Standard-cost household service for childcare providers

This Determination may be cited as "Determination DET 001: 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 accordance with the Education (Home-Based Care) Order 1992.
   
   Subject to an adjustment based on the annual movement of the Consumers Price Index as at 31 March, this Determination, unless specifically withdrawn, shall apply from the 2004 to the 2008 income years (inclusive).
   
   
4. Interpretation
   
   In this Determination, unless the context otherwise requires-
   
   Expressions used have the same meanings as those in sections CB 9, ID 1 and OB 1 of the Income Tax Act 1994 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 1994 and the Tax Administration Act 1994:
   
   "Order" means the Education (Home-Based Care) Order 1992.
   
   
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.
   
   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.
   
   (a) Variable standard-cost
   Variable standard-cost shall be $2.67 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.
   
   (b) 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 $260.00 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.
   
   (i) 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 7.30 a.m./5.30 p.m. drop off/pick up for Mondays to Fridays and a 7.30 a.m./12.30 p.m. for Saturdays/Sundays, totalling 55 hours per week.
   
   (ii) 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
   
   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 7.30 a.m./5.30 p.m. drop off/pick up for Mondays to Fridays and a 7.30 a.m./12.30 p.m. for Saturdays/Sundays, totalling 55 hours per week.
   
   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 10th day of May 2004.

Margaret Cotton
National Manager
Technical Standards

Commentary on Determination DET 001

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

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.

1. Section ID 1(2) of the Income Tax Act 1994 prohibits any resultant losses from being utilised against other income for any income year or carried forward to future income years.
   
   
2. In accordance with section 33B of the Tax Administration Act 1994, a childcare provider would not be required to file a tax return for that income year if:
   
   
   1. after deducting the amount of standard-cost under the Determination, the childcare provider has zero income tax liability; and
      
      
   2. the childcare 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 31 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 the New Zealand Gazette and 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 to 31 March 2005.

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 and cannot be used by a childcare provider who is registered for GST.

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 Education (Home-Based Care) Order 1992.

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 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.

Impact on previously accepted practice

Prior to the issue of Determination DET 001, childcare providers applied the practice as it related to persons providing boarding services in their own homes (boarders).

Determination DET 001 supersedes any previously accepted practice.  Childcare providers, in determining their income tax liability, must now adopt either the standard-cost basis (as detailed in DET 001) or the actual-cost basis.  In adopting the actual-cost basis, childcare providers must ensure that a full set of records are kept.

Appendix A

Weekly Variable Standard-Cost Items

The basis of $2.67 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 ($10.00) - 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 ($15.00) - 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 ($10.00) - 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 ($18.00) - 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.

Laundry ($8.00) - This not only covers obvious cleaning and laundry products but also rubber gloves, wet wipes, toilet paper and other similar items.

Educational resources ($7.00) - These cover all related expenses and include items such as paper, paints, crayons, books, and other stationery items.

Modification costs ($5.00) - The Education (Home-Based Care) Order 1992 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 ($6.00) - This covers the cost of providing indoor and outdoor equipment such as video tapes, swings, puzzles and games.

First aid ($1.00) - 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 001: 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 001: 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 001: 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 001: Standard-Cost Household Service for Childcare Providers.

His income tax liability is calculated as follows: