There's a huge penalty associated with FBT should an employer provide child care support onsite
A big focus by the new Commonwealth Government on assisting families returning to work and continuing on with full-time employment is providing financial support for childcare services. The Australian Labor Party promised in 2020 to increase the maximum subsidy rate to 90% for families up to $80,000 and remove the annual subsidy cap, but the government matched this last year by removing the subsidy cap and introducing a higher subsidy for families with more than one child under six years of age.
Prime Minister Albanese went to the election with a pledge to support the higher rate and promise that 96% of all families in the system will be better off under the changes.
One area that Commonwealth Government should consider is the Fringe Benefits Tax (FBT) on childcare.
“Currently there is a huge penalty associated with FBT should an employer provide child care support onsite or as an allowance to pay it privately,” Richenda Vermeulen, Founder and CEO of digital strategy agency, ntegrity, said. “It’s very practical to remove FBT on childcare or even better- make childcare tax deductible. Especially if we want more people working and spending less time out of the workforce.”
The Australian Taxation Office guidelines states that: employer-sponsored childcare is exempt from fringe benefits tax (FBT), where provided on business premises. This means that employers can give staff the option of salary sacrificing childcare fees, by which employees forgo part of their salary and employers pay the childcare fees. Employees do not pay income tax on the portion of salary they have sacrificed, so they gain what amounts to a tax deduction in every pay packet.
“From a nuts and bolts perspective, it wouldn’t add any administrative or system burden because currently you need to ‘report on’ your FBT activities to get taxed 47% cent,” Vermeulen said. “If it were removed from childcare, it would mean practically not reporting on it. That’s it. There would be no consequences to employers apart from giving employers the option to support employees’ childcare costs, if they so choose.”
The ATO goes on to state that: Without the exemption under the Fringe Benefits Tax Assessment Act 1986, employers offering this would incur a fringe benefits tax penalty of 46.5 per cent of the value of the benefits provided. Regardless of whether this liability would be borne by the employer or transferred to staff by means of an employee contribution, it would mean that salary sacrificing would not be worthwhile. 7.3
The intention of the exemption, therefore, was to encourage employers to participate in solutions to their employees’ childcare needs. This would assist not only employees but contribute to the government’s objectives for increased women’s workforce participation.
Late last year the Federal Department of Education announced that childcare providers could choose to offer a discounted fee to employees with children enrolled at one of their services without negatively affecting the amount of Child Care Subsidies received. This commenced on 24 January 2022.
This was clearly well-intentioned and welcomed, especially in view of the severe labour shortages for early childhood education and care even before and since the COVID pandemic.
However, the Australian Childcare Alliance (ACA) NSW received initial tax and legal advice based on prima facie evidence that there could be fringe benefits tax (FBT) implications, for example: Only not-for-profit entities who are FBT exempt (e.g. church-owned ECEC services) will be able to completely realise this announced benefit for their staff or otherwise, there may be a requirement for educators to “contribute” towards an FBT offset to pay for the FBT obligation.
This may all well change under the new Commonwealth Government.
