Private ruling: Assessable income
Published: September 2014
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are the fees paid by the Department to the rulee assessable income of the rulee? | A1: Yes. | Q2: Is the rulee a small business entity? | A2: No.

Relevant facts and circumstances: The rulee is an approved family day care service operator. The rulee has entered into contracts with a number of educators who provide the day care to families. As a service operator, the rulee has the following responsibilities: • supporting, monitoring and providing information regarding training for individual educators • ensuring all aspects of its business, including the services provided by the educators, comply with all legal obligations • facilitation of placement of children with the educator(s) • administration of the child care benefit (CCB) and child care rebate(CCR) received from the Department of Education for children in care • checking and uploading individual educators timesheets to facilitate the payment of CCB and CCR • passing on the CCB and CCR payments to the educators, net of fees charged. As a service operator, the rulee must engage one or more educators to provide the day care. The educators are engaged under a contract. Educators are responsible for their own reporting and payment of income tax, insurances and superannuation. The rulee recommends a scale of childcare fees to the educators, but it is the responsibility of the educator to set the childcare fee. An agreement is entered into between the rulee and the educators. This agreement states at clause 19: 19. Recommended fee schedule & Admin Fee [The Service Operator] has provided a recommendation of the fee scale (below), but it is the responsibility of the educator to set the childcare fees. Once the Educator has set the hourly rate they must ensure that all children in their care are charged the same hourly rate. Child care benefit is paid through the scheme to the educator and does not cover the full fee. [The Service Operator] does not take any payment from the parent/guardian. Any amount owing after the CCB has been paid is payable by the parent/guardian directly to the educator. This amount has already been calculated by the DHS when they process the CCB payment. Families not eligible for CCB will be required to fill a Full Fee Paying Customer form. All fees are to be paid on an agreed basis and according to the Parent Agreement document. The Department has overall responsibility for overseeing and regulating the provision of family day care services. The Department have issued several fact sheets on the operation of family day care services. The Department's fact sheet FDC business model fact sheet explains how Family Day Care operates under both national law and family assistance law. The Department's fact sheet 'Key obligations of a Family Day Care service' sets out the responsibilities and obligations of the service provider: 4. Payments types, charging fees and providing statements a) Charging fees .... In order for CCB to be payable, there must be a direct commercial relationship between the family that is paying for the care, and your service. Importantly, it is not your educator that is charging the family for the care, it is your service that is charging the fee. As a consequence, your service is required to include all fees charged on your behalf by your educators in your taxable income. Educators are liable to pay tax on the remuneration they receive from the service. Service operators and educators should seek taxation advice from an accountant, industry body or the Australian Taxation Office if uncertain about their taxation obligations. .... The Department's fact sheet 'Obligations and expectations of Family Day Care educators' sets out the responsibilities and obligations of the educators. This states at section 3: 3. Money arrangements a) Charging fees Under Family Assistance Law, parents must be charged fees by the CCB approved service and not by the educator in order to be eligible for Australian Government fee assistance (eg CCB and CCR). In order for CCB to be payable, there must be a direct commercial relationship between the family that is paying for the care, and the service that is providing the care. ... b) Your remuneration Your remuneration arrangements are different to the fees families are charged by the service operator (or by you on behalf of the service). It is important to understand that families to whom you provide care, on behalf of the service, make payments to the service and not to you personally. Many educators collect money from families; however, when doing so they are collecting on behalf of the service. How this money is handled (i.e. passed to the service operator, and/or offset against remuneration the service owes the educator, etc.) is a matter to be negotiated and agreed between the service operator and each educator. As outlined above, under the family assistance law it is the service, not the educators that charge families for care. Also, after CCB is calculated if there is an outstanding gap fee for a family, legally the family owes that money to the service; not to you personally. For the income year the rulee received over $2 million in fees from the Department. For the immediate preceding income year, the rulee received over $2 million in fees from the Department.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 328-110 | Income Tax Assessment Act 1997 Section 328-115 | Income Tax Assessment Act 1997 Section 328-120

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) includes income according to ordinary concepts (ordinary income) in an Australian resident taxpayers assessable income when it is derived directly or indirectly from all sources, whether in or out of Australia, during the income year. In order for the Commissioner to rule on whether or not the fees received by the rulee in its capacity as a family day care service operator, constitute part of the rulee's assessable income, the Commissioner will need to decide if fees paid to the rulee are derived by the rulee in its own right. Accordingly, it is necessary to determine if the fees received by the rulee are as an agent of another entity, and not for its own benefit. If the rulee is acting as agent for the education providers it will not have derived any income. Family day care services operators The main laws governing family day care services are contained in Commonwealth family assistance law (collectively referred to as the 'family assistance law') is regulated by the Commonwealth Department of Education: • A New Tax System (Family Assistance) Act 1999 • A New Tax System (Family Assistance) (Administration) Act 1999 • Child Care Benefit (Eligibility for Approval and Continued Approval) Determination 2000 • Other legislative instruments made under the two acts above. The law is administered by the relevant state or territory. In relation to the state family day care businesses these are: • Education and Care Services National Law Act 2010 (Vic) • Education and Care Services National Regulations Under the family assistance law, it is the family day care service operator that registers and gains approval to operate a family day care business. The service operator will then engage educators to provide the family day care. The service operator can either employ the educators, or engage the educators as contractors. Parents are eligible to receive Child Care Benefits (CCB) or Child Care Rebates (CCR) in relation to the child care expenses that they incur for care provided by an approved child care service (Division 4 (re CCB) and Division 5 (re CCR) of Part 3 of the A New Tax System (Family Assistance) Act 1999 ). Thus, the CCB or CCR is paid in relation to care provided by the service operator and not the educator. Is there an agency relationship? Agency relationships and the application of the law are discussed in Goods and Services Tax Ruling GSTR 2000/37 (GSTR 2003/7), and the factors discussed therein are helpful as a guide in determining the ATO view on whether an agency relationship exists. GSTR 2000/37 provides that: 11. For commercial law purposes, an agent is a person who is authorised, either expressly or impliedly, by a principal to act for that principal so as to create or affect legal relations between the principal and third parties. Paragraphs 28 and 29 of GSTR 2000/37 discuss the factors that indicate an agency relationship. The Ruling also states that an agency relationship can arise even where there is documentation between the parties specifically precluding the relationship to be that agent and principal (paragraph 33). GSTR 2000/37 also states that any particular clause in an agreement stating that an agency relationship exists must be considered with all other terms of the agreement (paragraph 34). In the current case, family assistance law requires that the individual parents must contract with an approved family day care service operator before there is an entitlement to CCB or CCR. Therefore, if the educator is entering into an agreement with the individual parents in relation to that child care, they are doing so as agent and on behalf of the service operator and not the reverse. Parents must enter into an agreement with the service operator, if not there is no entitlement to CCB or CCR. It is therefore considered that the rulee is receiving the fees in their own right and not as an agent of the educators. Accordingly, the gross fees received by the rulee from the Department are assessable as ordinary income of the rulee under 6-5 of the ITAA 1997. Small Business Entities Subdivision 328-C of the ITAA 1997 discusses what a small business entity (SBE) is. Subsection 328-110(1) states you are a SBE for an income year (the current year) if: a) you carry on a business in the current year; b) one or both of the following applies: i. you carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than $2 million; ii. your aggregated turnover for the current year is likely to be less than $2 million. Subsection 328-110(2) states you work out your aggregated turnover for the current year for the purposes of subparagraph (1)(b)(ii): a) as at the first day of the current year; or b) if you start to carry on a business during the current year - as at the day you start to carry on the business. There is an exception under subsection 328-110(3) however where your aggregated turnover for 2 previous income years was $2 million or more. It states however, you are not a small business entity for an income year (the current year) because of subparagraph (1)(b)(ii) if: (a) you carried on a business in each of the 2 income years before the current year; and (b) your aggregated turnover for each of those income years was $2 million or more. There is an additional rule under subsection 328-110(4) which is based on aggregated turnover worked out as at the end of the current income year. It states you are also a small business entity for an income year (the current year) if: (a) you carry on a business in the current year; and (b) your aggregated turnover for the current year, worked out as at the end of that year, is less than $2 million. Subsection 328-115(1) states your aggregated turnover for an income year is the sum of the relevant annual turnovers (see subsection (2)) excluding any amounts covered by subsection (3). Subsection 328-115(2) states the relevant annual turnovers are: (a) your annual turnover for the income year; and (b) the annual turnover for the income year of any entity (a relevant entity) that is connected with you at any time during the income year; and (c) the annual turnover for the income year of any entity (a relevant entity) that is an affiliate of yours at any time during the income year. Subsection 328-120(1) states an entity's annual turnover for an income year is the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business. In this case, the payments received by the rulee from the Department, which are considered ordinary income payments, were over $2 million in both the income year and the year immediately preceding it, thereby placing the rulee's aggregated turnover for both income years over the $2 million threshold. Therefore the conditions listed in subsection 328-110(1) of the ITAA 1997 have not been met for the income year. As such the rulee is not considered a SBE.