Edited version of private ruling

Authorisation Number: 1011498916863

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Ruling

Subject: Entertainment. Tax-exempt body entertainment benefit

This ruling applies to

A Public Educational Institution

Issue 1

A public educational institution is income tax exempt. It provides food and drink to its employees at two venues, The public educational institution has asked if the provision of this food and drink to its employees at these venues constitutes an entertainment benefit that is a tax-exempt body entertainment benefit as described by section 38 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA).

Question 1

Is the food and drink provided by the public educational institution to its employees 'entertainment' as defined in section 32-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Morning and afternoon tea, light lunches and finger food provided without alcohol to its employees during working hours for their comfort is not 'entertainment.' All other food and drink provided on other occasions is 'entertainment.'

Issue 2

Whether the provision of 'entertainment' by the public educational institution to its employees at the premises of two venues, is a tax-exempt body entertainment benefit?

Question 1

Is the provision of 'entertainment' (as defined in section 32-10 of the ITAA 1997) by the public educational institution to its employees at two venues, tax-exempt body entertainment benefit under section 38 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes, unless the entertainment provided is an allowable deduction to the employer under subdivision 32B (other than section 32-20) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Question 2

Are the premises of the first venue an 'in-house dining facility' pursuant to item 1.1 of section 32-30 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes, the restaurant is an 'in-house dining facility'.

No, the function rooms are not an 'in-house dining facility'.

Question 3

Are the premises of the second venue a 'dining facility' pursuant to item 1.3 of section 32-30 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Relevant facts

The public educational institution (institution) holds income tax exemption status.

The public educational institution provides food and drink to its employees at two venues in a variety of situations related to its education operations.

First venue

The premises of the first venue are run by a company that is the current approved caterer for the institution.

The venue is separated from the public educational institution but is located on premises owned by the institution which is licensed to the venue.

The object of the venue is to provide social amenities and accommodation on venue premises for the use of members and their guests. This is predominantly by way of the use of rooms for hire and the provision of food and drink.

The venue provides morning/afternoon teas and light lunches. Finger foods may also be provided for functions held at worksites on university premises. It will provide banquet and cocktail function food and drink where requested by a member.

The majority of the food and drink will be provided during working hours or eligible seminars. The public educational institution has advised that an eligible seminar is regarded as a seminar within the parameters of section 32-65 of the ITAA 1997.

There may be minor instances where food and drink is provided as part of a social function. These instances are treated as entertainment and subject to fringe benefits tax.

Employees may use venue facilities for private purposes but the cost is borne by the employee not the public educational institution.

The venue complex consists of a restaurant with full kitchen facilities and function rooms. The restaurant provides primarily light sit down meals between 11:30am and 6:30pm. Occasionally it operates longer and may provide more substantial meals.

The function rooms are used for eligible seminars and for business purposes such as faculty meetings. A sit down facility can be provided. The food and drink and serving facilities for these rooms are supplied from the restaurant.

The venue does not provide overnight accommodation.

The first venue restricts its membership. The members may take guests and business contacts to the venue. Access to the building is restricted to venue members.

Second venue

The second venue is wholly owned by the public educational institution.

The venue complex includes a café, function room/restaurant and private function/meeting rooms that are housed on property leased by the public educational institution and sublet to the venue.

The café serves coffee, muffins and sandwiches. The main function room has full kitchen facilities. It is hired by the public educational institution at market rates.

The venue operates during working hours and later for eligible seminars.

All facilities at the venue are open to the public. However the private function rooms are available to the public for hire when not booked by the public educational institution. All rooms are used by its employees for a range of purposes from eligible seminars to business functions such as faculty meetings and entertaining business contacts

The venue provides mainly morning /afternoon teas, light lunches to the institution's employees. Occasionally a business related function may be held at which alcohol is included with the service of light finger food.

Other functions held at the venue by the public educational institution may include:

· Lunches or dinners as part of an eligible seminar with and without alcohol

· Lunches and or dinners not as part of an eligible seminar with or without alcohol

· Functions that would be defined as celebration dinners or balls.

Reasons for decision

Issue 1

The public educational institution (institution) is income tax exempt. It provides food and drink to its employees at two venues. The institution has asked if the provision of this food and drink to its employees at these venues constitutes an entertainment benefit that is a tax exempt body entertainment benefit as described by section 38 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA).

Question 1

Is the food and drink provided by the institution to its employees 'entertainment' as defined in section 32-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Section 32-10 of the ITAA 1997 describes entertainment as by way of food or drink or recreation, or accommodation or travel to do with providing that entertainment. If business discussions or transactions occur during entertainment events, the events are still considered to be entertainment. Some examples of entertainment are provided such as business lunches and social functions. In these examples the provision of food or drink confers entertainment on the recipient.

The institution provides morning and afternoon teas, light lunches and function finger food to its employees through two venues, both of which are situated on the institution's premises. The light meals are available to employees during working hours and may be served at the venues or at the employee's worksite. There are minor instances where the food and drink is provided as part of a social function. These minor instances are treated as entertainment and subject to fringe benefits.

Taxation Ruling IT 2675: Income tax and fringe benefits tax: entertainment - morning and afternoon teas; light meals; and in-house dining facilities, provides guidance on morning and afternoon teas; light meals and in-house dining facilities. Updated by its addenda, Taxation Ruling IT 2675A, it states that provision of morning and afternoon teas and light meals consumed on the taxpayer's premises or worksite by its employees and incidental visitors on a working day will not be regarded as the provision of entertainment but rather as the provision of refreshments to enable the employees or their clients to complete the working day in comfort. The provision of food and drink in these circumstances does not confer entertainment on the recipient. Therefore expenditure incurred in the provision of the food and drink on these occasions will not be denied deductibility under the general deduction provision, section 8(1) of the ITAA 1997. However, if alcohol is provided with these light meals, paragraph 8 of IT 2675 states the occasion constitutes the provision of entertainment in terms of section 32-5 of the ITAA 1997. Unless the occasion is identified as an exception under subdivision 32B of the ITAA 1997, all expenses incurred in providing the food and drink are denied deductibility.

Paragraph 10 of IT 2675 states:

'If an employer is an income tax-exempt body, expenditure on morning and afternoon tea and light meals is not a fringe benefit under section 38 (income tax-exempt body entertainment benefits) of the FBTAA.'

The institution is an income tax-exempt body that provides morning and afternoon teas and light lunches to its employees at venues located on its premises and at the employees' worksite. The provision of food and drink to its employees in these circumstances is not considered to be entertainment and is not an income tax-exempt entertainment benefit. In minor instances where the provision of food and drink is in a social context rather than as refreshment at work to allow employees to complete their working day in comfort, the expenditure is treated as a fringe benefit.

Where the food and drink provided to the institution's staff by the institution is the provision of entertainment, division 32 of the ITAA 1997 and section 38 of the FBTAA are to be considered. Occasions at which food and drink provided would be considered entertainment are banquets, cocktail parties, business meals and hot or substantial meals provided to employees in venues such as meeting rooms or restaurants.

Issue 2

Whether the provision of 'entertainment' by the public educational institution to its employees at the premises of two venues, is a tax-exempt body entertainment benefit?

Question 1

Is the provision of 'entertainment' (as defined in section 32-10 of the ITAA 1997) by the institution to its employees a tax-exempt body entertainment benefit pursuant to section 38 of the FBTAA?

According to section 38 of the FBTAA, 'where a person (referred to as the 'provider') incurs non deductible exempt entertainment expenditure that is wholly or partly in respect of the provision, in respect of the employment of an employee, of entertainment to a person(referred to as the 'recipient') being the employee or an associate of the employee, the incurring of the expenditure shall be taken to constitute a benefit provided by the provider to the recipient at that time in respect of that employment.'

Section 136(1) of the FBTAA defines non deductible exempt entertainment expenditure as non deductible entertainment expenditure to the extent to which it is not incurred in producing assessable income.

A public educational institution is generally exempt from a liability to pay income tax by virtue of item 1.4 of section 50-5 of the ITAA 1997 on the basis that it is a public educational institution. The institution holds an income tax-exempt status and is considered not to produce assessable income, thereby satisfying one of the requirements of 'non deductible exempt entertainment expenditure' under section 136(1) of the FBTAA.

The second requirement is that the entertainment expenditure is non deductible. To determine deductibility, tax-exempt bodies need to look at the same factors as income tax paying bodies in the income tax assessment provisions.

Section 32-5 of the ITAA 1997 does not allow a deduction for entertainment expenses except under subdivision 32-B. Entertainment is defined in section 32-10 of the ITAA 1997 as by way of food or drink or recreation or accommodation or travel to do with providing that entertainment. If business discussions or transactions occur during entertainment events they are still considered to be entertainment. Some examples that are provided are business lunches and social functions. Expenditure on these entertainment events is not deductible by virtue of section 32-5 of the ITAA 1997.

Entertainment expenses that are deductible are the exceptions listed in subdivision 32-B of the ITAA 1997. Section 32-20 of the ITAA 1997 is the main exception that allows an employer to claim a loss or outgoing to the extent that it is entertainment provided as a fringe benefit. Taxation Ruling TR 97/17 Income tax and fringe benefits tax: entertainment by way of food or drink, provides detail on the treatment of meal entertainment by tax-exempt bodies. At paragraph 33 Taxation Ruling TR 97/17 advises;

'Certain entertainment provided to employees of a tax-exempt employer gives rise to a separate category of fringe benefit known as a 'tax-exempt body entertainment fringe benefit'. It is only entertainment that is non-deductible for income tax purposes (e.g., a meal at a party) that gives rise to a tax-exempt body entertainment fringe benefit. Section 32-20 of the ITAA is ignored for the purposes of determining whether the entertainment expenditure is deductible.'

While section 32-20 of the ITAA 1997 is ignored when considering the second requirement of non deductible exempt entertainment expenditure, the other exception provisions in subdivision 32B of the ITAA 1997 are considered. Section 32-25 of the ITAA 1997 allows a deduction for entertainment expenditure in specific circumstances that are tabled in section 32-30 of the ITAA 1997. The institution has asked whether the provision of food and drink to its employees will make this expenditure deductible under item 1.1 for the first venue and under item 1.3 for the second venue.

Question 2

Are the premises at the first venue an 'in-house dining facility' pursuant to item 1.1 of section 32-30 of the Income Tax Assessment Act 1997 (ITAA 1997)?

'…a canteen, dining room or similar facility that:
(a) is on property you occupy; and
(b) is operated mainly for providing food and drink to your employees; and
(c) is not open to the public.

Note 1: In the case of a company, this definition also covers directors of the company as if they were employees: see section 32-80.

Note 2: In the case of a company, this definition also covers directors, employees and property of another company that is a member of the same wholly-owned group: see section 32-85.'

IT 2675 explains what is meant by the term operated mainly for providing food or drink. At paragraph 26 it states:

'In its context in the definition of 'in-house facility', the word 'principally', in relation to the operation of a facility, means operation mainly for providing food or drink. Whether a facility is operated principally for the required purpose will ordinarily be determined on a time basis i.e. operated more than 50% of the time it is used. However, time is not necessarily the sole criterion. The issue is one of fact, degree or impression. '

The venue is a company that is the preferred caterer for the institution. It operates from premises that are owned by the institution but are licensed to the venue.

Access to the building is limited to venue members and their visitors. The venue has restricted membership. The members may take guests and business contacts to the venue. This ruling is concerned only with those members of the venue who are employees of the institution.

Is the restaurant an 'in-house dining facility' as described by section 32-55 of the ITAA 1997?

The restaurant at the venue operates predominantly to provide food and drink during work hours (11:30am to 6:30pm) to the institution's employees on premises that are owned by the institution and not open to the public. The restaurant is therefore an in-house dining facility at the institution.

The expenditure incurred by the employer in providing meals at an in-house dining facility is an allowable tax deduction to a tax-paying body. The second requirement to be non deductible exempt entertainment expenditure is not met. Therefore the entertainment expenditure is not a tax-exempt body entertainment fringe benefit as described in section 38 of the FBTAA.

Are the upstairs function rooms an 'in-house dining facility' as described by section 32-55 of the ITAA 1997?

The function rooms upstairs are used for eligible seminars and for business purposes such as faculty meetings. The restaurant is responsible for providing the facilities used to serve food and drink in these rooms. Occasionally a sit down substantial meal is requested by the institution's employees. There are no kitchen facilities in the function rooms. The function rooms are not an in-house dining facility because:

they are not a canteen, a dining room or a facility similar to a canteen or a dining room, and

they are not operated wholly or principally for providing food and drink on working days to employees.

The function rooms are used for, or operate mainly as, venues for meetings or conferences. Entertainment provided in these circumstances that are not eligible seminars as defined by section 32-65 of the ITAA 1997, are tax-exempt body entertainment fringe benefits.

Question 3

Is the second venue a 'dining facility' pursuant to item 1.3 of section 32-30 of the Income Tax Assessment Act 1997 (ITAA 1997)?

The complex consists of a café, function room/restaurant and private function/meeting rooms. The café serves coffees, muffins and sandwiches. The main function room has full kitchen facilities and can accommodate a large number of people.

Item 1.3 of section 32-30 of the ITAA 1997 allows an employer a deduction for food and drink provided to its employees who perform most of their duties in connection with the dining facility or a facility (of which the dining facility forms a part) for providing accommodation, recreation or travel unless the food or drink is provided at a party, reception or other social function.

A dining facility is defined in section 32-60 of the ITAA 1997 as

(a) a canteen, dining room or similar facility; or

(b) a cafe, restaurant or similar facility;

that is on property you occupy.

Note: In the case of a company, this definition also covers property of another company that is a member of the same wholly-owned group: see section 32-85.'

The venue complex is on property leased by the institution and sublet to the venue. The venue is operated by a company that is wholly owned by the institution. The restaurant and café within the complex meet the definition of a dining facility in section 32-60 of the ITAA 1997.

However item 1.3 of section 32-30 of the ITAA 1997 that allows an employer a deduction for food and drink provided in a dining facility, states that the employees who are the recipients of the food and drink must perform most of their duties in connection with the dining facility or the broader facility that provides accommodation, recreation or travel. The institution's employees are employed in the education industry. They are not employed in the restaurant, travel or accommodation industry. Therefore they do not perform most of their duties in connection with the venue complex. The expenses incurred by the institution when entertainment is provided to its employees at the venue are not an allowable deduction under item 1.3 of Section 32-30 of the ITAA 1997.

The second requirement to be 'non deductible exempt entertainment expenditure' is met. Therefore the entertainment expenditure is a tax-exempt body entertainment fringe benefit as described in section 38 of the FBTAA.

Further issues for you to consider

Section 41 of the FBTAA exempts meals provided to employees in an in-house dining facility but does not operate to exempt from fringe benefits a tax-exempt body entertainment benefit.

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