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Ruling

Subject: FBT - exempt benefits - child care on business premises

Question

Will you be exempt from fringe benefits tax for the provision of childcare in the childcare centre that will be located on the ground floor of your premises?

Answer

Yes.

This ruling applies for the following periods:

1 January 2012 to 31 March 2013

The scheme commences on:

On or after 1 January 2012

Relevant facts and circumstances

You plan to provide a corporate childcare centre for the children of your employees, on the ground floor of the same premises as your workplace.

You have signed a Management Agreement with an external child care provider, for the operation of the child care centre at your workplace. The Management Agreement outlines items such as the fees to be paid to the child care provider for the care of the children, the requirements to be met by the child care provider, the nature of the relationship and the termination conditions.

You entered into a License Agreement with the child care provider, allowing them to enter and use the ground floor premises for the permitted use in accordance with the terms and conditions of the licence. A licence fee will be paid by to you by the child care provider and this is set out in the licence agreement.

Under the terms of the agreements, the child care provider will be responsible for public liability and workcover insurance to cover the operation of the centre. You will have responsibility for public liability and occupational health & safety over the premise. Your insurance arrangements and the child care provider's insurance arrangements will be under separate policies.

You plan to establish a Child Care Committee (The Committee) that will consist of three people, a representative of the child care provider and two representatives appointed by yourself.

The Committee will meet regularly and the role will be to consider the following matters in relation to the operation of the management agreement:

· approve child care fee increases payable

· ensure access to the services is provided in accordance with the agreement

· ensure information given to you by the child care provider conforms with the agreement

· discuss matters arising in relation to the agreement.

The Committee may also have a role in advising the management of the child care provider matters affecting the operation of the centre including, but not limited to:

· developing and implementing centre policies and procedures

· handling of issues or concerns raised by any parent with a child at the centre.

However, the final decision on operational issues shall be retained by the child care provider management.

Child care fees are set at $XX per day per child regardless of whether the child's parents are your employees or not.

83% of the childcare places will be for your employees as a priority with the remaining places to be community places that can be filled by children with parents that do not necessarily work for you. Should any of your childcare places be unused, you will be responsible to pay these fees.

Children of your employees receive priority in allocating places.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 47(2)

Fringe Benefits Tax Assessment Act 45

Fringe Benefits Tax Assessment Act 136(1

Reasons for decision

Will you be exempt from fringe benefits tax for the provision of childcare in the childcare centre that will be located on the ground floor of your premises?

According to the terms of the management and lease agreements, childcare will be provided for the children of your employees in a childcare centre at the same location of your workplace.

Subsection 47(2) of the Fringe Benefits Tax Assessment Act (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 a 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:

1. the benefit is a residual benefit

2. the benefit is provided to a current employee

3. the benefit consists of the care of the children of the employee

4. the care of the children is in a child care facility

5. 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 pay for the cost of providing child care to children of your current employees only. Therefore this condition is satisfied

Will the benefit consist of the care of children?

In the Management Agreement, it states that the child care provider will provide child care services to children of your employees. Therefore, this condition has been met.

Will the children be cared for in a child care facility

A child care facility is defined within sub section 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

This requirement is satisfied as the facility will provide care for up to 61 children in a non residential childcare centre.

Will the child care facility be located on the business premises of the employer (or a related company if the employer is 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, but does not include....

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 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 employer's actions and activities on the premises 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 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 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 or non-exclusive possession.

You have a sub-lease agreement to lease the building you currently occupy. The proposed child care centre will be located on the ground floor of this building.

The Licensing Agreement with the child care provider does not affect the exclusive occupancy rights that arise under the sublease agreement between yourself and the leaser of the building you occupy. The child care provider has the right to occupy the premises for the purposes of operating a childcare centre only. The relationship between you and the child care provider does not constitute a relationship of tenancy.

Although you have a Licence Agreement with the child care provider which will provide them with a licence to enter the premises, this does not change your control and possession of the premises. As the licensor you can enter the facility at reasonable times with reasonable notice. Therefore, although the child care provider will operate the proposed child care centre, the premises remain your premises.

Will the premises be 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 TR2000/4 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 their employee's children, paragraph 57 of TR 2000/4 provides the following minimum requirements which should be incorporated into the arrangement for the operations to be considered the business operations of the employer:

The management agreement with the child care 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 child care 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 child care 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 child care 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.

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

The Management Agreement with the child care provider details:

· the fees to be paid

· the fees will be varied to reflect the market rate for child care services

· the requirements to be met by the child care provider

· the objectives of the child care provider

· the nature of the relationship between you and the childcare provider, and

· the general termination rights.

The Licence Agreement details:

· the fixed licence fee is paid to you by the child care provider

· the requirements to be met by the child care provider as licensee.

A clause in the Licence Agreement enables you to terminate the licence immediately upon any material default the child care provider or its related entities in respect of the Head Lease and the Management Agreement.

In considering whether these agreements are on an ordinary and arm's length basis it is accepted that the fees paid to the child care provider in relation to the care of your employees' children reflect the market rate and that many of the conditions would be present in an ordinary agreement.

However, it is also relevant to note:

· the Management Agreement specifically states that the child care operator is not acting as your agent

· the fee paid by you is determined by the number of your employees' children are cared for in the centre, rather than the actual total number of children cared for in the centre. Although you must pay a minimum of 50 places per day regardless of whether 50 your employees' children attend each day.

These facts indicate the childcare activities may not be your business activities as you only have obligations in relation to your employees' children and the child care provider is required to pay for each space used by a child in the wider community. However the child care provider is only required to pay a minimal number of positions because you will pay for the guaranteed 50 places for children of your employees. Therefore the maximum the child care provider will be required to pay is for 11 positions and this amount could be less if any of your employees' children occupy the community positions.

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

The Management Agreement outlines the termination conditions and it is accepted that the agreement can be terminated on normal commercial grounds.

Even though the License Agreement can be terminated upon any material default in respect of the Head Lease agreement, it is accepted that this a necessary condition if the premises are no longer available.

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 outlines that if the agreement is terminated, that:

· each party will return to the other party all the property of the other party held pursuant to the Management Agreement

· the child care provider will deliver you a copy of all the information pertaining to the Services including upon the provision the written agreements of the parents, all records of a personal nature in respect of the your employee's children who attended the centre

· each party will co-operate with the other to ensure an orderly termination of the agreement

· the child care operator will have the right to recover sums owing for the services supplied until the date of termination.

It is satisfactory under these conditions, that if the agreement is terminated, there is no impediment to another childcare operator being engaged to manage and operate the facility on the particular premises.

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

This condition is met as it appears the sub-lease between you and the lesser of the building operates 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.

This condition is met. There are no clauses in the Management Agreement that require the termination of the sub-lease agreement in the event of the termination of the Management Agreement.

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

The occupancy rights agreement does not operate independently from the management agreement as a clause of the License Agreement allows you to terminate the Management Agreement if there is a material default by the child care provider of the Licence 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.

This condition is met as the payments under the Management Agreement are commercially based in order to give the operator a commercial return from the operation of the child care centre. The child care fees reflect the market rate in the same area and both the positions held by children of your employees and the community available position, paying the same fee.

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).

In considering the risks borne by each party it is relevant to note the following:

· the Licence Agreement will transfer many of the risks contained within the sub-lease to the child care provider

· the risks that arise in relation to unfilled spaces, or spaces not used by your employees children will be borne by you, however the risk associated with unfilled community spaces will be borne by the child care provider

· you have limited risks in relation to the child care centre with the child care provider receiving the profits and bearing the losses for the child care activities.

· although the child care provider will have responsibility for public liability and workcover insurance you potentially are at risk for public liability and Occupational Health & Safety as a result of your control over 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.

This condition is met as the occupancy rights are transferred to the child care provider through the Licence Agreement. Without the Licence Agreement, the child care provider is 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 or employers.

The Management Agreement provides for the establishment of a Child Care Committee which will consist of the one person appointed by the child care provider and two representatives appointed by you. This Committee is able to direct you and the child care provider in relation to the operation of the Agreements including:

· approving child care fees

· ensure the services are being provided in accordance with the Agreement

· the development and implementation of Centre policies and procedures, and

· handling of issues or concerns raised by any parent with a child at the Centre.

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 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 child care provider is determined by the Licence and Management Agreement

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

· the conditions imposed on the child care provider are consistent with the conditions that would be expected to be imposed on a 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 will establish The Committee in collaboration with the child care provider

· if the child care provider wishes to change the opening hours agreed on in the Management Agreement, they need to consult with you

· your employees have a priority of access to the guaranteed positions, and

· if the current child care fees are changed, it is subject to your approval.

Although the agreements specifically state that the child care provider is not acting as your agent in conducting the child care operations, these factors enable your situation to be distinguished from paragraph 19 of TR 2000/4 where all of the positions are filled by your employees' children. The differences arise in relation to:

· the level of control in relation to the occupancy of the premises by the child care provider

· the ability to determine the priority of children to fill spaces at the centre

· the process for approving the amount of child care fees charged, and

· the degree of influence over activities of the centre.

However, the significance of these factors decreases as the number of children that are not your employees' children increases as:

· the obligations and responsibilities imposed on you under the Agreements only relate to children of your employees

· if the Licence Agreement is terminated the information specified to be provided by the child care provider to you is the records of the children of your employees, rather than all the children attending the centre, and

· you only have limited risks in relation to the child care centre with the child care provider receiving the profits and bearing the losses for the child care activities.

These factors will make it difficult to distinguish the situation from that described in paragraph 19 of TR 2000/4 if only a small number of the children are your employees' children. However, you have indicated that 50 of the 61 available spaces will be paid by you if filled by your employees' children or if these places remain unused.

Therefore, based on the conditions satisfied above, the provision of child care under the proposed arrangements will qualify for exemption under subsection 47(2) of the FBTAA