Edited version of private ruling

Authorisation Number: 1011601939469

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Ruling

Subject: Fringe benefits tax: Sales promotions packages

Issue 1

Deductibility of expenditure incurred in relation to "entertainment" as defined in the Income Tax assessment Act 1997 (ITAA 1997).

Question 1

Is this application for a private ruling in respect of the advertising packages is in a form approved by the Commissioner of Taxation in accordance with section 359-10 of the Taxation Administration Act 1953 (TAA)?

Answer

Yes.

This ruling applies for the following period:

1 January 2009 - 31 December 2009.

The scheme commences on:

1 January 2009.

Question 2

Does expenditure incurred in providing incentives under the promotional packages that fall within the definition of 'entertainment' under section 32-10 of the Income Tax Assessment Act 1997 remain deductible under section 8-1 of the Income Tax Assessment Act 1997 by virtue of Item 4.1 of the table in section 32-45 of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following period:

1 January 2009 - 31 December 2009.

The scheme commences on:

1 January 2009.

Issue 2

Reduction of fringe benefits tax liability where the expenditure in issue (1) above includes costs associated with the assignment of employees to act in the capacity of "tour leaders" in respect of company promotions.

Question 1

Where the expenditure on the promotional packages includes costs associated with assigning employees to act in the capacity of 'tour leaders' in respect of the promotions, is that expenditure subject to a fringe benefit tax pursuant to the Fringe Benefits Tax Assessment Act 1986?

Answer

No.

Relevant facts and circumstances

The taxpayers, are all members of the same tax consolidated group of companies except for one company. As a means of attracting long term clients and building loyalty, packages are offered by the taxpayers to prospective clients which combine regular services with the provision of a benefit/incentive which could be used by the recipient for the purpose of entertainment. The cost of the package is based on the normal cost of service to a third party. The incentives are offered as a bonus to encourage clients to take up the advertising offer.

Copies of the incentive packages offered by the taxpayers have been provided. The incentives principally consist of either a trip or invitation to a seminar, sporting event or party. The packages are provided on terms similar to those detailed in the appendices to earlier ruling requests in respect of prior income years.

The packages are promoted in newspapers or on a 'one to one basis' to existing and prospective clients through sales representatives of the group members in an attempt to attract additional business. In addition, where appropriate, packages are also promoted by representatives of the marketing arm of the group of companies to agencies which represent potential clients. It is the objective of the group members to reach the maximum number of potential clients with news of a particular package in order to sell the maximum number of packages. Any person or entity who wishes to purchase a package is entitled to receive the incentives outlined.

The cost of certain packages includes expenses associated with sending employees of the taxpayers to act as hosts or tour guides at the relevant sports event, party etc. In having staff members accompany the clients on certain benefit/incentive packages, the group members seek to open further business and marketing opportunities.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1,

Income Tax Assessment Act 1997 Section 32-5,

Income Tax Assessment Act 1997 Section 32-10,

Income Tax Assessment Act 1997 Section 32-45,

Fringe Benefits Tax Assessment Act 1986 Section 40,

Fringe Benefits Tax Assessment Act 1986 Section 44,

Fringe Benefits Tax Assessment Act 1986 Section 45,

Fringe Benefits Tax Assessment Act 1986 Section 52,

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1), and

Taxation Administration Act 1953 Section 359-10.

Issue 1

Question 1

Summary

The application for a private ruling in respect of the advertising packages is in a form approved by the Commissioner of Taxation in accordance with section 359-10 of the Taxation Administration Act 1953 (TAA).

Detailed reasoning

According to section 359-10 of the Taxation Administration Act 1953 (TAA) an application for a private ruling must be made in the approved form. The approved form is outlined in Practice Statement Law Administration PS LA 2008/3, Provision of advice and guidance by the Tax Office. Paragraph 85 of PS LA 2008/3 states that:

The application will be in the approved form provided it is in writing and contains all the necessary information, including copies of all relevant documents, the checklisted items and declaration referred to in the relevant standard form.

The application was submitted in the approved form as it used the Private ruling application form for tax professionals and included all the necessary information, copies of all relevant documents, a completed checklist and declaration.

Question 2

Summary

Expenditure incurred in providing incentives under the promotional packages that fall within the definition of 'entertainment' under section 32-10 of the Income Tax Assessment Act 1997 remain deductible under section 8-1 of the Income Tax Assessment Act 1997 by virtue of Item 4.1 of the table in section 32-45 of the Income Tax Assessment Act 1997.

Detailed Reasoning

Entertainment expenses

Section 32-5 of the Income Tax Assessment Act 1997 (ITAA 1997) denies an entity a deduction under section 8-1 of the ITAA 1997 for any loss or outgoing incurred in respect of providing 'entertainment'. Entertainment is defined under section 32-10 of the ITAA 1997 as meaning:

· entertainment by the way of food, drink or recreation; or

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

However there are exceptions that allow entertainment expenses to be deductible under section 8-1 of the ITAA 1997. These exceptions are set out in Subdivision 32-B of the ITAA 1997. Item 4.1 of the table in section 32-45 of the ITAA 1997 allows a deduction for a loss or outgoing that is entertainment, provided:

· it is provided to an individual under a contract to supply him or her with goods and services in the ordinary course of your business; and

· you incur the loss or outgoing to promote or advertise to the public your business or its goods or services.

The group's promotional expenses satisfy the first criteria. They entered into a contract to supply goods and services in the ordinary course of their business. The entertainment was provided under an agreement whereby the client purchased the services of the group members.

The second limb requires that the entertainment expense be incurred in promoting or advertising to the public the business or its goods or services. By incurring a loss or outgoing in attracting potential clients they satisfy the second limb. The public are the potential clients.

Issue 2

Question 1

Summary

The expenditure on the promotional packages includes costs associated with assigning employees to act in the capacity of 'tour leaders' in respect of the promotions, is not subject to a fringe benefit tax pursuant to the Fringe Benefits Tax Assessment Act 1986.

Detailed reasoning

Fringe benefits

'Fringe benefit' is defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) and generally applies to a benefit that is provided to an employee in respect of their employment. The benefit may be provided by the employer, an associate of the employer or under an arrangement with a third party.

Attendance by employees as 'tour guides' at the promotional events results in those employees being provided with 'fringe benefits'.

The types of benefit that may arise are property benefits under section 40 of the FBTAA, being the provision of food and drink, and residual benefits under section 45 of the FBTAA being the right to participate in the events.

The taxable value of the fringe benefits would normally be the costs incurred in providing the benefits to the employees. However, the taxable value can be reduced by using the "otherwise deductible rule" under section 44 of the FBTAA in relation to property fringe benefits and section 52 of the FBTAA in relation to residual fringe benefits.

Broadly, this means that the taxable value may be reduced by the amount that the employee would have been entitled to claim as an income tax deduction, if the employee had incurred the expenses to perform their employment related duties rather than being provided with benefits by the employer.

As the employees acting as 'tour guides' are undertaking work responsibilities, the taxable value of fringe benefits that arise from the costs of allowing them to attend the promotional events can be reduced to nil by applying the "otherwise deductible rule".

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