Edited version of private advice

Authorisation Number: 1052344491592

Date of advice: 24 December 2024

Ruling

Subject: FBT - capping thresholds

Question

Are each of the hospitals operated by the Employer a 'public hospital' under paragraph (c) in Step 2 of the Method Statement in subsection 5B(1E) of the Fringe Benefits Tax Assessment Act 1986?

Answer

No.

This ruling applies for the following periods

Fringe Benefits Tax (FBT) year ending 31 March 20YY

FBT year ending 31 March 20YY

FBT year ending 31 March 20YY

FBT year ending 31 March 20YY

FBT year ending 31 March 20YY

The scheme commenced on

1 April 20YY

Relevant facts

The Employer is a charity registered with the Australian Charities and Not-for-Profits Commission (ACNC) which, either itself or through entities which it owns, operates public and private hospitals, and aged care facilities. The Employer is owned by a religious institution.

The Employer conducts no other activities apart from operating these hospitals and is a not-for-profit organisation. The Employer is funded substantially by patients on a 'fee for service' basis, with much of that by way of reimbursement from the large health funds, together with 'out of pocket' costs funded by the patients themselves. The remaining funding is largely government funding provided under service contracts voluntarily entered into by the Employer.

Almost all of the government funding is provided to one hospital which receives its funding from a State government under a service contract voluntarily entered into.

Employees of the Employer's public hospital entities are employed to work solely at public hospitals, apart from de minimis secondments.

Similarly, employees who work at the Employer's private hospitals are employed to work solely at private hospitals, apart from de minimis secondments.

There is a segregation, both by legal entity and by who performs services, between employees in the Employer's public and private hospitals.

None of the private hospitals operated by the Employer are bound to provide services to the public by government regulation. Each of the private hospitals of the Employer also do not provide free or 'pro bono' services (with the exception of one private hospital which provides negligible free or 'pro bono' services).

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 subsection 5B(1E)

Fringe Benefits Tax Assessment Act 1986 section 57A

Fringe Benefits Tax Assessment Act 1986 section 123C

Reasons for decision

Question

Are each of the hospitals operated by the Employer a 'public hospital' under paragraph (c) in Step 2 of the Method Statement in subsection 5B(1E) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Summary

Each of the 'private' hospitals operated by the Employer are not considered to be a 'public hospital' under paragraph (c) in Step 2 of the Method Statement in subsection 5B(1E) of the FBTAA. It is noted that 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

Relevant law

Under section 57A of the FBTAA, benefits provided by the following employers in respect of the employment of an employee are exempt from FBT up to a specified cap:

•                     registered Public Benevolent Institutions (PBIs) endorsed under section 123C of the FBTAA

•                     registered health promotion charities

•                     public and not-for-profit hospitals

•                     government employers whose employees work in public and not-for-profit hospitals, and

•                     public ambulance services.

Section 123C of the FBTAA deals with the endorsement of a PBI, which states that:

123C(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.

123C(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.

Benefits provided by the employers listed above will be exempt where the total grossed-up value of certain benefits (which are benefits not otherwise exempt) provided to each employee during the FBT year is equal to, or less than, the relevant capping threshold. If the total grossed-up value of certain benefits provided to an employee is more than that capping threshold, the employer will need to pay FBT on the excess.

This 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)          (Repealed by No. 142 of 2003)

(b)          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

(c)          the employer is a public hospital; or

(ca)          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

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

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 that $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.

Therefore, as per Steps 2 and 3 of the Method Statement in subsection 5B(1E) of the FBTAA, registered PBIs which do not operate a public hospital have a higher FBT exemption cap of $30,000 grossed-up value (that is, the value of the benefit plus the notional FBT liability) per employee, while a $17,000 per-employee FBT exemption cap applies to employees of government and non-government public hospitals, and hospitals run by rebatable employers (relevantly, charities that are not PBIs).

As per section 123C of the FBTAA, a registered PBI cannot be endorsed as a PBI if it, amongst other things, is a 'public hospital'. As such, a registered PBI which operates a public hospital is subject to the $17,000 per employee FBT exemption cap.

Meaning of a 'public hospital' and a 'private hospital'

The term 'public hospital' is not defined in the FBTAA. No cases have considered the meaning of 'public hospital' in the context of the FBTAA. Authorities dealing with the meaning of 'public hospital' in other statutes have held the determination is a question of fact. These authorities include Little Company of Mary (SA) Incorporated v Commonwealth [1942] HCA 26 (Little Mary) and Australian Hospital Care (Latrobe) Pty Limited v Commissioner of Taxation [2000] FCA 1509 (Latrobe). Relevantly, the High Court held in Latrobe and Little Mary that not-for-profit hospitals carried on by religious orders were not 'public hospitals'. Those authorities considered the ordinary or common meaning of the term and equivalence between legislation in the same jurisdiction.

In particular, the Court in Little Mary ruled that the hospital was not a 'public hospital', despite being non-profit, as:

•                     it 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

•                     the majority of patients paid for their medical treatment, and there was no offer of free or publicly funded services

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

The principles in Little Mary were followed in Latrobe,which despite providing public health care services, 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 indicia emerge from these cases that can assist in considering whether a hospital satisfies the ordinary meaning of a 'public hospital', which include:

•                     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 charges fees for its services

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

However, despite these indicia 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.

Whilst acknowledging the Full Federal Court's comments, it is noted that Commonwealth legislation has, since at least 1953, distinguished between a 'public hospital' and a 'private hospital'. The Australian Institute of Health and Welfare's Glossary, accessed 23 December 2024, contains the following definitions:

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

•                     Private hospital: A privately 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 by relevant medical allied health practitioners. The term includes acute care and psychiatric hospitals as well as private free-standing day hospital 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.

Aside from any legal meaning of a 'public hospital', there exists a dichotomy between 'public' ('jointly funded by the Commonwealth and the states and territories') and 'private' ('funded through private health insurance and individual out-of-pocket payments') health in Australia's health system. Such health services are provided through 'public' and 'private' hospitals, thus espousing a current ordinary or common understanding of those terms.

Application to your circumstances

The Employer is a registered PBI endorsed under section 123C of the FBTAA.

The Employer has a fully private ownership structure, which is ultimately the religious institution. That is, the Employer is not publicly owned.

The level of public/government control over the Employer is minimal, if any. The Employer is not bound to provide services to the public by any government regulation.

Each of the 'private' hospitals operated by the Employer are a not-for-profit hospital, with each hospital charging fees for its services (thus being self-funded) and provide nil or negligible free or 'pro bono' services. As a result, these hospitals are substantially funded by patients on a 'fee for service' basis, with the minor balance funded by government under service contracts voluntarily entered into. Almost all of this government funding is provided to one hospital which receives its funding from a State government entity under a service contract voluntarily entered into.

Each of the 'private' hospitals operated by the Employer are not considered to be 'public hospitals' for the following reasons:

•                     The hospitals are privately owned.

•                     The level of public/government control is minimal.

•                     The hospitals charge fees for the majority of its services.

•                     The hospitals are self-funded.

In relation to the single hospital that receives minor funding from a State government entity, the funding is provided under service contracts voluntarily entered into, rather than regulated by the State government. The hospital is privately owned and is not controlled by government. In line with the Latrobe case, this particular hospital is not considered to be a 'public hospital'.

As such, in the context of a PBI that operates hospitals, each of the 'private' hospitals operated by the Employer are not 'public hospitals' under the common meaning of the term.

On this basis, subsection 5B(1E) of the FBTAA applies as follows:

•                     Step 2 in the Method Statement in subsection 5B(1E) does not apply to the Employer (a registered PBI) because it is not a:

-                    government body (relevant to paragraph 57A(2)(b)) (which is about duties of employment being exclusively performed in or in connection with certain hospitals)

-                    public hospital (paragraph 57A(3)(a)), or

-                    provider of public ambulance services or services that support those services (paragraph 57A(3)(b).

•                     Step 2 of the Method Statement in subsection 5B(1E) of the FBTAA also does not apply to the Employer as it is not a hospital described in subsection 57A(4) (which pertains to hospitals carried on by societies and associations that are rebatable employers). The Employer does not operate a hospital described in subsection 57A(4) because it, being an entity registered as a PBI under the Australian Charities and Not-for-profits Commission Act 2012, cannot be a rebatable employer under the FBTAA.

•                     Step 3 of the Method Statement provides that if Step 2 does not apply in respect of one or more employees of the employer, the individual grossed-up non-exempt amount for each such employee is reduced by $30,000, but not below nil.

For completeness, the Employer is endorsed as a PBI for the purposes of section 123C of the FBTAA. It is not entitled to be so endorsed if Step 2 of the Method Statement in subsection 5B(1E) applies to it.

Therefore, each of the 'private' hospitals operated by the Employer are not considered to be a 'public hospital' under paragraph (c) in Step 2 of the Method Statement in subsection 5B(1E) of the FBTAA.

It is considered that Step 3 of the Method Statement in subsection 5B(1E) of the FBTAA would apply in the current circumstances 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).