Private ruling: Fringe benefits tax
Date of advice: 26 February 2016
Published: April 2016
Ruling period: FBT year ending 31 March 2017 | FBT year ending 31 March 2018 | FBT year ending 31 March 2019
Date scheme commenced: The scheme has commenced

Ruling: Q1: Will employees who enter into salary sacrifice arrangements (SSA) for the provision of child care receive a fringe benefit from the Employer pursuant to subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A1: No. The benefit provided by the Employer to its employees under the child care SSA will be an exempt residual benefit under subsection 47(2) of the FBTAA. A fringe benefit does not include a benefit that is an exempt residual benefit pursuant to paragraph 136(1)(g) of the FBTAA. | Q2: Is the Employer exempt from paying fringe benefits tax (FBT) on the benefit provided to its employees under the child care SSA? | A2: Yes.

Relevant facts and circumstances: The Employer entered into a contract with the Supplier for the provision of child care services located in the CBD. The Employer leases the premises in the CBD. Copies of the following documentation were provided: • the Management Agreement (MA) between the Employer and the Supplier • the Lease Agreement between the Employer and the Lessor • the Site Licence Agreement (SLA), and • documents detailing the Employer's retention, recruitment and remuneration strategies. The Employer will provide child care services to your employees as part of a wider remuneration and retention of staff strategy through a salary sacrifice arrangement (SSA).

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 Section 45 | Fringe Benefits Tax Assessment Act 1986 Subsection 47(2). | Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Reasons for decision: Summary: Subsection 47(2) of the FBTAA provides an exemption from fringe benefits tax for the provision of child care when certain conditions are satisfied. It states: 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 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, the benefit is an exempt benefit. Therefore, the provision of 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). | Detailed Reasoning - 1. Is the benefit a residual 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). As set out above under the proposed arrangement the Employer will enter into a: a. MA with the Supplier to manage the services and care for the Employer's employees' children, and b. a salary sacrifice arrangement with employees who wish to utilise the child care services. Under the terms of these agreements: • the Employer will pay the Supplier child care fees that relate to its employee's children in accordance with the MA; and • the employee's salary will be reduced by the amount that the Employer pays to the Supplier for the care of their children In such a situation the benefit to be provided to the Employer's employees will be the care of their children. As this does not come within divisions 2 to 11 of the FBTAA it will be a residual benefit. | Detailed Reasoning - 2. Will the benefit be provided to a current employee?: Under the terms of the above Agreements the Employer will only pay for the cost of providing child care to children of its current employees. | Detailed Reasoning - 3. Will the benefit consist of the care of children?: As discussed above, the benefit consists of the care of the children of the employee. | Detailed Reasoning - 4. Will the children be cared for in a child care facility: A child care facility is defined within subsection 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 more than two children under the age of six in a non-residential child care centre. | Detailed Reasoning - 5. 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 there are two requirements that 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 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 TR 2000/4 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'. | Detailed Reasoning - 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. The Employer has entered a lease agreement with the owner of the building for the area occupied by the child care centre which will be used for the care of its employees' children. Paragraph 7 of TR 2000/4 states that where a person has ownership of premises or exclusive occupancy rights as lessee, the premises would ordinarily be described as premises of the person. The Employer has a lease for the premises on which the childcare centre is located, as lessee the Employer has exclusive occupancy rights and therefore has the necessary right to possession of the premises. | Detailed Reasoning - 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 employee's children, paragraph 57 of TR 2000/4 provides the minimum requirements to be incorporated into the arrangement for the operations to be considered the business operations of the employer. | Detailed Reasoning - The management agreement with the child care operator operate on an ordinary and arm's length basis: The MA between The Employer and the Supplier details: • the fees to be paid to the Supplier for the care of the children of the Employer's employees. The fees can only be changed annually if there is a change in the underlying cost of providing the services and if the Supplier provides written evidence and justification of the change in costs • the MA sets out the requirements to be met by the Supplier • the MA provides a statement of the services to be provided by the Supplier, and • the MA details termination rights. In considering these factors it is accepted that the agreement operates in a manner that would be expected where an employer engages a child care operator to manage the employer's child care centre. | Detailed Reasoning - The management agreement is able to be terminated on normal commercial grounds: The MA details the grounds on which the agreement can be terminated. These grounds are accepted as being on normal commercial grounds. Where the management agreement is terminated, there is no impediment to another child care operator being engaged to manage and operate the facility on the particular premises This condition is met. | Detailed Reasoning - The document granting the employer or employers tenure or occupancy rights operate on normal commercial grounds: This condition is met. The Employer's lease over the premises is with a third party and is separate to the MA it has with the Supplier. The termination of the management agreement should 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 There are no clauses in the MA that require the termination of the lease in the event of the termination of the MA, or that affect the conditions of the lease. | Detailed Reasoning - The management agreement and tenure or occupancy rights agreement operate independently of each other: This condition is met as the Management Agreement and the Lease will operate independently of each other. The calculation of rentals under the tenure or occupancy rights agreement, management fees and child care fees be commercially based and independent of each other This condition is met. The MA sets out the child care fees and the conditions in which the fees will be adjusted. The lease agreement and the MA are separate documents independent of each other. 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) Under the terms of lease the Employer is liable for the lease expenses and maintaining public liability insurance. The Employer is also liable to pay for all the committed child care places under the MA. | Detailed Reasoning - The tenure and occupancy rights as they affect the child care facility come from the employer or employers, rather than the operator: The Employer's occupancy rights are from the lease agreement, not from the Supplier. 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. 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 the Employer's situation it is accepted the Employer 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 the Employer's business premises it is necessary to be able to distinguish the Employer's 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 the Employer's circumstances, the following factors support the childcare activities being part of the Employer's business operations: • the occupancy of the premises by the Supplier is determined by the Site Licence and the Management Agreement • if the agreement with the Employer's Supplier is terminated there is no impediment to another operator being engaged to operate the childcare centre • the Employer's employees have a priority of access to positions • the child fees charged are subject to the Employer's approval; and • the reporting and service standards that are required to be met by the Employer's Supplier Therefore, the Commissioner accepts that the child care facility is located on the business premises of the Employer and the child care activities are part of the Employer's business operations. In conclusion, the benefit provided by the Employer to its employees under the child care SSA will be an exempt residual benefit under subsection 47(2) of the FBTAA. A fringe benefit does not include a benefit that is an exempt residual benefit pursuant to paragraph 136(1)(g) of the FBTAA. Accordingly, no fringe benefit will arise from the provision of child care by the Employer to the children of their employees.