)

Fringe Benefits Tax Assessment Act 1986 Subsection 57A(3)

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Reasons for decision

1. If the proposed Health body becomes the employer of the employees who perform their employment duties in the proposed Health bodies will a benefit provided to an employee be an exempt benefit under subsection 57A(3) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Subsection 57A(3) of the FBTAA states that:

A benefit provided in respect of the employment of an employee is an exempt benefit if:

(a) the employer of the employee is a public hospital; or

(b) 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.

This subsection will apply where the employer is a 'public hospital'.

Will the Health body be a public hospital if it becomes the employer of all employees currently employed by the three existing hospital boards?

The term 'hospital' is not defined in the FBTAA.

As the term 'hospital' is not defined within the FBTAA, it is necessary to consider the ordinary meaning provided by various court cases.

The Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne, defines 'hospital' as:

'an institution providing medical and surgical treatment and nursing care for ill or injured people'.

The Macquarie Dictionary [Multimedia], version 5.0.0, 01/10/01 defines a 'hospital' as:

An institution in which sick or injured persons are given medical or surgical treatment'.

In Padbury: Home of Peace for the Dying and Incurable v. Solicitor-General (1908) 7 CLR 680 (Padbury),Griffith CJ stated:

In Australia it [the term "hospital"] is commonly used to denote an institution for the medical or surgical treatment of persons suffering from bodily ailment or injury.

Also in Padbury Barton J stated:

The sense in which the word [hospital] is generally understood is, I think, that of an institution for those who, being sick or injured in body, are in need of medical or surgical aid.

The term 'hospital' was also considered in the case Public Trustee v. Hospitals Commissioner of New South Wales (1939) 56 Weekly Notes 198 (Public Trustee) where at 199 the decision states:

I think that it is an essential characteristic of a hospital that medical or surgical services should be rendered … A hospital connotes an institution within whose walls medical or surgical attention is given to the sick or injured.

Based on the ordinary meaning of the term and precedent, an essential function of a hospital is the provision of medical or surgical treatment for sickness, disease or injury. In addition, the reason for the institution receiving the patient must be for the provision of medical care and treatment of that patient.

The provision of accommodation is also essential to an institution being a hospital. In Re Alfred Ford [1945] 1 All ER 288 it was stated:

… but it [the word "hospital"] seems to me, prima facie, to indicate a place in which patients are received for continuous treatment and to exclude places to which patients merely resort for the purpose of occasional medical or surgery aid such as is normally obtained at the out-patients' department of hospitals.

In Salmar Holdings Pty Ltd v. Hornsby Shire Council [1971] 1 NSWLR 192 at 199 (Salmar case) where the definition of 'hospital' was considered, Jacobs JA stated:

There are many different features of hospitals, but the feature which they all have in common is that they provide residential care for the sick.

The Salmar case supports the view that accommodation is an important part of a hospital's function.

Additional guidelines on what constitutes a hospital are provided in GiftPack - Guide for deductible gift recipients and donors which states:

A hospital is an institution in which patients are received for continuous medical care and treatment for sickness, disease or injury. Providing accommodation is integral to a hospital's care and treatment. Clinics that mainly treat ambulatory patients who return to their homes after each visit are not hospitals. However, day surgeries that provide beds for patients to recover after surgery may be hospitals. Homes providing nursing care in respect of feeding, cleanliness and the like are not hospitals. However, nursing homes for people suffering from illness are accepted as hospitals. Hospices for the terminally ill will generally be hospitals. Minor outpatient and nursing care will not prevent an institution from being a hospital.

In applying these extracts, in considering whether the Health body will be a hospital, it is necessary to consider the following three questions:

· Will the Health body be an institution?

· Will the dominant objective of the Health body be the provision of continuous medical care and treatment for sickness, disease or injury?

· Will the Health body provide associated accommodation and nursing services on their premises?

Will the Health body be an institution?

Although there is no statutory definition of the term 'institution', there are a number of court cases, which provide guidance.

An institution has been described as 'the body (so to speak) called into existence to translate the purpose as conceived in the mind of the founders into a living and active principle' (Mayor of Manchester v. McAdam (1896) 3 TC 491 at 497; AC 500 at 511 (Mayor of Manchester) per Lord Nacnaghten).

In Pamas Foundation (Inc) v. Deputy Commissioner of Taxation 92 ATC 4161; 23 ATR 189 the Full Federal Court applied the decision of Christian Enterprises Ltd v. Comr of Land Tax (1968) 88 WN (Pt2) (NSW) 112 to conclude that the word institution is to be given a meaning greater than a structure controlled and operated by family members and friends. The fact that the foundation in that case was incorporated did not mean that it was also an institution. It was relevant that the foundation had a small and exclusive membership.

Another case involving an organisation that was held not to be an institution despite being incorporated was the Federal Court decision of The Trustees of the Allport Bequest v. FCT 88 ATC 4436; 19 ATR 1335. In that case, the organisation's sole activities were to manage trust property and apply the income in donations to such other charitable organisations and objects as it determined. Northrop J characterised the organisation's activities as those of simple or mere trustees. They were insufficient to constitute the organisation as an institution. The fact that it had a recognised identity and permanent nature was not sufficient.

An institution must have a separate identity. Constituent documents and separate accounts and records will help to indicate a separate identity. The need for a separate identity is illustrated by the decision in Case X33 90 ATC 308. In that case a gift of land was made to a church to facilitate the construction of an old peoples' home. Although there was some evidence that separate funds were held for a home, no institution existed separately from the church. Even though it is possible to consider an aged persons' home as a public benevolent institution it could not be established that the home was an institution outside of the church.

These cases indicate that the question of whether an organisation is an institution depends upon a range of factors including its activities, size, permanence and recognition. Even if the organisation is incorporated this in itself is not sufficient for the organisation to be considered to be an institution. If the organisation is controlled and operated by family members and friends it will not be considered to be an institution. If another body controls the organisation the organisation will not be considered to be institution in its own right.

Taxation Ruling TR 92/17 Income tax and fringe benefits tax: exemptions for 'religious institutions' states at paragraph 4:

A body is an "institution" for the purposes of both the ITAA and the FBTAA if it is an establishment, organisation or association, instituted for the promotion of some object (especially one of public or general utility) that is religious, charitable, educational, etc…

In applying these cases to the Health body, it accepted that the Health body will be an institution established to undertake the objectives contained within its constitution.

Will the dominant objective of the Health body be the provision of continuous medical care and treatment for sickness, disease or injury?

Under the proposal the Health body will provide a range of services that will include:

· the provision of acute medical, psychiatric, surgical or obstetric care on its premises;

· the provision of non-acute care; and

· the provision of employees to the other health bodies.

Only some of these activities can be considered to involve the provision of continuous medical care and treatment for sickness, disease or injury. For example, the provision of acute medical, psychiatric, surgical or obstetric care will involve the provision of continuous medical care, but the provision of employees to other health bodies will not.

Therefore, it is necessary to determine which type of activity is the predominant activity. In doing this, it is relevant to consider the resources (funding and personnel) devoted to each of the activities.

These figures indicate the predominant activity of health body will be the provision of employees to the other health bodies as:

· most of revenue received will be from the other health bodies for the employees supplied to those health bodies;

· most of expenditure will be for the payment of salary or wages to the employees who undertake their employment duties in the other health bodies; and

· most of the employees will undertake their employment duties in the other health services.

This indicates the provision of continuous medical care and treatment for sickness, disease or injury will not be the predominant activity. Rather, the predominant activity will be the provision of employees to the other health bodies.

Will the Health body provide associated accommodation and nursing services on their premises?

The Health body will provide accommodation and nursing services at several of its sites.

Conclusion

Although the Health body will be an institution that will provide associated accommodation and nursing services on its premises it will not be a hospital if it becomes the employer of all of the employees who work in the health bodies as its predominant activity will be the provision of employees to the other health bodies.

Therefore, as the Health body will not be a hospital, it will not be a 'public hospital' and the benefits provided to its employees will not be an exempt benefit under subsection 57A(3) of the FBTAA.

2. Alternatively, if the benefit is not an exempt benefit under subsection 57A(3) of the FBTAA will it be an exempt benefit under subsection 57A(2) of the FBTAA if the benefit is provided to an employee whose duties of employment are exclusively performed in, or in connection with one of the other health bodies?

Subsection 57A(2) of the FBTAA states:

Where -

(a) the employer of an employee is a government body; and

(b) the duties of the employment of the employee are exclusively performed in, or in connection with:

(i) a public hospital; or

(ii) (Repealed)

(iii) a hospital carried on by a society that is a non-profit society for the purposes of section 65J or by an association that is a non-profit association for the purposes of section 65J;

a benefit provided in respect of the employment of the employee is an exempt benefit.

This subsection will apply if:

· the Health body as the employer is a 'government body'; and

· the duties of the employment of the employee are exclusively performed;

o in; or

o in connection

with a public hospital.

Is the Health body a 'government body'?

Subsection 136(1) of the FBTAA defines a 'government body' as

the Commonwealth, a State, a Territory or an authority of the Commonwealth or of a State or Territory.

As the Health body is not the Commonwealth, a State or a Territory it can only be a 'government body' if it is an authority of the State.

As the word 'authority' is not defined in the FBTAA it is necessary to consider its ordinary meaning.

The Macquarie Dictionary defines the word 'authority' to mean:

'1. The right to determine, adjudicate, or otherwise settle issues or disputes; the right to control, command, or determine. 2. a person or body with such rights.'

While the courts have, on a number of occasions, determined whether or not particular bodies are authorities or public authorities, no single test has emerged. However, the cases have provided a number of propositions that were summarised as follows by Hill J in FC of T v. Bank of WA Ltd; FC of T v. State Bank of NSW Ltd 96 ATC 4009; (1995) 32 ATR 380:

· a private body, corporate or unincorporated, established for profit is not an authority;

· for a body to be an authority of a State or of the Commonwealth, the body in question must be an agency or instrument of government set up to exercise control or execute a function in the public interest. It must be an instrument of government existing to achieve a government purpose;

· the body in question must perform a traditional or inalienable function of government and have governmental authority for doing so;

· for a body to be an authority, it is not necessary that it has coercive powers and the possession of coercive powers does not of itself characterise a body as an authority;

· as a minimum, a body is required to possess exceptional powers. However, the possession of exceptional powers is not of itself sufficient to characterise a body as an authority. For example, a private utility that may have the legal right to enter premises would not be an authority solely because of that power; and

· incorporation by legislation is not a requirement for a body to be classed as an authority.

In considering these principles it is accepted that the Health body is an 'authority of the State' and as such will be a 'government body'.

Are the duties of employment exclusively performed in, or in connection with a 'public hospital'?

This requirement contains two alternate tests that were discussed in ATO Interpretative Decision ATO ID 2003/40 Fringe benefits tax: exempt benefits - duties of employee relating to a public hospital.

In discussing the first test which considers whether the duties of employment are exclusively performed 'in' a public hospital ATO ID 2003/40 states:

The word 'in' within its present context denotes physical location, physical precinct or physical situation. For a public hospital, the institution may in fact be located over separate physical sites, much the same as a university campus.

To satisfy this limb, the employee would be required to exclusively perform her duties of employment within the physical boundaries or sites of a public hospital which is a public benevolent institution. As this has not occurred the first limb within paragraph 57A(2)(b) is not satisfied.

The second test which considers whether the duties of employment are exclusively performed 'in connection' with a public hospital, ATO ID 2003/40 states:

The presence of the word 'exclusively' or 'only' was discussed by Kitto J in Lloyd v Federal Commissioner of Taxation (1955) 93 CLR 645. At page 672 Kitto J said,

In neither case is the restriction as precise as it would be if the word "exclusively" or "only" were found in s. 8 (5) after "public educational purposes", for then no gift could attract the exemption if any part of the corpus or income of the property given could be applied, consistently with the gift, for any purpose, however minor in importance, which was collateral or independent as distinguished from being a purpose of or incidental to public education...

The meaning of the phrase 'in connection with' was discussed in Burswood Management Ltd v A-G (1990) 23 FCR 144. In a joint decision the court said: 'The words "in connection with" are words of wide import; and the meaning to be attributed to them depends on their context and the purpose of the statute in which they appear.'

The purpose of the former subsection 57A(2) was discussed in paragraph 1.4 of the Replacement Supplementary Explanatory Memorandum (Senate) to the A New Tax System (Fringe Benefits) Act 2000 (EM). The EM said:

Under section 57A of the FBTAA 1986, a benefit provided to an employee of a public hospital which is a PBI, or to an employee of a government body where the employee works exclusively for a public hospital that is a PBI, is wholly exempt from FBT.

This description also applies to the current year subsection 57A(2) as the rewritten words remain the same.

In considering what is the extent or degree of the 'connection' required by the second limb the words of the EM provide assistance in that they require the employee to work exclusively for a public hospital.

An employee working exclusively for a public hospital would have to be fully engaged in a principal activity of the public hospital, or at least the work duties would be incidental to that principal activity. Refer also Ngurratjuta Pmara/Ntjarra Aboriginal Corp v. Commissioner of Taxes (No 2) (2000) 155 FLR 196; 2000 ATC 4264.

It will be a question of fact as to whether either of these tests will be satisfied in relation to an individual employee. However, where a particular Health Service Board is a public hospital it can be concluded that subsection 57A(2) will apply to a benefit provided to an employee who either:

· performs all of their employment duties within the physical premises of the Health Service Board; or

· is fully engaged in a principal activity of the Health Service Board.

Therefore, to determine whether 57A(2) will apply it is necessary to consider whether each of the Health Service Boards are a public hospital.

Is the Health body a public hospital?

As discussed above in relation to question 1, the Health body will not be a public hospital where it employs all of the employees who work in the other health bodies and provides the services of some of the employees to the other health bodies.

Therefore, the exemption in subsection 57A(2) will not apply merely by virtue of the employee performing his or her duties in, or in connection with the Health body.

Is the other health body a public hospital?

As discussed above in relation to question 1, in determining whether a Health body is a public hospital it is necessary to consider the following questions:

· Will the Health body be an institution?

· Will the dominant objective of the Health body be the provision of continuous medical care and treatment for sickness, disease or injury?

· Will the Health body provide associated accommodation and nursing services on their premises?

Will the Health body be an institution?

As the same factors discussed above in relation to the Health body apply to the other health body the other health body will be an institution established to undertake the objectives contained within its constitution.

Will the dominant objective of the Health body be the provision of continuous medical care and treatment for sickness, disease or injury?

Under the proposal the Health body will provide a range of services at a number of locations.

Only some of these activities can be considered to involve the provision of continuous medical care and treatment for sickness, disease or injury.

Therefore, it is necessary to determine which type of activity is the predominant activity. In doing this, it is relevant to consider the resources (funding and personnel) devoted to each of the activities.

These figures indicate the predominant activity of the other health body will be the provision of continuous medical care and treatment for sickness, disease or injury.

Will the Health body provide associated accommodation and nursing services on their premises?

The Health body will provide accommodation and nursing services at several of its sites.

Conclusion

As the Health body will be an institution that will provide associated accommodation and nursing services on its premises and the predominant activity will be the provision of continuous medical care and treatment for sickness, disease or injury it will be a hospital.

Will the Health body be a public hospital?

As the term 'public hospital' is not defined within the FBTAA it is necessary to consider its ordinary meaning.

In discussing the contemporary common understanding or ordinary meaning of the term 'public hospital', Merkel J in Australian Hospital Care (Latrobe) Pty Ltd v Commissioner of Taxation [2000] FCA 1509; (2000) 105 FCR 20; (2000) 45 ATR 593; 2000 ATC 4723 referred to the decisions in O'Connell v The Council of the City of Greater Newcastle (1941) 41 SR (NSW) 190 and the Little Company of Mary (SA) Incorporated v The Commonwealth (1942) 66 CLR 368 before stating at paragraph 51:

The question of whether a particular institution is a public hospital according to common understanding is a question of fact to be resolved upon a consideration of all the circumstances. The institutions with which each of the above cases was concerned were different from the institution under consideration in the present case. Thus, the cases on the meaning of the term "public hospital" in other statutory context, while of assistance, cannot be treated as authorities on what constitutes a public hospital.

On the basis of the relevant facts Merkel J concluded that the hospital was a privately owned and operated hospital that provided public hospital services to the public, rather than a public hospital as:

· it was privately owned for the purpose of gain or profit for its members;

· the state regulation of the hospital's activities was indirect in the sense that it was pursuant to the voluntary undertaking of obligations under contract, rather than by statute or direct state control; and

· the funding was in the form of payments based on a fee for the service provided.

None of these factors apply to the Health body as it will be incorporated as a statutory body and will be controlled by the Minister.

Taxation Ruling TR 2000/10 discusses the meaning of the word public in the context of what is a public library, public museum and public art gallery for purposes of gift deductibility under Division 30 of the Income Tax Assessment Act 1997 (ITAA 1997).

At paragraph 18, TR 2000/10 indicates that for an organisation to exist for the public benefit, it does not have to serve the entire community. It can serve a section of the community provided it is a wide and substantial section of the community.

In paragraph 19, TR 2000/10 refers to the principles In re Income Tax Acts (No 1) [1930] VLR 211. In considering whether a benevolent institution was public, Lowe J at 222 said that the word public in relation to institutions connotes:

…the carrying on of the institution for the benefit of the public generally, or at least of a definitely ascertainable section of the public, where the benefit of the institution is available without discrimination to every member of the public or of that section of it.

As the services of the Health body will be available to the public generally its activities are considered to be for the benefit of the public.

Conclusion

From the information provided we consider that the Health body will be a public hospital for the purposes of subsection 57A(2) of the FBTAA.

Therefore, a benefit provided to an employee who performs his or her employment duties exclusively in, or in connection with the Health body will be an exempt benefit under subsection 57A(2) of the FBTAA.