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Ruling

Subject: Meal Entertainment

Question 1:

Is the provision of food and drink to employees while at comparable businesses for purposes of market research, the provision of entertainment as defined in subsection 32-10(1) of the Income Tax Assessment Act 1997?

Answer:

Yes.

Question 2:

Is the provision of food and drink to employees while at comparable businesses for purposes of market research, the provision of meal entertainment as defined in subsection section 37AD of the Fringe Benefits Tax Assessment Act 1986?

Answer:

Yes.

Question 3:

Are expenses incurred in the provision of food and drink to employees while at comparable businesses, for purposes of market research an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997?

Answer:

Yes.

This ruling applies for the following period

1 April 2011 to 31 March 2012

The scheme commenced on

1 April 2011

Relevant facts and circumstances

The company operates in an entertainment industry. It runs entertainment venues which vary significantly in size and general operations. Generally the venues provide the food and drink. The venues also provide other facilities.

The company states that due to the nature of this particular industry, in order to remain competitive it is important that they keep well informed of the approach to food and drink, and other activities provided by their competitors, so that they can revise their own practices as required.

Consequently, during the course of the year the directors and employees of the company attend various similar venues to those that they operate. A significant proportion of the related expenses are said to be market research expenses related to food and drink.

In addition to the activities undertaken by the directors at the competitors' venues they compare things, such as:

• layout and any theme evident

• number of staff and roles

• greeting by staff (i.e. approaching customers as they enter)

• staff uniforms

• type of food and drink available

• timeliness of food and drink

• staff ratios

• paid upfront or billed at the end of meal

• price and quality of the food and drink

As part of the employment agreements held with the directors of the company it is a requirement that the directors engage in the food and drink activities on a monthly basis and report on the events at the next director's meeting. Following such reports the directors determine if there is to be any change to the way they currently carry on their business.

The ATO requested copies of employment contracts. It was advised that there are no formal employment contracts between the company and the directors. Obligations relating to the terms of the employment as well as the expected behaviour of the directors have been agreed and documented at a director's meeting.

The directors of the company attend at competitors' venues for the purpose of market research no more than twice per month, though not all directors will attend each month. They only ever attend during work hours and never on a Friday or Saturday night.

There are multiple venues which the directors have determined have operations similar to their own. Accordingly, they alternate between these venues throughout the year.

The direct expenses are paid via company credit cards held by each of the directors. Accordingly, there is no need for reimbursement as 100 per cent of the costs are incurred by the company.

Although a break-up of costs between food and drink was requested by the ATO, the company stated that it is impracticable to provide a break-up of the exact costs incurred as these vary from venue to venue and visit to visit. There is an agreed limit of $100 per head for each occasion. There is no limit placed on the split of that amount between food and drink.

Very rarely would there be any type of additional entertainment such as a floor show, while the directors are attending a venue. However, on occasion, there may be additional entertainment.

Relevant legislative provisions

Section 8-1 of the Income Tax Assessment Act 1997

Section 32-5 of the Income Tax Assessment Act 1997

Subsection 32-10(1) of the Income Tax Assessment Act 1997

Subsection 32-10(2) of the Income Tax Assessment Act 1997

Section 32-20 of the Income Tax Assessment Act 1997

Section 37AD of the Fringe Benefits Tax Assessment Act 1986

Section 51AEA of the Fringe Benefits Tax Assessment Act 1986

Section 51AEB of the Fringe Benefits Tax Assessment Act 1986

Section 51AEC of the Fringe Benefits Tax Assessment Act 1986

Subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986

Reasons for decision

Question 1:

Entertainment is defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986) to have the same meaning as that given to entertainment in section 32-10 of the Income Tax Assessment Act 1997 (ITAA 1997). Section 32-10 states:

32-10(1) Entertainment means: 

(a)   entertainment by way of food, drink or recreation; or

(b)   accommodation or travel to do with providing entertainment by way of food, drink or recreation. 

32-10(2) You are taken to provide entertainment even if business discussions or transactions occur.

Note: These are some examples of what is entertainment:

· business lunches

· social functions.

These are some examples of what is not entertainment:

· meals on business travel overnight

· theatre attendance by a critic

· a restaurant meal of a food writer.

Taxation Ruling TR 97/17 Income tax and fringe benefits tax: entertainment by way of food or drink provides guidelines on the Commissioner's view of the factors to be considered in determining whether the provision of food or drink constitutes entertainment.  

Paragraph 7 of TR 97/17 states: 

In order to determine when the provision of food or drink to a recipient results in the entertainment of that person, an objective analysis of all the circumstances surrounding the provision of the food or drink is required. In making this determination an employer should consider: 

· why the food or drink is being provided;

· what type of food is being provided;

· when the food or drink is being provided; and

· where the food or drink is being provided. 

Food or drink which is determined by these criteria to constitute entertainment is taken to be meal entertainment. 

In discussing the meaning of the term entertainment, TR 97/17 refers to the following alternative views for interpreting what is entertainment by way of food and drink, at paragraph 12: 

(1)   that the provision of all food or drink in any circumstance will constitute entertainment; or 

(2)   that only the provision of food or drink that has an element of entertainment satisfies the definition, i.e., the provision of food or drink must confer entertainment on the recipient. 

Paragraph 18 of TR 97/17 provides that, although the latter interpretation represents the better view of the law, in most cases the mere provision of food or drink will satisfy the entertainment test. It is only a narrow category of cases where the mere provision of food or drink does not amount to entertainment. 

By way of illustration, paragraph 19 of TR 97/17 refers to the conclusion in Taxation Ruling IT 2675 that the provision of morning teas or a working lunch on the employer's premises is not considered entertainment. 

By way of contrast, paragraph 20 of TR 97/17 states that business lunches and drinks, dinners, cocktail parties and staff social functions are examples of situations in which the provision of food or drink confers entertainment upon the recipient, regardless of whether or not business discussions or business transactions occur at the same time. 

Regarding the four tests listed in paragraph 7 of TR 97/17, paragraph 23 provides that the following are relevant factors (with the first two considered more important) which should be considered in undertaking any objective analysis in determining whether or not the provision of food or drink constitutes entertainment: 

(a)     Why is the food or drink being provided. This test is a purpose test. For example, food or drink provided for the purposes of refreshment does not generally have the character of entertainment, whereas food or drink provided in a social situation where the purpose of the function is for employees to enjoy themselves has the character of entertainment. 

(b) What food or drink is being provided. As noted above, morning and afternoon teas and light meals are generally not considered to constitute entertainment. However, as light meals become more elaborate, they take on more of the characteristics of entertainment. The reason for this is that the more elaborate a meal, the greater the likelihood that entertainment arises from the consumption of the meal. 

For example, when an employer provides morning or afternoon teas or light meals, that food or drink does not usually confer entertainment on the employee. By contrast, a three course meal provided to an employee during a working lunch has the characteristics of entertainment. The nature of the food itself confers entertainment on the employee. 

(c) When is the food or drink being provided. Food or drink provided during work time, during overtime or while an employee is travelling is less likely to have the character of entertainment. This is because in the majority of these cases food provided is for a work-related purpose rather than an entertainment purpose. This, however, depends upon whether the entertainment of the recipient is the expected outcome of the provision of the food or drink. For example, a staff social function held during work time still has the character of entertainment. 

(d) Where is the food or drink being provided. Food or drink provided on the employer's business premises or at the usual place of work of the employee is less likely to have the character of entertainment; refer to the reasons in (b) and (c) above. However, food or drink provided in a function room, hotel, restaurant, cafe, coffee shop or consumed with other forms of entertainment is more likely to have the character of entertainment. This is because the provision of the food or drink is less likely to have a work-related purpose. 

The application of these four factors to the company's circumstances results in the determination of whether the food and drink it provides to its directors and employees amounts to entertainment: 

Why the food or drink was provided?

The meals are provided to the directors and to employees, at least once per month and no more than twice per month, during normal working hours. 

It is purported that the purpose of the meals is market research. That is, dining at various venues similar to those run by the company enables the directors to assess their competitors on a range of factors in order to make comparisons to their own venues. However no specific documentation has been provided to indicate a systematic, structured plan, such as written procedures or previously prepared reports by the directors indicating outcomes.

More importantly, as paragraph 20 of TR 97/17 indicates, business lunches and drinks are examples of situations in which the provision of food or drink confers entertainment upon the recipient, regardless of whether or not business discussions or business transactions occur at the same time. Consequently, although critical analysis and discussion of the particular venue may occur between directors whilst they dine - and later be reported - this is considered insufficient to alter the character of entertainment that is conferred by the provision of food and drink.

Furthermore, it is not essential that food or drink be consumed at the venues in order that a comparison of the following elements be made:

· layout and any theme evident

· number of staff and roles

· greeting by staff (i.e. approaching customers as they enter)

· staff security uniforms

· type of drinks and food available

· wait staff versus counter ordering

· paid upfront or billed at the end of meal

· price of food and drink

That is, these comparisons can be made independent of the consumption of food or drink. 

What food or drink was provided?

As set out in paragraph 23 of TR 97/17 the more elaborate a meal, the more likely it becomes that entertainment arises from eating the meal. While the cost of the meal can indicate the elaborateness of a meal, there is no specific cost at which a meal becomes entertainment.

In the company's case there is an agreed limit of $100 per head for each occasion, which will be split between the cost of the meal and drinks, whether they be alcoholic or not. Although there is no specific cost at which a meal becomes entertainment, a limit of $100 is significant enough to go beyond the mere provision of a light meal (e.g. finger food). It is indicative of an entertainment character regardless of whether or not alcohol is provided.

The fact that alcohol is also available suggests that entertainment has been provided, as per paragraph 64 of TR 97/17:

Generally, the consumption of alcohol does have social connotations and provides or affords diversion or amusement.

Although paragraph 64 indicates there is a narrow category of situations where the provision of alcohol is incidental to a larger event or work-related activity, this is not one of those situations. That is, the consumption of alcohol is not required by the company's directors for purposes of researching a competitor's quality of menu and surroundings. It does not have the character of a necessary business undertaking. It is more appropriately categorised as adding a social flavour.

In short, it is considered that the provision of food and drink in the company's circumstances has the character of entertainment when analysing this factor (what), primarily due to the elaborate nature of the food and supported by the availability of alcohol.

When the food or drink was provided?

The provision of food and drink in the company's case occurs during normal working hours. This generally indicates a work-related purpose, subject to the expected outcome of the provision of food or drink.

Where the food or drink was provided?

As set out in paragraph 23 of TR 97/17 food or drink provided in a function room, hotel, restaurant, cafe, coffee shop or consumed with other forms of entertainment is more likely to have the character of entertainment.

The food and drink in the company's case is provided at hotels and restaurants, being the venues of competitors within the industry. The company has stated that it is rare that additional forms of entertainment are provided while directors are present at these other venues. 

Conclusion

There is a lack of sufficient evidence, such as written procedures or a formal, structured plan, to indicate a predominantly business purpose to attendance at functions and consumption of meals. Although there may be business discussions and analysis taking place, this does not sufficiently alter the overall character of the expenses as the provision of meal entertainment. The more elaborate nature of the meals as indicated by costs and the availability of alcohol is a further indicator of entertainment.

It is concluded from an analysis of these factors that, on balance, the provision of food and drink by the company to its directors and employees does not fall within the narrow category of cases where the mere provision of food or drink does not amount to entertainment. That is, the expenses are taken to be for the purpose of entertainment as described at section 32-10 of the ITAA 1997.

Question 2

The term 'provision of meal entertainment' is defined in section 37AD of the FBTAA 1986. The definition is similar to the definition of 'entertainment' in section 32-10 of the ITAA, except that section 37AD:

(a) contains paragraphs (e), (f) and (g), which were omitted from the section 32-10 definition. The explanatory memorandum to the Tax Law Improvement Bill 1996 outlined the effect of the omitted paragraphs, stating at page 97 that:

"... The omissions have no substantive effect on the definition, they were clearly within the definition's ordinary scope. ... "; and

(b) does not include reference to recreation.

For the purposes of understanding the concept of what is entertainment as it relates to food or drink only, the terms 'entertainment' and 'provision of meal entertainment' are interchangeable (paragraph 8 of TR 97/17).

Since it has been established that the provision of food and drink by the company to its employees constitutes entertainment, it follows that it also constitutes the provision of meal entertainment, as per section 37AD of the FBTAA 1986.

Question 3

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

Section 32-5 of the ITAA 1997 provides a general prohibition on the deductibility of entertainment expenses under section 8-1.  

Since it has been established that the provision of food and drink by the company to its employees constitutes entertainment, this provision applies.

However, section 32-20 of the ITAA 1997 states:

Section 32-5 does not stop you deducting a loss or outgoing to the extent that you incur it in respect of providing entertainment by way of providing a fringe benefit. 

The provision of entertainment to the company's directors and employees constitutes the provision of a fringe benefit. Consequently the exception in section 32-20 of the ITAA 1997 applies to remove the prohibition on deductibility provided under section 32-5 of the ITAA 1997. As a result, the company is entitled to treat as deductible the expenditure it incurs in providing meal entertainment to their employees and directors.

Note: In accordance with Note 1 at section 32-20 of the ITAA 1997, the company will not be entitled to deduct its entertainment expenses under section 8-1 of the ITAA 1997 if it makes an election under section 37AA of the FBTAA 1986. Deductions will be available under sections 51AEA, 51AEB or 51AEC of the Income Tax Assessment Act 1936 if this election is made.