Standard-cost household service for childcare providers

This Determination may be cited as “Determination DET 09/02: Standard-Cost Household Service for Childcare Providers.”

1. Explanation (which does not form part of the Determination)

1. This Determination sets out the standard-cost household service that has been provided as childcare services by taxpayers, who are natural persons, in their own domestic accommodation.
2. It also sets out the components of expenditure that are generally incurred in the provision of the standard-cost household service by these taxpayers.
3. This Determination determines a figure for a cost or costs that for the purpose of the Tax Administration Act 1994 may be treated as being incurred by a taxpayer in deriving:
   1. exempt income; and
   2. gross income.
4. This Determination also prescribes a method of calculating such a figure, as set out in paragraph c.

2. Reference

This Determination is made pursuant to section 91AA of the Tax Administration Act 1994.

3. Scope of Determination

Except where its application is specifically excluded in another Determination or a fresh Determination pursuant to section 91AA(5) of the Tax Administration Act 1994, this Determination shall apply to all natural persons who are not registered for goods and services tax purposes and who have provided childcare services in their own domestic accommodation. In addition, this Determination will only apply to persons who provide childcare in accordance with the Education (Home-Based Care) Order 1992 and/or the Licensing Criteria for Home-based Education and Care Services 2008.
This Determination replaces the Commissioner’s practice published in the former Determination DET 001 which is withdrawn with effect from 1 April 2008. This Determination shall apply to the 2009 and subsequent income years until it is replaced but will be subject to an adjustment based on the annual movement of the Consumer Price Index, as at 31 March each year.

4. Interpretation

In this Determination, unless the context otherwise requires, expressions used have the same meanings as those in sections CW 61 and YA 1 of the Income Tax Act 2007 and section 91AA of the Tax Administration Act 1994: “Childcare provider” means a natural person who carries on an activity of providing a standard-cost household service in their own domestic accommodation:

“Childcare service” means a service that is provided by a childcare provider:

“Consumers Price Index” means the application of the annual movement of the All Groups Consumers Price Index to the variable standard-cost component and the administration and record keeping fixed standard-cost component, but not the domestic accommodation fixed standard-cost component, of the standard-cost household service for childcare providers:

“Standard-cost household service for childcare providers”, in relation to any childcare service, means the standard-cost that has been determined by the Commissioner of Inland Revenue for the purpose of the Income Tax Act 2007 and the Tax Administration Act 1994:

“Order” means the Education (Home-Based Care) Order 1992 and/or the Licensing Criteria for Home-based Education and Care Services 2008.

5. Determination

Provision of childcare service
A childcare service shall be a standard-cost household service where:

1. the childcare provider is a natural person; and
   
2. the childcare service requires the use of the childcare provider’s domestic accommodation; and
   
3. the childcare service involves activities that commonly occur in a family household; and
   
4. the childcare service provided is a kind specified in the Order.
   

Standard-cost for childcare providers
Where applicable, the standard-cost for childcare providers shall be inclusive of goods and services tax (“GST”). Persons who are registered for GST may be required to make an adjustment to their GST return to the extent that they have claimed GST back on goods and services which are subsequently used in providing homeshare services i.e., as these costs would not have been incurred in the course or furtherance of their taxable activity.

A childcare provider who in an income year derives gross income from providing a childcare service may elect to deduct the expenditure as set out in this Determination.

Where a childcare provider makes such an election, they shall not deduct any additional cost of providing the childcare service, if the additional cost relates to a type of expenditure that is covered in this Determination.

1. Variable standard-cost
   
   Variable standard-cost shall be $3.09 per hour per child. This shall cover expenditure on items such as electricity/fuel, food, wear and tear, outings and associated transport costs, laundry, educational resources, modification costs, equipment and first aid.
2. Fixed standard-cost
   
   Fixed standard-cost shall be calculated on an annual basis and shall not vary in relation to the number of children under care. Fixed standard-cost shall comprise two categories, namely administration and record keeping, and domestic accommodation.
   Administration and record keeping fixed standard-cost shall be $301.00 per annum and shall include such items as the use of telephone, postage and stationery, the use of computers and other incidental administration costs.
   
   The Determination of domestic accommodation fixed standard-cost shall depend on whether the childcare provider owns or rents their domestic accommodation. Additionally, where the childcare provider is entitled to an accommodation supplement, the annual deduction calculated shall be reduced by the amount of the accommodation supplement received.
   1. Childcare provider who owns their domestic property
      Where the childcare provider owns their domestic property, the domestic accommodation fixed standard-cost shall be determined in accordance with the following formula:
      [(a x 5%) - b] x 50% x 33.33%
      where-
      
      a     is the purchase price of the domestic property; and
      
      b     is the annualised amount of accommodation supplement received by the childcare provider (i.e. weekly amount received x 52 weeks); and
      
      5%     represents the expenditure normally incurred in owning a domestic property, including depreciation of the building and outgoings such as rates, insurance, mortgage interest cost; and
      
      50%     represents the usage factor that is based on usage by area such as bedrooms, kitchen, laundry, toilet/bathroom, other living areas and the use of outdoor areas pursuant to the Order; and
      
      33.33%     represents the availability factor that is based on a 7.30am / 5.30pm drop off/pick up for Mondays to Fridays and a 7.30am / 12.30pm. for Saturdays/Sundays, totalling 55 hours per week.
      
   2. Childcare provider who rents their domestic property
      Where the childcare provider rents their domestic property, the domestic accommodation fixed standard-cost shall be determined in accordance with the following formula:
      (a - b) x 50% x 33.33%
      where-
      
      a     is the annualised rental payment (i.e. weekly rent paid x 52 weeks); and is the annualised amount of accommodation supplement received by the childcare provider (i.e. weekly amount received x 52 weeks); and
      
      b     is the annualised amount of accommodation supplement received by the childcare provider (i.e. weekly amount received x 52 weeks); and
      
      50%     represents the usage factor that is based on usage by area such as bedrooms, kitchen, laundry, toilet/bathroom, other living areas and the use of outdoor areas pursuant to the Order; and
      
      33.33%     represents the availability factor that is based on a 7.30am / 5.30pm drop off/pick up for Mondays to Fridays and a 7.30am / 12.30pm. for Saturdays/Sundays, totalling 55 hours per week.
      

Exempt income

The sum of the variable standard cost and the fixed standard cost calculated in accordance with this Determination, relevant to the childcare provider’s circumstances, shall be treated as exempt income or expenditure incurred in providing the services.

This Determination is made by me, acting under delegated authority from the Commissioner of Inland Revenue under section 7 of the Tax Administration Act 1994.

This Determination is signed on the 21st day of April 2009.

Rob Wells
LTS Manager
Technical Standards

Commentary on Determination DET 09/02

This commentary and its appendices do not form part of the Determination. They are intended to provide assistance in the understanding and application of the Determination.

Standard-cost basis and actual-cost basis

1. In accordance with section 91AA(3) of the Tax Administration Act 1994, a childcare provider who uses the standard-cost basis set by the Commissioner in determining their income tax liability has elected this basis to be appropriate for their circumstances.
2. A childcare provider who elects to use the standard-cost basis determined by the Commissioner must use this basis to calculate their income tax liability for the elected income year.
3. The childcare provider must adopt either the standard-cost basis or the actual-cost basis, but not both, for an income year with the exception of one-off costs actually incurred (refer to the commentary on additional costs).
4. As the use of the standard-cost basis is optional, childcare providers will not be precluded from adopting the actual-cost basis or from opting in and out of the standard-cost basis for any subsequent income year.
5. A childcare provider who does not elect to use the standard-cost basis set by the Commissioner in determining their income tax liability must use the actual-cost basis. In electing to use the actual-cost basis, the childcare provider must ensure that they have adhered to all the record keeping requirements for verifying the costs.

Income tax implications and filing of tax returns

1. The following income tax implications apply to a childcare provider who provides childcare service and elects to use the standard-cost basis set out in the Determination.
2. Section CW 61 of the Income Tax Act 2007 will treat any income received by a childcare provider as being exempt income, to the extent to which the standard cost applies to the childcare provider’s gross income.
3. Standard-cost expenditure that exceeds payments received is not available as expenditure against other income for any income year, nor can it be carried forward to future income years.
4. In accordance with section 33A of the Tax Administration Act 1994, a service provider would not be required to file a tax return for that income if:
5. after deducting the amount of standard-cost under the Determination, the service provider has zero income tax liability; and
6. The service provider did not have any other income where tax has not been deducted at source.

Consumers Price Index

To assist childcare providers, Inland Revenue will publish the effect of the annual movement of the All Groups Consumers Price Index as at 3 March on the variable standard-cost component and the administration and record keeping fixed standard-cost component. The revised standard-cost components will be published in Inland Revenue’s Tax Information Bulletin in May of each year.

The changes in the annual movement of the All Groups Consumers Price Index will not be applied to the domestic accommodation fixed standard-cost component. This is because the basis for this component is either historical (where a childcare provider owns their domestic accommodation) or market related (where a childcare provider rents their domestic accommodation).

The first such annual adjustment will be for the income year 1 April 2009 to 31 March 2010.

Goods and services tax (GST)

As the annual turnover from childcare services is expected to be well below the registration threshold for GST, it is presumed that few childcare providers will be registered for GST. Therefore, the standard-cost components determined by the Commissioner have been prepared on a GST inclusive basis.

Purchase price of domestic property

The purchase price of a domestic property will include any subsequent cost of improvement to the domestic property. Childcare providers will be required to provide verification of such additional costs incurred.

Receipt of accommodation supplement by a childcare provider

A childcare provider may be entitled to an accommodation supplement.; The Ministry of Social Development assesses each applicant’s entitlement based on a set of guidelines. The assessment of entitlement takes into account such factors as accommodation costs, income and assets, family status, employment status and residential location. Where a childcare provider is entitled to an accommodation supplement, the amount of annual domestic accommodation fixed standard-cost calculated will be reduced by the annual amount of the accommodation supplement received. The examples in Appendix B illustrate how the receipt of an accommodation supplement affects the calculation of the annual domestic accommodation fixed standard-cost.

Additional costs

Where a childcare provider has incurred additional one-off costs, which have not been taken into account by the Commissioner in arriving at the standard-cost in the Determination, such costs will be allowed as an additional deduction. The childcare provider must however demonstrate to Inland Revenue that such costs have been incurred for the childcare service they provide. An example may be expenses incurred to comply with the training requirements of the Order. 

Reimbursements

Where a parent or guardian reimburses a childcare provider for specific costs incurred, these costs are not allowed as deductions against their gross income. For example, the childcare provider may choose to take the children in their care to the zoo, as an outing, but asks the parents to pay the admission fee charged by the zoo. The money received from the parents for the admission fee to the zoo is not regarded as gross income. The admission fee to the zoo will not be allowed as a deduction to the childcare provider.

Appendix A

Weekly variable standard-cost items

The basis of $3.09 per child per hour has been calculated in relation to their operation on a weekly basis.

Explanation of weekly variable standard-cost items

Electricity/fuel - This covers the use of all appliances including the cost of heating, lighting and hot water. It includes other heating fuels such as gas, wood and coal.

Food - This covers the cost of food that is supplied and includes basics such as bread, milk, fruit juice, biscuits and special dietary needs. The cost of baking involved/provided for children is also included in this figure. It also covers incidentals such as tea and coffee consumed by childcare providers and parents/guardian.

Wear and tear - These cover all related expenses and include such expenses as the cleaning of carpets, repairing/replacing furnishings (e.g. rugs, linen), repairs and maintenance of equipment and appliances.

Outings and associated transport costs - These cover the costs of actual outings such as swimming pool or other administration/user costs for a particular activity.In addition, motor vehicle costs in transporting the children to these locations and other travel costs associated with picking up from a play group/kindergarten are also included. Owning/hiring of car seats for small children under the age of five is also a statutory requirement and is therefore included in this component. As mentioned in paragraph 15 of the Determination, the costs covered by parent contributions are not allowed as deductions against the caregivers gross income, and the contributions from parents are not regarded as income.

Laundry - This not only covers obvious cleaning and laundry products but also rubber gloves, wet wipes, toilet paper and other similar items.

Educational resources - These cover all related expenses and include items such as paper, paints, crayons, books, and other stationery items.

Modification costs - The Order sets out the minimum requirements for caregivers to be eligible to provide childcare. These include fencing, fireguards, window locks, and other safety features and cover the initial cost plus ongoing costs necessary to comply with the required standard.

Equipment - This covers the cost of providing indoor and outdoor equipment such as video tapes, swings, puzzles and games.

First aid - This covers the requirement to have a first aid cabinet equipped to the standard set by the Ministry of Health/District Health Boards.

Appendix B

Application of the standard-cost basis as determined by the commissioner for childcare providers

(Note: all the calculations are rounded to the nearest dollar.)

Example 1

A childcare provider owns a domestic property. The purchase price of the domestic property is $200,000.The childcare provider receives an accommodation supplement of $10 per week based on the location of the domestic property and their individual circumstances. Therefore, the domestic accommodation fixed standard-cost that the childcare provider may elect to deduct per annum is:
[($200,000 x 5%) -($10 x 52)] x 50% x 33.33% = $1,580.00

Example 2

A childcare provider rents a domestic property. The rent is $200 per week. The childcare provider receives an accommodation supplement of $20 per week based on the location of the domestic accommodation and their individual circumstances. Therefore, the domestic accommodation fixed standard-cost that the childcare provider may elect to deduct per annum is:
[($200 x 52) - ($20 x 52)] x 50% x 33.33% = $1,560.00

Example 3

A childcare provider owns a domestic property, which costs $200,000. The childcare provider receives an accommodation supplement of $10 per week based on the location of the domestic property and their individual circumstances.

The childcare provider provided care for several children in the income year for a total of 1,250 hours. The childcare provider charged an hourly rate of $4.00 and elected to use the standard-cost basis in accordance with Determination DET 09/02: Standard-Cost Household Service for Childcare Providers.

The childcare provider’s income tax liability is calculated as follows:

Example 4

A childcare provider rents a domestic property for $200 per week. The childcare provider receives an accommodation supplement of $20 per week based on the location of the domestic accommodation and their individual circumstances.

The childcare provider provided care for several children in the income year for a total of 1,250 hours. The childcare provider charged an hourly rate of $4.00 and elected to use the standard-cost basis in accordance with Determination DET 09/02: Standard-Cost Household Service for Childcare Providers. The childcare provider’s income tax liability is calculated as follows:

Example 5

A childcare provider owns a domestic property, which costs $250,000 and receives no accommodation supplement. The childcare provider provided care for several children in the income year for a total of 3,120 hours. The childcare provider charged an hourly rate of $4.00 and elected to use the standard-cost basis in accordance with Determination DET 09/02: Standard-Cost Household Service for Childcare Providers.

The childcare provider’s income tax liability is calculated as follows:

Example 6

A childcare provider rents a domestic property for $210 per week and receives no accommodation supplement. The childcare provider provided care for several children in the income year for a total of 3,120 hours. The childcare provider charged an hourly rate of $4.00 and elected to use the standard-cost basis in accordance with Determination DET 09/02: Standard-Cost Household Service for Childcare Providers.

The childcare provider’s income tax liability is calculated as follows: