Edited version of private advice

Authorisation Number: 1052081808286

Date of advice: 8 February 2023

Ruling

Subject: FBT - exempt residual benefits

Question

Is the provision of child care as part of a salary sacrifice arrangement an exempt benefit in accordance with subsection 47(2) of the Fringe Benefits Tax Assessment Act 1986?

Answer

Yes.

This ruling applies for the following period:

1 April 20XX to 31 March 20XX

The scheme commences on:

1 April 20XX

Relevant facts and circumstances

You provide child care to your employees as part of your wider remuneration and retention of staff strategy. Your employees will be able to obtain child care through salary sacrifice arrangements (SSA).

You have engaged an unrelated entity (the Supplier) for the provision of the child care services, which is regulated by the Child Care Management Agreement (MA) between you and the Supplier. The MA established that the Supplier is to provide childcare services as an agent on your behalf.

This service agreement was established since December 20XX, but it will cease from 1 September 20XX.

You enter to a Lease with an unrelated entity (the Lessor) to secure a premises, until 31 August 20XX, upon which to carry out the childcare services.

The Supplier's right to enter and use the premises for the provision of the childcare services is granted through a licence under the Site Licence Agreement. According to this agreement, legal possession and control of the premises remain with you at all times.

You have previously been granted private rulings on this matter.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 subsection 47(2)

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Taxation Ruling TR 2000/4 Fringe Benefits tax: meaning of 'business premises'

Taxation Ruling TR 2001/10 Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements

Fringe benefits tax - a guide for employers

Reasons for decision

A fringe benefit is defined in subsection 136(1) of the FBTAA, being a benefit provided to the employee or to an associate of the employee by the employer or an associate of the employer in respect of the employment of the employee. However, the definition does not include:

a payment of 'salary or wages' or a payment that would be 'salary or wages' if 'salary or wages' included exempt income for the purposes of the ITAA 1936 (paragraph (f) of the definition of 'fringe benefit' in the FBTAA)

Under Paragraph 32 of TR 2001/10 Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements (TR 2001/10), benefits provided under an effective SSA are not 'salary or wages' within the meaning of that term in subsection 136(1) of the FBTAA but constitute fringe benefits.

According to Fringe benefits tax - a guide for employers (the Guide), an effective SSA involves the employee agreeing to receive part of his or her total amount of remuneration in benefits before the employee has earned the entitlement to receive that amount as salary or wages.

In accordance with the terms and conditions of MA, you are responsible for the collection and payment of the childcare fee for the eligible employees through its Employer Salary Sacrifice Program.

This is evidence that it is your intention to allow your employees to agree to forgo part of their total amount of remuneration in exchange for the provision of childcare services prior to earning the entitlement to that amount of salary or wages. It is therefore concluded that this is a fringe benefit paid under an effective SSA to your employees.

Residual benefit

Subsection 47(2) of the FBTAA provides an exemption from FBT for certain childcare services, where:

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

(i) the provision, or use, of a recreational facility; or

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

(b)  the recreational facility or childcare 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,

the benefit is an exempt benefit.

Section 45 of the FBTAA defines a residual benefit as:

A benefit is a residual benefit for the purpose of this Act if the benefit is not a benefit by virtue of a provision of Subdivision A of Division 2 to 11 (inclusive).

The provision of childcare is not a fringe benefit by virtue of a provision under Divisions 2 to 11. It is therefore a residual benefit as per the section 45 definition.

As the residual benefit consists of the care of children of the employee in a childcare facility, paragraph 47(2)(a) of the FBTAA is satisfied.

Business premises

As outlined in Chapter 20.3 of the Guide, child-minding facilities are exempt benefits if the facilities are provided on employer's business premises for the benefit of employees.

Paragraph 4 of TR 2000/4 Fringe benefits tax: meaning of 'business premises' (TR 2000/4)provides ATO's view of the definition of "business premises". Accordingly, premises are only "business premises" in relation to an employer if two requirements are met:

(a)  the premises or part of the premises are premises "of" the employer; and

(b)  the premises or part of the premises are used by the employer, in whole or in part, for the purposes of their "business operations"

Premises of the employer

Paragraph 7 of TR 2000/4 state that:

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.

Your enter a lease agreement with the Lessor, which allow AMP Services has full occupancy rights in its capacity as Lessee under the lease agreement.

Meaning of 'business operations'

As stated in Paragraph 10 of TR 2000/4, in a situation that the provision of benefits to current employees in the form of childcare being an important factor in recruiting, retaining and otherwise rewarding employees, activities undertaken in connection with the provision of those benefits to employees would be 'business operations' of the employer.

It is evident that it is your intention that you will continue to provide childcare to your employees as part of their wider remuneration and retention of staff strategy.

Independent childcare operator

You have engaged an unrelated Supplier for the provision of the childcare services. The service provision is regulated by the MA between you and the Supplier.

According to Paragraph 55-57 of TR 2000/4, premises upon which childcare services provide to employees by independent provider can be deemed as business premises, only if all following minimum requirements have met:

a)    the management agreement with the childcare operator operates on an ordinary and arm's length basis.

As You and the Supplier are unrelated entities. it is accepted that the management agreement operates on an arm's length basis.

b)    the management agreement be able to be terminated on normal commercial grounds.

It is evident that the MA grants you extensive rights of termination.

c)    where the management agreement is terminated, there be no impediment to another childcare operator being engaged to manage and operate the facility on the particular premises.

Pursuant to certain clauses of the MA, the Supplier must develop a transition out plan in respect of the services to ensure a seamless transition of services to another supplier.

This indicates that the MA creates no impediment to another childcare operator being engaged to manage and operate on the same premise.

d)    the document granting the employer or employers tenure or occupancy rights operate on normal commercial grounds.

We reviewed copy of lease agreement between you and the Lessor in respect of the premises. We agreed that it is an ordinary commercial lease agreement.

e)    the termination of the management agreement not require termination of the employer's or employers' tenure or occupancy rights, nor should the rights under the tenure or occupancy rights agreement (for example, amount of rental, conditions of occupancy) be affected in any way.

f)     the management agreement and tenure or occupancy rights agreement operate independently of each other.

In relation of point e) and f) above, both agreements operate separately from each other. The termination of the MA does not result in the termination of the Lease. It will not bear on any of your obligations under the Lease.

g)    the calculation of rentals under the tenure or occupancy rights agreement, management fees and childcare fees be commercially based and independent of each other.

The rental amount payable under the Lease reflects the commercial rental rate for premises of this size in this location.

h)    the risks held by the various parties be consistent with the relevant premises being those of the employer or employers (for example, risks in respect of flow of funds, insurance, etc).

It is evident that you retain financial risk under the Lease in respect of the premise.

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

Pursuant to certain clauses of the Lease, you hold the occupancy rights in relation to the premise.

You entered a Site Licence Agreement with the Supplier (as Licensee) which grants the Supplier the right to enter the premises for the purpose of providing the services.

j)      the composite rights of control over the service provider, e.g., the right of termination, 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 give rise to the inference that the activity is not 'business operations' of the employer or employers.

Pursuant to the terms and conditions of the MA, it evident that you have the right to terminate the services where the Supplier fails to meet service levels.

We have considered the requirements outlined in TR 2000/4 and consider that paragraph 47(2)(b) of the FBTAA is also satisfied.

Conclusion

Your provision of child care to employees as part of a SSA is an exempt residual benefit under subsection 47(2) of the FBTAA as all of the eligible requirements for the exemption are met.