Edited version of private ruling

Authorisation Number: 1011501153534

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Ruling

Subject: Entertainment fringe benefits

1. Is the provision of food and/or drink to the hosting employees who are not travelling considered to be the provision of entertainment?

Answer: Yes.

2. Is the provision of food and/or drink to the hosting employees who are travelling considered to be the provision of entertainment?

Answer: No.

3. Is the provision of food and/or drink to the event co-ordination employees considered to be the provision of entertainment?

Answer: No.

4. Is the provision of food and/or drink to the media liaison employees who are not travelling considered to be the provision of entertainment?

Answer: Yes.

5. Is the provision of food and/or drink to the media liaison employees who are travelling considered to be the provision of entertainment?

Answer: No.

This ruling applies for the following period:

The year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You organise numerous events in Australia to promote your brands.

Certain employees are required to attend these events to perform specific duties. For example, brand management; media liaison, corporate communication, product promotion and demonstration.

The employees are selected for attendance based on their positions and specific roles within the company, including their brand knowledge, marketing and communications skill set.

The requirement to attend events is an express requirement of the employee's employment job description. It is expected that employees in brand promotion or marketing roles will attend events aimed at profiling/promoting their particular brand.

All your employees who compulsorily attend promotional events are bound by your Alcohol Policy.

This ruling concerns the employees who attended the events in one of the following three categories:

(a) Hosting

A hosting employee is required to host customers and potential customers. This may include conducting product presentations and/or tasting demonstrations.

(b) Event Co-ordination

An event co-ordination employee is involved in the organisation, management and oversight of the event.

(c) Media Liaison

A media liaison employee manages the media liaison for a promotional event.

This ruling does not consider whether entertainment was provided to other employees who attended the function, but did not undertake any specific duties.

By way of example you have provided details of the duties undertaken by employees in the three categories at the following four promotional events:

1. a sporting event

2. an annual dinner to promote your products to senior business leaders and politicians

3. an annual awards night to promote your products in conjunction with a magazine

4. an annual launch to promote your products.

Relevant legislative provisions

Fringe Benefits Assessment Act 1986 Section 40

Fringe Benefits Assessment Act 1986 Section 58P

Fringe Benefits Assessment Act 1986 Subsection 136(1)

Income Tax Assessment Act 1997 Section 32-10

Income Tax Assessment Act 1997 Section 32-30

Income Tax Assessment Act 1997 Subdivision 32-B

Reasons for decision

Is the provision of food and drink to the employees considered to be the provision of entertainment?

Summary

'Entertainment' is defined in subsection 32-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to mean:

(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.

Subsection 32-10(2) of the ITAA 1997 states the following:

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.

Guidance on the situations in which the provision of food and drink will constitute the provision of entertainment is provided in Taxation Ruling TR 97/17 and in the Minutes of the FBT subcommittee of the National Taxation Liaison Group (NTLG) and the FBT States and Territories Industry partnership (FBT STIP). These publications can be viewed on the Tax Office website at www.ato.gov.au.

As set out in these publications and in subsection 32-10(2) of the ITAA 1997 a requirement to attend a function as part of the employment duties, whether or not business discussions occur, will not be detrimental to a finding that in 'fact' entertainment has been provided. Further, it is only a narrow category of cases where the provision of food or drink does not amount to 'entertainment'.

Two of the circumstances in which the provision of food or drink will not constitute the provision of entertainment are where the food or drink is consumed whilst on overnight business travel and where the food or drink is provided for the purposes of providing sustenance to an employee who is working long hours.

The application of the tests set out in TR 97/17 Income tax and fringe benefits tax: entertainment by way of food or drink (TR 97/17) leads to the conclusion that:

· the food and drink provided to the hosting employees who are not travelling will constitute the provision of entertainment as the food and drink is provided in a social setting designed to provide entertainment and does not come within one of the exceptions;

· the food and drink provided to the hosting employees who are travelling will not constitute the provision of entertainment as the employees are undertaking overnight business travel;

· the food and drink provided to the event co-ordination employees will not constitute the provision of entertainment as the food and drink is provided for sustenance purposes;

· the food and drink provided to the media liaison employees who are not travelling will constitute the provision of entertainment as the food and drink is provided in a social setting designed to provide entertainment and does not come within one of the exceptions; and

· the food and drink provided to the hosting employees who are travelling will not constitute the provision of entertainment as the employees are undertaking overnight business travel.

As you have not made an election under Division 9A of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) for the meal entertainment benefits to be treated as meal entertainment fringe benefits the different outcomes will not affect the application of the FBTAA. In each situation the provision of the food and drink will be a property benefit as defined in section 40 of the FBTAA.

Depending upon the circumstances in which the food and drink is provided the benefit may be an exempt minor benefit if the requirements of section 58P of the FBTAA are satisfied. Further guidance on the application of section 58P is provided in Taxation Ruling TR 2007/12 Fringe benefits tax: minor benefits.

A property benefit which is not an exempt benefit will be a property fringe benefit. The taxable value of a property fringe benefit depends upon whether the employee could have claimed an income tax deduction for the cost of the food and drink if he or she had purchased the food and drink. An example of a situation in which an employee could claim an income tax deduction is where he or she is undertaking overnight business travel.

Detailed reasoning

'Entertainment' is defined in subsection 32-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to mean:

(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.

Subsection 32-10(2) of the ITAA 1997 states the following:

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 Income tax and fringe benefits tax: entertainment by way of food or drink TR 97/17 (TR 97/17) provides guidance whether food or drink is considered to be entertainment.

Paragraphs 17 and 18 of TR 97/17 note that while an element of entertainment is required before the provision of food or drink will constitute the provision of meal entertainment, it is only a narrow category of cases where the provision of food or drink does not amount to 'entertainment'.

To illustrate this principle, paragraph 20 refers to the provision of business lunches and drinks, dinners, cocktail parties and staff social functions as being examples of situations where the provision of the food or drink confers entertainment on the recipient. It states:

The wording of section 32-10 of the ITAA shows a clear intention to treat food or drink consumed in these situations as entertainment, whether or not business discussions or business transactions occur at the same time.

By contrast, paragraphs 19 and 21 provide two examples of where the provision of food and drink will not constitute the provision of entertainment. These paragraphs state:

19. We have expressed this view previously, for example, in Taxation Ruling IT 2675. That Ruling considers that the provision of morning and afternoon tea to employees (and associates of employees) on a working day, either on the employer's premises or at a worksite of the employer, is not entertainment. The provision of light meals (finger food, etc.), for example in the context of providing a working lunch, is not considered to be entertainment. The provision of food or drink in these circumstances does not confer entertainment on the recipient.

21. Where an employee is travelling in the course of performing their employment duties, the food or drink provided is consumed as a result of that work-related travel. In the absence of supplementary entertainment, the food or drink is not provided by the employer in order to confer entertainment on that employee. Therefore, the meal does not have the character of entertainment.

Paragraph 23 of TR 97/17 provides four tests that can be used to determine whether the provision of food or drink constitutes entertainment. It states:

It can be seen that the determination of whether or not the provision of food or drink constitutes entertainment requires an objective analysis of all the circumstances surrounding that provision. We are of the view that the following are relevant factors that should be considered in undertaking any objective analysis:

(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.

(c) 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.

(d) 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.

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.

In applying these four tests, paragraph 24 states:

No one of the above factors will be determinative; however, paragraphs (a) and (b) are considered the more important.

TR 97/17 then provides a table that contains the outcomes in various situations. One of the situations set out in part (g) is food or drink consumed by employees at a promotion where the function is not held on the employer's premises and is open to the general public. This situation is discussed in paragraphs 121 to 124 of TR 97/17 which state:

121. Is an employer liable to FBT on food or drink provided to employees at a promotional function not held on the premises of the employer? The promotional function is open to the general public.

Answer

122. Yes. A property fringe benefit is provided to employees in these circumstances. Where the food or drink amounts to meal entertainment, the 'otherwise deductible' rule does not apply to reduce the taxable value of the benefit provided.

123. The employer can claim a deduction under section 8-1 of the ITAA for the costs of staging the function because item 4.3 of the table in section 32-45 prevents section 32-5 of the ITAA from denying an income tax deduction.

Example 14.1

124. An employer who owns a department store holds a fashion parade in a nearby convention centre. Employees attend the function, and food or drink is served. The employer has a liability to FBT in respect of the food or drink provided to the employees. A 'per head' apportionment basis as per Taxation Determination TD 94/25 can be used to determine the value of the food or drink provided to each employee.

Further examples of the way in which the provision of food and drink will be treated are contained within the Minutes of forums such as the FBT subcommittee of the National Taxation Liaison Group and the FBT States and Territories Industry Partnership. These minutes are available on the Tax Office website at www.ato.gov.au.

For example, the issue of whether entertainment is provided to employees of sporting bodies and clubs who are required to attend functions or events to host sponsors or members of the public who have paid to attend the event was discussed at the meeting of the FBT subcommittee of the NTLG held on 19 May 2005. The Tax Office in responding to the agenda item stated:

In essence, the CPA Australia submission contends that firstly, in the circumstances outlined, that the employee's attendance is required/mandatory and is part of the employee's duties of employment. Secondly, that a 'player' is providing entertainment at a particular function and therefore is not being entertained and thirdly that attendance at interstate functions does not have the character of entertainment.

Given the above referred to extracts from TR 97/17 the first proposition put forward cannot be accepted. The views of the Tax Office and the clear policy intent of the relevant legislation covering 'entertainment' is that a requirement to attend a lunch, function and so on, as part of employment duties, whether or not business discussions occur, will not be detrimental to a finding that in fact 'entertainment' has been provided.

The Tax Office noted Case Y11, 91 ATC 184, as being on point (notwithstanding the fact that the case considered section 51AE which was repealed, as the current relevant provisions in Division 32 of the ITAA contain the same broad policy intent).

That case concerned a senior officer of the Australian defence force who was engaged to negotiate at high levels in the USA over substantial contracts. The expenditure that was in question in the case was incurred on a range of lunches, cocktail parties, dinners and other forms of social contact which were directly relevant to the taxpayer's negotiating duties and the discharge of the protocols of his exacting office. The applicant's argument was that he was a serving military officer and that he was required to carry out those duties. The Senior Member affirmed the decision under review, the applicant was not entitled to deduct the expenditure incurred and noted that 'whatever policy compromises are involved in a blunt and essentially arbitrary solution to the problem of taxation of entertainment fringe benefits, the objectives of the provision are clear'.

In relation to the second contention, that a 'player' is in fact the entertainment at a particular function and is not therefore being entertained, the Tax Office acknowledged that in applying the tests in TR 97/17, it could be correct to say that entertainment has not been provided to that player (as an employee). The player may appear as the draw-card and is not attending the function to be entertained.

In respect of the third contention, that attendance at interstate functions does not have the character of entertainment, this would require all the facts of a particular circumstance to be considered.

TR 97/17 adopts the following broad position re entertainment and travelling at paragraph 21. 'Where an employee is travelling in the course of performing their employment duties, the food or drink provided is consumed as a result of that work-related travel. In the absence of supplementary entertainment, the food or drink is not provided by the employer in order to confer entertainment on that employee. Therefore, the meal does not have the character of entertainment.'

In the circumstances put forward, supplementary entertainment is, given the tests and views expressed in TR 97/17, being provided. In such cases attendance at an event, related travel and related accommodation to employees who are required to attend functions/games/events interstate would not appear to immediately be otherwise deductible under either section 24, 44 or 52 of the FBTAA.

Further examples are contained in the Minutes of the FBT STIP meeting held on 9 September 2005. The most relevant examples to your situation are scenarios 17 and 18 which concern the treatment of the food and drink provided to an employee who attends a function to undertake official duties, or as a result of their position.

Scenario 17 concerned the following situation:

A department with responsibility for sporting facilities have rooms within stadia to undertake work (meetings, functions, and so on). During sports events and sporting functions, the department assigns several employees to co-ordinate the function, act as MC, act as liaison for the media and VIP guests and/or co-ordinate security and on site vendors. These employees are provided with a meal which they may consume at the table of paying guests or VIP guests. These employees do not get the opportunity to watch the sporting event or be 'entertained' at the function because they are busy carrying out their employment duties.

The Tax Office response quoted the above extract from the minutes of the FBT subcommittee of the NTLG meeting of 19 May 2005. It also stated:

It is not clear whether the meals are consumed on business premises, what the full duties of the employees are, how elaborate the meals are, whether alcohol is provided and so on.

The Tax Office also noted that in such circumstances, not having the opportunity to watch the sporting event, in itself, does not assist in determining whether the food or drink amounts to entertainment.

It is important to determine, objectively, whether meal entertainment has been provided. As noted in TR 97/17 it is only in a narrow category of cases where the mere provision of food or drink does not amount to 'entertainment' for purposes of Division 32 of the ITAA.

Apart from morning and afternoon teas and light meals provided on business premises, the narrow category of cases includes meals provided to employees on business travel overnight, theatre attendance by a critic and a restaurant meal of a food waiter. These are specified examples of what is not entertainment for the purposes of Division 32 of the ITAA (refer note to sub-section 32-10 (2)). This is not an exclusive list; they are examples of what is not entertainment.

An objective analysis, in accordance with TR 97/17, in circumstances where an employee consumes food and drink at a table with guests would generally result in a conclusion that 'meal entertainment' has been provided.

Scenario 18 concerned the following situation:

1. A non-government organisation such as Chamber of Commerce may hold a function off government premises, whether it is a meeting with food and drink provided afterwards or a sit-down dinner. A Department is asked to send a representative to provide a presentation regarding relevant government initiatives.

2. There is also the situation as above but the non-government organisation does not require a government representative. However, the Department may pay for an employee to attend the function to keep abreast with what is happening in the local business community.

3. One government agency conducts a meeting on premises and invites an 'expert' from another agency to provide a presentation. Food and drink is provided following the meeting.

The Tax Office response stated:

It is important to determine, objectively, whether meal entertainment has been provided. As noted in TR 97/17 it is only in a narrow category of cases where the mere provision of food or drink does not amount to 'entertainment' for purposes of Division 32 of the ITAA.

As per the FBT NTLG minutes noted in scenario 17, is some cases, food or drink provided to an employee attending a function, such as a presenter, may not amount to entertainment.

Where the employer has paid for an employee to attend a function, consideration of issues such as whether it is a seminar or CPD session need to be determined. Such issues are discussed at paragraphs 104 - 120 TR 97/17. If the function does not satisfy either a seminar or a CPD session, an objective conclusion would result in the food and drink being meal entertainment.

In relation to the third example, application of the principles contained in IT 2675 is required, as it would appear that the food or drink is provided on business premises.

In applying these examples to the three categories of employees:

Hosting

In considering these factors:

each of the events involves food or drink being provided at a promotional event;

in each instance clients are receiving entertainment as part of the promotion;

the promotional events are held at an entertainment venue;

none of the venues are the employer's business premises, or the employee's usual place of work; and

the food and drink provided varies between an elaborate sit down meal to alcoholic drinks with finger food.

As set out in subsection 32-10(2) of the ITAA 1997 the fact that business discussions occur while the food and drink is consumed will not prevent the food and drink being entertainment. Therefore, the fact that the employees are required to attend the events as part of their employment duties will not prevent the food and drink constituting the provision of entertainment.

Therefore, as the functions attended by the employees are similar to the business lunches and social functions which the note to subsection 32-10(2) of the ITAA 1997 states are entertainment, the food and drink provided to the employees will constitute the provision of entertainment unless there are factors that indicate entertainment is not being provided.

As indicated in the note to subsection 32-10(2) of the ITAA 1997 one instance in which the food and drink will not constitute the provision of entertainment is where the employee is travelling. In discussing the treatment of food or drink that is consumed by employees travelling on business paragraphs 70 and 71 of TR 97/17 state:

70. Will an employer be liable to FBT on the reimbursement to an employee of the cost of food or drink consumed while travelling on the employer's business?

Answer

71. No. Generally, the food or drink does not amount to meal entertainment. The employer is providing the employee with food or drink while undertaking work-related travel. As a result, the food or drink does not have the character of entertainment. However, this is not the case where there was entertainment (e.g., a floor show) provided with the meal. The cost of the food or drink would have been 'otherwise deductible' to the employee under section 8-1 of the ITAA. Therefore, the taxable value of the expense payment fringe benefit is reduced to nil.

In applying these paragraphs:

· the food and drink provided to the hosting employees who are not travelling will constitute the provision of entertainment; but

· the food and drink provided to the hosting employees who are travelling will not constitute the provision of entertainment unless additional entertainment is provided with the meal.

Event co-ordination

As outlined above in relation to the hosting employees:

· each of the events involves food or drink being provided at a promotional event;

· in each instance clients are receiving entertainment as part of the promotion;

· the promotional events are held at an entertainment venue; and

· none of the venues are the employer's business premises, or the employee's usual place of work.

However, unlike the hosting employees the event co-ordinators do not receive food and/or drink with the clients. Rather, than being a host that consumes the food and/or drink with clients, the event co-ordinators do not receive the food and drink as part of the event. Instead, the event co-ordinators are involved in providing the entertainment as their duties include setting up, managing staff, guests and serving drinks.

Therefore, the application of the four tests set out in TR 97/17 leads to the conclusion that the food and drink provided to the event co-ordinators does not involve the provision of entertainment as it is provided for sustenance purposes.

Media Liaison

The food and drink provided to the employees involved in media liaison will generally be the same as that of the hosting employees. That is:

· the food and drink provided to the employees who are not travelling will constitute the provision of entertainment; but

· the food and drink provided to the employees who are travelling will not constitute the provision of entertainment.

However, this will depend upon whether the media liaison employees receive food or drink at the promotions. The facts as provided indicate that this may not always occur.

Fringe benefits tax

In discussing your ruling application you indicated that you had applied for the ruling to clarify the fringe benefits tax obligations that will arise from the attendance of the employees at the events.

As you have not made an election under Division 9A of the FBTAA for the meal entertainment to be treated as meal entertainment fringe benefits the different outcomes will not affect the application of the FBTAA. In each situation the provision of the food and drink will be a property benefit as defined in section 40 of the FBTAA.

Depending upon the circumstances in which the food and drink is provided, the benefit may be an exempt minor benefit if the requirements of section 58P of the FBTAA are satisfied. Further guidance on the application of section 58P is provided in Taxation Ruling TR 2007/12 Fringe benefits tax: minor benefits.

A property benefit which is not an exempt benefit will be a property fringe benefit. The taxable value of a property fringe benefit depends upon whether the employee could have claimed an income tax deduction for the cost of the food and drink if he or she had purchased the food and drink.

If the employee could have claimed an income tax deduction for the cost of the food and drink the taxable value will be reduced to nil. For example, the taxable value of the food and drink provided to an employee undertaking overnight business travel will generally be reduced to a nil value.

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