Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Ralph Willis, MP)
Chapter 1 - Entertainment
1.1 Schedule 1 of this Bill will amend the Fringe Benefits Tax Assessment Act 1986 (FBTAA) and the Income Tax Assessment Act 1936 (ITAA) to reduce the cost to employers of complying with the requirement to pay fringe benefits tax (FBT) on meal entertainment expenditure incurred on employees and their associates.
1.2 The amendments will:
- enable an employer to choose one of three methods to determine the proportion of 'meal entertainment' provided to employees and associates;
- clarify that corporate boxes and other similar hospitality arrangements are not 'business premises', ensuring that food and drink consumed by employees and their associates on those premises will be subject to FBT; and
- allow a 50/50 split to be applied to leasing or hiring costs of corporate boxes and other similar hospitality arrangements to determine what amount will be subject to FBT.
1.3 The FBTAA and the ITAA will be amended to allow employers to apportion 'meal entertainment' expenditure between employees (and associates) and non-employees by one of three methods. These methods are a 50/50 split, an apportionment based on a 12 week register or based on actual expenditure incurred on entertainment.
1.4 The FBTAA will be amended to clarify that a corporate box is not considered to be 'business premises' of the employer. This amendment will ensure that food and drink provided to employees and their associates at corporate boxes is subject to FBT.
1.5 The amendments provide that the 50/50 split method will also be applicable to leasing or hiring costs of corporate boxes and other similar hospitality arrangements.
1.6 The amendments will apply to assessments for the FBT year beginning on 1 April 1995 and later years. [Item 5]
1.7 As part of the 1993 Budget measures, amendments were made to the FBTAA and the ITAA so that certain benefits provided by an employer to an employee or associate of the employee became liable to FBT. These amendments applied from 1 April 1994.
1.8 The benefits affected by the amendments include:
- the provision of entertainment;
- club fees;
- leisure facilities;
- travel expenses of accompanying relatives;
- Higher Education Contribution Scheme (HECS) payments; and
- Student Financial Supplement Scheme (SFSS) payments.
1.9 Prior to the amendments, all of these benefits, where they had the necessary nexus with the employee's employment, were fringe benefits under the FBTAA. However, because the expense of providing these benefits was non-deductible under the ITAA, their taxable values for FBT purposes were reduced by the amount that they were non-deductible, i.e. to nil and therefore no liability to FBT arose.
1.10 As a result of the amendments, providers of fringe benefits are now able to claim a deduction under the ITAA for the cost of providing these benefits to employees or associates of employees.
1.11 For example, the provision of entertainment by way of food and drink is currently non-deductible under subsection 51(1) of the ITAA because of the effect of subsection 51AE(4). However, exceptions to this general prohibition on deductibility are contained in subsection 51AE(5). Entertainment expenses can be claimed as income tax deductions where they are provided as fringe benefits under subsection 51AE(5AA).
1.12 Taxation Laws Amendment Act (No. 2) 1994 made further amendments to the FBTAA and the ITAA. Section 63A was inserted into the FBTAA to reduce the taxable value of an expense payment fringe benefit arising where a provider makes a payment or reimburses an employee for expenditure incurred on entertaining persons other than the employee or an associate of the employee. In such situations, the taxable value of the expense payment fringe benefit is reduced by the amount of the expenditure incurred on entertaining persons other than the employee or associate.
1.13 Subsection 51AE(5AA) was amended and subsection 51AE(5AB) was inserted to ensure that where the taxable value of a benefit is reduced under section 63A of the FBTAA, the amount by which the taxable value is reduced will also not be deductible for income tax purposes.
1.14 The amendments ensured uniform treatment of entertainment provided as a residual fringe benefit or an expense payment fringe benefit. Prior to the amendments, where entertainment was provided in the form of an expense payment fringe benefit the total amount of the reimbursement became a fringe benefit.
1.15 The above amendments have not affected the tax treatment of entertainment provided to non-employees, i.e. they continue to be non-deductible under the ITAA and are not subject to FBT.
1.16 In order to determine the FBT liability, it is necessary for the provider of the benefit to calculate the expenditure incurred on the provision of entertainment to employees, associates and other persons. The ATO issued Tax Determination TD 94/25 so that where employees and their associates and non-employees are jointly entertained, the costs can be allocated on a 'per head' basis rather than an actual expense basis.
1.17 This Bill inserts new Division 9A into Part III of the FBTAA [item 1] . The new Division provides that an employer can elect to determine the taxable value of 'meal entertainment' provided to employees and their associates by one of two methods. These methods are the 50/50 split method or the 12 week register method. If the employer does not make an election to use one of these methods, the taxable value will be determined according to actual expenditure.
1.18 When an employer elects to use one of these two methods, the election will apply for the full FBT year. Where meal entertainment is provided, a 'meal entertainment' benefit will arise at the time the benefit is provided. [New sections 37AA & 37AC]
1.19 New section 37AC defines the term 'provision of meal entertainment'. The meaning of this term is similar to the 'provision of entertainment' in subsection 51AE(3) of the ITAA. However, unlike that definition, the provision of meal entertainment does not include recreation. It also includes the payment or reimbursement of entertainment expenses.
1.20 'Provision of meal entertainment' will also include any ancillary accommodation or travel provided in connection with the meal entertainment. For example, taxi travel to and from a restaurant will be included in the provision of meal entertainment.
1.21 The terms 'meal entertainment benefit' and 'meal entertainment fringe benefit' will be defined in subsection 136(1) of the FBTAA. [Item 3]
1.22 New sections 37AD, 37AE, 37AF will ensure that under the 50/50 split or 12 week register methods:
- no benefit will arise to an employer where the same benefit arises to another employer;
- a fringe benefit may arise where the employer has not provided the benefit, or where the employer has provided the benefit but the benefit is a fringe benefit in relation to another employer.
Example: X and Y are related companies. Employees of both companies attend a staff function provided by X. X elects that the new Division 9A applies. The meals provided by X to X's employees will be meal entertainment benefits. New section 37AE ensures that X will only be subject once to fringe benefits tax on these benefits.
As X and Y are associated, the meals provided by X to Y's employees will be subject to fringe benefits tax in Y's hands. New section 37AD makes it clear that X's decision to elect that the new Division 9A applies does not cause the benefit to be a meal entertainment benefit in Y's hands. The benefit will be taxed under the other provisions of the FBTAA [new section 37AF] .
1.25 The first method to determine the taxable value of meal entertainment benefits is to halve the total 'meal entertainment' expenditure incurred by an employee in an FBT year. The split is based on the total expenditure incurred by an employer on the provision of meal entertainment to employees (and associates) and non-employees regardless of whether the expenditure would be deductible for income tax purposes. [New sections 37B & 37BA]
1.26 As a result of new sections 37AD, 37AE and 37AF , the taxable value of meal entertainment provided to employees by an associate of the employer will not be included in the taxable value of meal entertainment fringe benefits. The taxable value of these benefits will be determined under the relevant existing provisions. This measure ensures that an employer will not be able to avoid paying FBT on entertainment provided to his or her employees by an associate who will be able to claim a deduction for providing the entertainment.
1.27 It should be noted that the taxable value of the 'meal entertainment' benefits cannot be reduced by employee contributions or under the 'otherwise deductible' rule.
1.28 New subsection 51AEA will provide that where an employer elects to use the 50/50 split method, a deduction for 50% of meal entertainment expenses is allowable to the taxpayer for the year of income in which the expenditure is incurred. No other deduction will be allowed for the same expenditure. [Item 6]
Example: An employer incurs total expenditure on meal entertainment of $200,000 in an FBT year. Expenditure has been incurred on employees entertaining clients at restaurants, a Christmas party, and the provision of food and drink for a staff social club. The employer chooses to use the 50/50 split method. Meal entertainment benefits of $100,000 will be subject to FBT and deductible under the ITAA. $100,000 will not be subject to FBT and will be non-deductible under the ITAA.
1.30 If an employer elects to use this method, the taxable value of the meal entertainment benefit provided is determined by reference to a 12 week register. [New section 37C]
1.31 If the election is made, no benefit will arise under any other provision of the FBTAA.
1.32 The taxable value of meal entertainment fringe benefits for the FBT year will be the total meal entertainment expenditure incurred by the employer on all persons in the FBT year multiplied by the register percentage . The register percentage is a percentage of:
((total value of meal entertainment fringe benefits provided in 12 week period) / (total value of meal entertainment provided in 12 week period))
An employer's total meal entertainment expenditure in an FBT year is $100,000. The employer maintains a 12 week register which allows the employer to determine that 30% of meal entertainment expenditure was provided as a fringe benefit. The taxable value of meal entertainment fringe benefits provided during the FBT year is
$100,000 * 30%, i.e. $30,000
1.34 The employer must keep the register for a continuous period of at least 12 weeks of the FBT year. The period over which the register is kept must be representative of the meal entertainment patterns during the year. [New section 37CC]
1.35 The register can be used for the year in which the register is kept and the subsequent 4 years. If the register is kept over two years, it can only be used for the second year and the following 4 years. [New subsection 37CD]
1.36 If total meal entertainment expenditure in an FBT year is more than 20% higher than the same expenditure incurred in the year that the register was kept, then the register can no longer be used after the end of the FBT year. A new one will need to kept in the following FBT year. Also, if two registers are kept within the same FBT year, the first register cannot be used. [New subsections 37CD(2) & (3)]
1.37 New subsection 37CE(1) provides details of what is to be recorded in the register.
1.38 The entries need to be made as soon as practicable after the entertainment has been provided. [New subsection 37CE(2)]
1.39 A register is not valid if fraudulent entries have been made in the register. [New section 37CF]
1.40 New section 51AEB will provide a deduction for certain meal entertainment expenses [item 6] . The amount that is deductible will not only include the amount that relates to meal entertainment fringe benefits but also other deductible entertainment expenditure.
1.41 More specifically, the deductible amount will be the amount of meal entertainment expenditure incurred in an FBT year multiplied by the register percentage. The register percentage is the ratio of the total deductions for register meal entertainment to the total register meal entertainment expenses. The formula for calculating the register percentage is set out in new section 51AEB .
1.42 Division 10 of Part III of the FBTAA creates a tax-exempt body entertainment fringe benefit. In broad terms, a tax-exempt body entertainment fringe benefit is the provision of entertainment to an employee, or an associate of the employee, where the employer is an income tax-exempt body. Accordingly, where an income tax-exempt body provides entertainment to both employees (and their associates) and non-employees, the FBT will only apply in respect of the employees (and associates).
1.43 Tax exempt bodies can also elect that new Division 9A of the FBTAA applies.
1.44 Food and drink provided to employees on business premises are exempt benefits under section 41 of the FBTAA. The definition of 'business premises' in subsection 136(1) will be amended to make it clear that corporate boxes, boats, planes and other premises used for entertainment purposes are not business premises. However, certain boats, planes and other premises will continue to be treated as business premises so that food and drink provided to employees on these premises will remain exempt benefits. These are boats, planes and other premises which are either:
- used by employers who carry on the business of providing entertainment, e.g., a restaurant owner might hold a staff party in the restaurant, or
- not used primarily for entertainment purposes, e.g., an airline's plane on which meals were served to employees. [Item 2]
1.45 New section 152B will allow the 50/50 split method to be applied to the leasing and hiring costs of corporate boxes and other similar hospitality arrangements [item 4] . This means that a 50/50 split will be accepted for the purposes of determining what proportion of the leasing or hiring costs is subject to FBT.
1.46 The term 'entertainment facility leasing expenses' will be defined in subsection 136(1). Entertainment facility leasing expenses will include leasing or hiring expenses for corporate boxes, boats, planes or other premises or facilities leased or hired for the purpose of providing entertainment. However, they will not include the expenses attributable to the provision of food or drink or advertising. [Item 3]
1.47 New section 51AEC provides that, where an employer has elected to apply the 50/50 split method to corporate box leasing or hiring expenses, a deduction equal to 50% of the expenses will be allowable to the employer for those expenses for the year of income in which the expense was incurred. [Item 6]