Private ruling: Fringe Benefits Tax – Exempt benefits – Exempt residual benefits - Other
Date of advice: 21 September 2017
Published: February 2018
Ruling period: Period ending 31 March 2018
Date scheme commenced: Not yet commenced.

Ruling: Q1: Is the child care facility located on the business premises of the employer or of a “company” related to the employer, pursuant to paragraph 47(2)(b) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A1: No.

Relevant facts and circumstances: The employer is located in a Building. The Building is owned by a Commonwealth entity which leases part of the Building to the employer for use in its day-to-day activities. The child care facility is a day care centre located in the relevant Building. The child care facility is operated by a not-for-profit community based organisation (child care operator) providing a diverse range of community services. The Commonwealth entity has entered into a commercial lease agreement with the child care operator. Under the terms of this lease agreement: ● the child care operator has been expressly permitted to use part of the Building to operate a child care centre; ● the Commonwealth entity is able to terminate the lease agreement on normal commercial terms, which would include the right to terminate the lease agreement where there has been a significant breach of the terms by the child care operator. Additionally, both parties are able to terminate the lease agreement on mutual terms. Employees of the employer have enrolled their children at the child care facility. Neither the employer nor the Commonwealth entity has a Management Agreement in place with the child care operator. Both the employer and the Commonwealth entity constitute a “Department” as defined in the Fringe Benefits Tax (Application to the Commonwealth) Act 1986 .

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 Section 47 | Subsection 47(2) | Paragraph 47(2)(b) | Subsection 136(1) | Fringe Benefits Tax (Application to the Commonwealth) Act 1986 Subsection 3(1) | Section 4.

Reasons for decision: Summary: The child care facility is not located on the business premises of the employer or of a “company” related to the employer, pursuant to paragraph 47(2)(b) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). | Detailed Reasoning - Detailed reasoning: In relation to the child care exemption provided for in subsection 47(2) of the FBTAA, paragraph 47(2)(b) of the FBTAA states: (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; 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... Taxation Ruling TR 2000/4 Fringe benefits tax: meaning of ‘business premises’ (TR 2000/4) considers the question of what constitutes business premises for the purposes of the FBTAA. Paragraph 4 of TR 2000/4 provides that 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. ● The second requirement is that the premises or part of premises must be used by the person, in whole or in part, for the purposes of their business operations. Paragraph 7 of TR 2000/4 provides 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. Paragraph 9 of TR 2000/4 provides that the term ‘business operations’ in the definition of ‘business premises’ includes a wide range of activities. In addition to including activities undertaken by a person in the ordinary course of carrying on a business, they also include those activities that, although not undertaken in the ordinary course of carrying on a business, are nevertheless undertaken in the course of carrying on a business. The term ‘business operations’ is defined in subsection 136(1) of the FBTAA in relation to a government body or a non-profit company to include any operations or activities carried out by that body or company. Pursuant to paragraph 12 of TR 2000/4, 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 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. Alternatively, if the employer is in a group of related companies and the child care facility is not ‘business premises’ of the employer, then the child care facility must be located on ‘business premises’ of a related company. Paragraph 20 of TR 2000/4 goes on to state that 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. | Detailed Reasoning - Control over the premises: 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; (1998) 40 ATR 76 ( Esso ) 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. Paragraph 49 of TR 2000/4 also provides that in most situations where premises are owned or held under a normal commercial lease, both possession and control exist. The employer leases the premises they currently occupy at the Building for use in its day-to-day activities from the Commonwealth entity. The child care operator has a commercial lease agreement with the Commonwealth entity to lease the premises they currently occupy on the ground floor of the Building to operate a child care centre. Whilst the employer may have a right of possession and control over the use of the premises that it occupies at the Building, that does not include the premises occupied by the child care operator. Therefore, the part of the premises on which the child care facility is located cannot be considered to be the premises of the employer. | Detailed Reasoning - Premises used for the employer's business operations: The ruling clarifies that the operations of facilities as child care facilities, are operations that would be business operations. Paragraph 43 of TR 2000/4 states: As indicated in this Ruling, the provision of benefits to employees in the form of child care would be an important factor in recruiting, retaining and otherwise rewarding employees. Having regard to the views expressed above, activities undertaken in connection with the provision of those benefits (or indeed the provision of recreational, car parking or health care facilities) to employees would be 'business operations' of the employer who carried on the business or carried out the profit making undertaking. Thus, if that employer were to use its premises for operating a child care facility on the premises, that activity would be regarded as 'business operations'. Paragraph 44 of TR 2000/4 states: ... premises would be 'used … for the purposes of business operations' where they are used exclusively for the operations of a child care facility". This was the express view of Merkel J in Esso Australia Ltd v. FC of T 98 ATC 4953 at 4957; (1998) 40 ATR 76 at 80; 157 ALR 652 at 656: ‘Once it is accepted that the provision of benefits to employees in the form of child care at business premises of an employer is an important factor in recruiting, retaining and otherwise rewarding employees and, as such, is part of the business operations of the employer, it does not seem to be relevant whether the child care facilities are located at the premises where the employer carries out other business operations, or are located at premises of the employer which have been procured solely for the purpose of the provision of a child care facility thereon…’ In determining whether the child care activities amount to the employer's 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 either by itself, or jointly with one or more other employers, engages an independent child care operator under a management agreement to care for employee's children, paragraph 57 of TR 2000/4 provides that the following minimum requirements should be incorporated into the arrangement: i. The management agreement with the child care operator should operate on an ordinary and arm's length basis. ii. The management agreement should be able to be terminated on normal commercial grounds. iii. 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. iv. The document granting the employer or employers tenure or occupancy rights should operate on normal commercial grounds. v. 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. vi. The management agreement and tenure or occupancy rights agreement should operate independently of each other. vii. 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. viii. 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). ix. The tenure and occupancy rights as they affect the child care facility should come from the employer or employers, rather than from the operator. x. 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. Paragraph 58 of TR 2000/4 provides that failure to observe the minimum requirements means it is unlikely an employer would be able to demonstrate it has the requisite possessory entitlement and degree of control. Consequently, an employer in this situation will have difficulty establishing that the care of the children was being carried on its premises and that the care of children of their employees amount to one of its ‘business operations’. The employer does not have a management agreement in place with the child care operator. As a result the employer cannot meet the business operations requirement as outlined above. | Detailed Reasoning - Conclusion: Therefore, as the premises on which the child care services are conducted are considered not to be the employer’s business premises, this requirement will not be satisfied. | Detailed Reasoning - Business premises of a company related to the employer: Where child care is not provided to the children of employees on the employer's own business premises, the exemption under subsection 47(2) of the FBTAA will apply if child care is provided in a child care facility on the business premises of a company that is related to the employer. Paragraph 64 of TR 2000/4 states: Where the employer claims the child care facility is located on ‘business premises’ of a related company, it is necessary for the related company to have the requisite possessory rights in respect of the premises and to use those premises for business operations of the related company. It is only by having such rights and such use in respect of the premises that the related company would satisfy the requirements of the definition of ‘business premises’. | Detailed Reasoning - Company related to the employer: The Fringe Benefits Tax (Application to the Commonwealth) Act 1986 (Application Act) provides for the notional application of fringe benefits tax in relation to benefits provided in respect of employment of Commonwealth employees. Section 4 of the Application Act considers the application of the FBTAA in relation to Commonwealth employment as follows: Subject to this Act and to such modifications as are prescribed, the Assessment Act applies, in respect of any matter or thing in respect of the employment of a Commonwealth employee, as if: (a) the employee were employed by the responsible Department and not by the Commonwealth; (b) the responsible Department were a company and each other Department, and each authority of the Commonwealth, were a company related to the responsible Department; and (c) the responsible Department were a government body. Subsection 3(1) of the Application Act defines “Department” to mean: a) a Department of State; (b) a Department of the Parliament established under the Parliamentary Service Act 1999 ; or (c) an Executive Agency or Statutory Agency (within the meaning of the Public Service Act 1999 ). Subsection 3(1) of the Application Act also defines “responsible Department”, in relation to the employment of a Commonwealth employee, to mean: (a) where the remuneration in respect of that employment is or was paid wholly or principally out of money appropriated under an annual Appropriation Act - the Department in respect of which the money was appropriated; and (b) where the remuneration in respect of that employment is or was paid wholly or principally out of money appropriated under an Act other than an annual Appropriation Act: (i) if the employee performs or performed the duties of that employment in, or in respect of, a Department - that Department; or (ii) in any other case - the Department of State administered by the Minister who administers the Act under which that money was appropriated, insofar as the Act appropriated that money; and (c) where the remuneration in respect of that employment is or was paid wholly or principally out of money appropriated by the Constitution - the Finance Department. The Commissioner accepts that both the employer (who is a Commonwealth employer) and the Commonwealth entity are a “Department” as defined in subsection 3(1) of the Application Act. In determining who the responsible Department is in relation to the employment of a Commonwealth employee we need to consider where the money is appropriated from in order to fund the remuneration in respect of that employment. In this case the employer is the responsible Department as their employees are remunerated out of money appropriated under an annual Appropriation Act as per paragraph (a) of the definition of “responsible Department” in subsection 3(1) of the Application Act. In accordance paragraph 4(b) of the Application Act, the employer and the Commonwealth entity are both treated as if they were a company and related to each other for the purposes of the FBTAA. As such, the Commonwealth entity is accepted as being a company that is related to the employer for the purposes of subparagraph 47(2)(b)(ii) of the FBTAA. | Detailed Reasoning - Control over the premises: Paragraph 50 of TR 2000/4 states: It should be noted that situations do arise where a person has ownership of premises, while at the same time another person has exclusive occupancy rights as lessee of the premises, and so the premises could be described as each of those persons. In other words, the premises could, in a particular period, be described as the premises of the owner and the premises of the lessee… The Commonwealth entity owns the Building, the premises in which the child care facility is operated by the childcare operator. Therefore, the premises are considered to be the premises of the Commonwealth entity. | Detailed Reasoning - Premises used for the employer's business operations: The lease agreement between the Commonwealth entity and the childcare operator grants the operator the right to lease the premises for the purpose of a child care facility, to occupy and use the premises for that purpose. The leasing of the Building to both the employer and the child care operator would be considered to amount to one of the Commonwealth entity’s business operations. However, as the Commonwealth entity does not have a management agreement in place with the child care operator it cannot meet the minimum requirements as outlined above in paragraph 57 of TR 2000/4 in order to demonstrate that the child care facility amounts to one of its business operations. | Detailed Reasoning - Conclusion: Therefore, whilst the Commonwealth entity owns the Building and leases premises to the child care operator for the purpose of a child care facility, these premises cannot be described as the business premises of the Commonwealth entity. Further, they cannot be business premises of a company that is related to the employer, as per paragraph 47(2)(b) of the FBTAA.