Edited version of private advice

Authorisation Number: 1052120377159

Date of advice: 29 May 2023

Ruling

Subject: FBT - capping threshold

Question 1

Is the Hospital considered a "public hospital" under Step 2, paragraph (c) of the Method Statement in subsection 5B(1E) of the Fringe Benefits Tax Assessment Act 1986 ("FBT Act")?

Answer

No

Question 2

Is the Hospital considered a hospital as described in subsection 57A(4) for the purposes of paragraph (d) of Step 2 of the Method Statement in subsection 5B(1E) of the FBT Act?

Answer

No

Question 3

Should the aggregate non-exempt amount for the Hospital for the current and subsequent tax years be worked out under Step 3 of the Method Statement in subsection 5B(1E) of the FBT Act?

Answer

Yes

This ruling applies for the following period:

Year ended 31 March 20XX

Year ended 31 March 20XX

Year ended 31 March 20XX

Year ended 31 March 20XX

The scheme commenced on:

1 April 20XX

Relevant facts and circumstances

The Hospital is a not-for-profit and fully operational hospital. It is privately owned and is not controlled by the government or any relevant government bodies.

The Hospital is registered as a charity with the Australian Charities and Not-for-Profits Commission ("ACNC"), with the charity subtypes that include "Public Benevolent Institution" ("PBI").

The Hospital provides private health services which are paid for by patients on a "fee for service" basis. The Hospital holds contracts with registered Australian Private Health Insurers ("PHIs") who sell products that provide various levels of insurance cover. The contracts held with each of these PHIs determine the terms and conditions and associated benefits paid on behalf of an insured patient.

The Hospital is an Australian incorporated organisation which is registered as a charity with the Australian Charities and Not-for-Profits Commission ("ACNC"), with the charity subtypes that include "Public Benevolent Institution" ("PBI").

Most of the fees incurred by patients for private health services received at the Hospital are funded by way of partial or full reimbursement from a private health fund of the patient. Alternatively, fees are paid by the patient directly (but this does not occur very often).

In addition to this, there are care agreements with the state government, for whom the Hospital provides medical and surgical services. These services are specified in an agreement which specifies that the Hospital must provide a defined volume of services (which is specifically capped) on behalf of the state government. Once the service volume cap has been reached, the Hospital is unable to provide further services the state government under the agreement. This also requires that Hospital provide a defined volume of services (which is specifically capped) on behalf of the state government. Should the requirement for services not be met (i.e. there is no surgical waitlist), then state government will not actively engage the Hospital for this purpose.

These agreements are freely negotiated and voluntarily entered into by the Hospital with the state government. These contracts are funded via a "fee for service" arrangement with an extension of the state government. As such, from the Hospital's perspective, no free services are provided, but rather, the healthcare services are paid for by the government, as opposed to directly by a patient or health fund.

Further in limited cases, other third parties provide payment to the Hospital on behalf of patients who qualify for relevant financial support in relation to fees incurred by them for private health services provided by the Hospital. Other income is also received in the form of donations and investments. Therefore, the Hospital does not provide any services for no consideration.

Relevant legislative provisions

Subsection 5B(1E) of the Fringe Benefits Tax Assessment Act 1986

Section 57Aof the Fringe Benefits Tax Assessment Act 1986

Subsection 65Jof the Fringe Benefits Tax Assessment Act 1986

Section 123C of the Fringe Benefits Tax Assessment Act 1986

Reasons for decision

Question 1

Is the Hospital a public hospital under Step 2, paragraph (c) of the Method Statement in subsection 5B(1E) of the Fringe Benefits Tax Assessment Act 1986?

Summary

The Hospital is not considered to be a public hospital for the purposes of paragraph (c) of Step 2 of the Method Statement in subsection 5B(1E) of the FBTAA.

Detailed reasoning

The term "public hospital" has not been defined in the Fringe Benefits Tax Assessment Act 1986(FBTAA). However, there have been cases where the meaning of "public hospital" has been considered in similar contexts. These cases include The Little Company of Mary (SA) Incorporated v The Commonwealth (1942) 66 CLR 368 (Little Mary), Australian Hospital Care (Latrobe) Pty Ltd v Commissioner of Taxation [2000] FCA 1509 (Latrobe).

In the court case of The Little Company of Mary (SA) Incorporated v The Commonwealth (1942) 66 CLR 368 (Little Mary) it was ruled that the hospital was not a "public hospital", despite being a not-for-profit, as:

•      Was under denominational control, being the Sisters in the State of South Australia of the Congregation of the Little Company of Mary, a congregation of nursing sisters of the Roman Catholic Church.

•      There was no public control and no obligation to continue operating the hospital for any purpose.

•      Did not offer any general "right of admission" to the public, namely any free or publicly funded services; whilst no group was precluded from accessing services, the hospital charged fees for all services

•      Did not rely on public funding or grant, instead generating revenue from the fees it charged.

Further for the court case of Australian Hospital Care (Latrobe) Pty Ltd v Commissioner of Taxation [2000] FCA 1509 (Latrobe), the court ruled similarly despite the Latrobe providing health care services. It was ruled not to be a "public hospital" based on the following factors:

•      The hospital was privately-owned and run to profit its members.

•      Whilst the hospital had obligations to provide free public health services to the public, and was controlled by the State, these controls arose out of voluntary undertakings under contracts entered into by the hospital.

•      Whilst the hospital received state funding, this funding was primarily in the form of payments for the free health services it was providing under contract.

•      A range of indicators from these cases emerged from these cases that can assist in considering whether a hospital satisfied the meaning of "public hospital".

•      The ownership of the hospital and whether it is run for profit.

•      The level of public/government control over the hospital's operations (and whether any control is regulated or arises voluntarily by contract).

•      Whether the hospital offers free/public-funded services to the public, or if it changes fees for it services.

•      Whether the hospital is funded by public grant or is self-funded.

However, despite these indicators of a 'public hospital', the Full Federal Court in Commissioner of Taxation v Hunger Project Australia [2014] FCAFC 69 has, in the context of the FBTAA, abstained from approaching a question about the ordinary or common meaning of a word or expression '... as a legal question to be dealt with by the mechanical application of past authority, irrespective of the present current understanding of the expression in the currently spoken English language...' or whether its meaning could be gleaned from other statutes which may use the same term.

It should be noted that there has been Commonwealth legislation which has distinguished between a 'public hospital' and a 'private hospital'. For example, paragraph 121-5(8) of the Private Health Insurance Act 2007 requires that the Minister for Health's declaration that a facility is a 'hospital' must include a statement as to whether the hospital is a public hospital or private hospital. The Australian Institute of Health and Welfare's Glossary, accessed 14 June 2021, contains the following definitions:

•         Public Hospital: A hospital controlled by a state or territory health authority. Public hospitals offer free diagnostic services, treatment, care, and accommodation to all eligible patients.

•         Private Hospital: A privately (non-government) owned and operated institution catering for patients who are treated by a doctor of their own choice. Patients are charged fees for accommodation and other services provided by the hospital and relevant medical and paramedical practitioners. Acute care and psychiatric hospitals are included in this category as are private free-standing day facilities.

The term 'private hospital' is not used in the FBTAA, and such hospitals may be operated by not-for-profit or for-profit entities. The FBTAA does not provide any concessional treatment by way of a per-employee exemption cap for a for-profit entity that operates a private hospital.

In regard to PBI's, Section 123C of the FBTAA deals with the endorsement of a PBI, which states that:

(1)     The Commissioner must endorse an entity as a public benevolent institution if:

(a)  the entity is entitled to be endorsed as a public benevolent institution (see subsection (2)); and

(b)  the entity has applied for that endorsement in accordance with Division 426 in Schedule 1 to the Taxation Administration Act 1953.

(2)    An entity is entitled to be endorsed as a public benevolent institution if the entity:

(a)  is a registered public benevolent institution; and

(b)  has an ABN; and

(c)   is not an employer in relation to which step 2 of the method statement in subsection 5B(1E) applies.

This would therefore mean a registered PBI cannot be endorsed as a PBI if it, amongst other things, is a 'public hospital'.

Applying the above indicators to your circumstances, The Hospital charges fees for services (thus being self-funded). The vast majority of the funding for the Hospital is from payments received for providing private health services on a "fee for service" basis, which are funded either by way of reimbursement from a private health fund of the patient or paid by the patient directly.

In relation to the government funding, the Hospital enters into agreements with the state government to provide public health services capped at the agreed amount. These agreements are freely negotiated and voluntarily entered into by the Hospital with the state government. These contracts are funded via a "fee for service" arrangement with the local government body. Any public health services provided to patients of the Hospital are paid for on a "fee for service" basis via the agreements entered into with the state government. In limited cases private health services are paid for via third parties including the DVA.

The Hospital is privately owned and is not controlled by the government or any government body. Additionally, there is no control over the Board of Directors of the Hospital or daily operations. As such, there is no government control of the operations of the Hospital.

The Hospital cannot be treated as a public hospital for the following reasons:

•        Is privately owned (despite being a not-for-profit structure).

•        Is not owned by or controlled by any government entity.

•        Does not provided services for nil consideration.

•        Receives its vast majority of the funding come from payments received for providing private health services on a "fee for service" basis, which are partially funded either by way of reimbursement from a private health fund of the patient, or through the Commonwealth Medicare Scheme, or paid by the patient directly.

•        In limited cases private health services are paid for via third parties including the DVA.

•        Provides limited medical and surgical services in agreement with the state government. These services are specified in an agreement which specifies that The Hospital must provide a defined volume of services (which is specifically capped) on behalf of the state government. Once the service volume cap has been reached, The Hospital is unable to provide further services to the state government under the agreement.

•        This agreement is freely negotiated and voluntarily entered into with the state government. These services are funded under a "fee for service" arrangement with the local government body.

Therefore, The Hospital should be considered a "private Hospital". Additionally, as the Hospital is a registered PBI endorsed under section 123C of the FBTAA, it cannot be considered a "public hospital".

Accordingly, the Hospital is not a public hospital under Step 2 paragraph (c) of the Method statement in subsection 5B(1E) of the FBTAA.

Question 2

Is The Hospital a hospital described in subsection 57A(4) for the purposes of paragraph (d) of Step 2 of the Method Statement in subsection 5B(1E) of the Fringe Benefits Tax Assessment Act 1986

Answer

No

Summary

The Hospital is not considered a "hospital" described in subsection 57A(4) for the purposes of paragraph (d) of Step 2 of the Method Statement in subsection 5B(1E) of the FBTAA.

Detailed reasoning

Step 2(d) applies when" the employer is a hospital described in subsection 57A(4) (which is about hospitals carried on by certain societies and associations that are exempt from income tax).

Section 57A(4) of the FBTAA describes a hospital carried on by a society or association that:

(a)  is exempt from income tax under Division 50 of the ITAA 1997; and

(b)  is not a company referred to in paragraph 65J(5)(a) or (b); and

(c)   is not a registered public benevolent institution or registered health promotion charity.

As per the facts, the Hospital has been registered as a PBI that has been endorsed by the ACNC. Therefore Section 57A(4) would not apply and Hospital would not be a hospital described under paragraph d of step 2 of the Method statement in subsection 5B(1E) of the FBTAA.

Question 3

Should the aggregate non-exempt amount for the Hospital for the current and subsequent tax years be worked out under Step 3 of the Method Statement in subsection 5B(1E) of the Fringe Benefits Tax Assessment Act 1986?

Answer

Yes

Summary

Step 3 of the Method Statement in subsection 5B(1E) of the FBTAA would apply such that the individual grossed-up non-exempt amount of benefits provided to each employee would be reduced by the higher FBT exemption cap of $30,000 (but not below nil).

Detailed reasoning

The exempt amount is determined by reference to the employer's 'aggregate non-exempt amount' in accordance with the Method Statement in subsection 5B(1E) of the FBTAA, which states:

Step 2. If:

(a)  the employer is a government body and the duties of the employment of one or more employees are as described in paragraph 57A(2)(b) (which is about duties of employment being exclusively performed in or in connection with certain hospitals); or

(b)  the employer is a public hospital; or

(c)   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; or

(ca) the employer is a hospital described in subsection 57A(4) (which is about hospitals carried on by societies and associations that are rebatable employers);

(d)  subtract $17,000 from the individual grossed-up non-exempt amount for each employee of the employer referred to in paragraph (c), (ca) or (d), or each employee referred to in paragraph (b), for the year of tax. However, if the individual grossed-up non-exempt amount for such as employee is equal to or less than $17,000, the amount calculated under this step for the employee is nil.

Step 3. If step 2 does not apply in respect of one or more employees of the employer, reduce the individual grossed-up non-exempt amount for each such employee by $30,000, but not below nil.

As outlined earlier, the Hospital is not:

• a public hospital for the purposes of paragraph (c) of Step 2 of the Method Statement in subsection 5B(1E) of the FBT Act; nor
• a hospital described in subsection 57A(4).

In addition, as outlined in the facts provided, the hospital:

• is not a government body for the purposes of paragraph (b) of Step 2 of the Method Statement in subsection 5B(1E) of the FBT Act; and
• does not provide public ambulance services or services that support public ambulance services for the purposes of paragraph (ca) of Step 2 of the Method Statement in subsection 5B(1E) of the FBT Act.

This means that Step 2 would not apply to this requirement and therefore, Step 3 of the Method Statement in subsection 5B(1E) of the FBTAA would apply in the current circumstances. This means that the individual grossed-up non-exempt amount of benefits provided to each employee would be reduced by the higher FBT exemption cap of $30,000 (but not below nil).