Edited version of private ruling

Authorisation Number: 1011812528616

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Ruling

Subject: Fringe benefits tax - Exempt Property Benefits

Question 1

Are the meals provided to X's employees at outlet 'A', outlet 'B' and outlet 'C' an exempt property benefit pursuant to section 41 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes, with the exception of those benefits that are reimbursements or tax-exempt body entertainment, as these are not a property benefits under section 40 of the FBTAA.

Question 2

Are the meals provided to X's employees at outlet 'D' an exempt property benefit pursuant to section 41 of the FBTAA?

Answer

Yes, with the exception of those benefits that are reimbursements or tax-exempt body entertainment, as these are not a property benefits under section 40 of the FBTAA.

Question 3

Are the meals provided to X's employees at outlet 'E', outlet 'F', outlet 'G', outlet 'H', outlet 'I', outlet 'J' and outlet 'K' an exempt property benefit pursuant to section 41 of the FBTAA?

Answer

Yes, with the exception of those benefits that are reimbursements or tax-exempt body entertainment, as these are not a property benefits under section 40 of the FBTAA.

This ruling applies for the following periods:

n Year ending 31 March 2012

n Year ending 31 March 2013

n Year ending 31 March 2014

n Year ending 31 March 2015

The scheme commences on:

1 April 2011

Relevant facts and circumstances

X has several dining facilities on it's premises opened for staff as follows:

· outlet 'A'

· outlet 'B'

· outlet 'C'.

The above dining facilities are owned by X but leased to and operated by an external party (Entity 1).

X also has several dining facilities on its premises opened for staff as follows:

· outlet 'D'

· outlet 'E'

· outlet 'F'

· outlet 'G'

· outlet 'H'

· outlet 'I'

· outlet 'J'

· outlet 'K'.

The above dining facilities are owned by X but leased to and operated by an external party (Entity 2).

The benefits are provided to employees by way of reimbursement and in some cases, the employees would make payments using their corporate credit cards. X can also make direct payments to the external parties for the meals.

The meals are mostly provided during breakfast and lunch time. The meals are provided for during business related meetings as X views any personal expenses payments made for its employees as a breach of its policy.

The circumstances of the meals provided will cover but not limited to staff meetings and business meetings with clients or external parties.

There is no limit on the amount of food and beverage that can be purchased in any one transaction. However, when making payment using the corporate credit card, every employee has different credit limits.

In some cases, alcohol may be included in the benefits.

Trading hours are normally Monday to Friday between 7am and 6pm.

Bookings are welcome for the restaurant and for the function rooms.

Any meal and drinks have to be ordered on arrival and not self served. Chairs and tables are provided.

The Restaurants are not restricted to staff and their guests for use during normal working hours.

The meals provided by the dining facilities are not required to be consumed at the facility that provided the meal. However, in most cases the meals would be consumed inside those facilities.

Each of the dining facilities provides a sit down area on their premises where the meal can be consumed by X's employees with the exception of outlet 'K'.

You have provided a copy of each of the agreements as follows:

· Licence between the X (Licensor) and Entity 1 (Licensee);

· Lease between X (Landlord) and Entity 2 (Tenant); and

· Lease between X (Lessor) and Entity 2 (Lessee).

The Licence agreement between X and Entity 1 provides the following clauses in relation to outlet 'A', outlet 'B' and outlet 'C':

Particular Clauses set out the terms of the Grant of License and reservations attached. They provide that the Licensee will pay the greater of the Base Rent and the Percentage Rent during the Term of the License. They also set out the conditions attaching to the License as follows:

This license:is personal to the Licensee only and does not create an interest in the site or the premises;. The licence shall confer no right of exclusive occupation of the Premises to the Licensee and the Licensor may at any time and all times and from time to time exercise all of its rights in respect of the Premises including the rights to use and possess and enjoy the whole or any part of the Premises save only in so far as such rights shall:

· prevent the operation of the Licence and rights with respect to the Premises; and

· be inconsistent with the express provisions of this License.

· is granted subject at all times to the right of the Licensor to utilise the Site and the Premises for the purposes for which the Site and the Premises are vested in the Licensor.

Further specific details of the Licence agreement were provided.

The Lease agreement between X and Entity 2 was provided.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 20

Fringe Benefits Tax Assessment Act 1986 section 40

Fringe Benefits Tax Assessment Act 1986 section 41

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 section 38

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Summary

The meals provided to X's employees at the dining facilities on X's premises are an exempt property benefit pursuant to section 41 of the FBTAA.

Detailed reasoning

Section 40 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) in respect of property benefits states:

Where, at a particular time, a person (in this section referred to as the "provider") provides property to another person (in this section referred to as the "recipient"), the provision of the property shall be taken to constitute a benefit provided by the provider to the recipient at that time.

Subsection 41(1) of the FBTAA provides the provision of a property benefit to an employee will be an exempt benefit where the following conditions are satisfied:

· the property benefit is provided to a current employee of an employer in respect of his or her employment, and

· the property is provided to, and consumed by, the employee on a working day and on business premises of:

· the employer; or

· if the employer is a company, of the employer or of a company that is related to the employer.

However, this exemption does not apply to employers who are exempt from income tax when entertainment arises from the provision of food and/or drink.

Providing morning or afternoon tea, or light meals to your employees on your premises is not entertainment if you are providing them to help your employees complete the working day in comfort.

However, if you provide alcohol at a morning or afternoon tea, or light lunch, you are providing entertainment to your employees; as such a tax-exempt body entertainment benefit would arise under section 38 of the FBTAA.

If the benefit is a tax-exempt body entertainment fringe benefit then it is not a property fringe benefit and thus can not be an exempt property benefit under section 41 of the FBTAA.

Also section 20 of the FBTAA provides that where an employer reimburses an employee in respect of expenditure incurred by the employee, that the reimbursement will constitute an expense payment fringe benefit.

Therefore reimbursement by the employer of expenditure incurred by the employee on food and drink is not a property benefit. As it is not a property benefit it cannot be exempt from FBT pursuant to section 41 of the FBTAA. Lights meals that are purchased at the dining facilities on X's premises by the employee and then reimbursed by X are not property fringe benefits and therefore are not exempt under section 41 of the FBTAA.

You have advised that the property (food and/or drink) will be:

· provided to a current employee in respect of their employment; and

· provided to, and consumed by, the employee on a working day;

· on the business premises of one of the dining facilities, with the exception of outlet 'K'.

Therefore, in determining whether the provision of the food and/or drink will be an exempt benefit it is necessary to whether the above dining facilities are considered your business premises. If they are then the food and/or drink provided to and consumed by an employee on working day will be an exempt benefit.

Are the dining facilities considered to be business premises of X for the purpose of section 41 of the FBTAA?

Subsection 136(1) of the FBTAA defines 'business premises':

"business premises", in relation to a person, means premises, or a part of premises, of the person used, in whole or in part, for the purposes of business operations of the person,…

The application of this definition is considered in Taxation Ruling TR 2000/4.

Paragraph 4 of TR 2000/4 states the premises will only be business premises if two requirements are met:

1. the premises or part of premises are 'of' the person; and

2. the premises or part of the premises must be used by the person, in whole or in part, for the purposes of their business operations.

Premises of the person

Paragraph 25 of TR 2000/4 states the question of whether premises or a part of premises are premises of the person is:

to be determined having regard to the nature of the person's interest in the premises, evidenced by the person's rights and obligations in relation to the premises.

In applying this test paragraphs 7 and 8 state:

7. If a person has ownership of premises, or has exclusive occupancy rights as lessee of premises, the premises would ordinarily be described as premises of the person.

8. In other circumstances, for example, where a person has non-exclusive possession of premises, the person satisfies this requirement if they have a right to possession of the premises, at least to the extent necessary to enable the conduct thereon of their business operations.

The following on dining facilities are on premises owned by X:

· outlet 'A'

· outlet 'B'

· outlet 'C'

· outlet 'D'

· outlet 'E'

· outlet 'F'

· outlet 'G'

· outlet 'H'

· outlet 'I'

· outlet 'J'

· outlet 'K'.

The premises may be premises of X; however, X may not have exclusive possession of the premises as the premises are split between and subject to three separate agreements:

· outlet 'A', outlet 'B' and outlet 'C' are subject to a Licence Agreement between the X and Entity 1;

· outlet 'D' is subject to a Lease Agreement between X and Entity 2; and

· outlet 'E', outlet 'F', outlet 'G', outlet 'H', outlet 'I', outlet 'J' and outlet 'K' are subject to a Lease Agreement between X and Entity 2.

These agreements raise the question of whether the premises can also be described as premises of either Entity 1 or Entity 2.

As set out above, paragraph 8 of TR 2000/4 indicates it is possible for premises to be premises of a person, even though they do not have exclusive possession of premises. What is required is for the person to have a right of possession to the extent necessary to enable the conduct thereon of their business operations.

In considering whether an employer has the necessary right of possession paragraphs 48 to 54 of TR 2000/4 discuss the importance of the employer having control over the use of the premises.

Paragraph 48 states the employer must have a right of possession and control over the use of the premises during the course of its business operations. The absence of a right of possession and control may indicate the premises are not of the person, or the activities being carried out on the premises are not truly business premises of the person.

In illustrating this point paragraphs 49 to 51 of TR 2000/4 state:

49. In most situations where premises are owned or held under a normal commercial lease, both possession and control exist. Conversely, for example, the ad hoc hire of squash courts by an employer does not make the squash courts 'business premises' of the employer. This is because any rights the employer has are subject to the overriding control of the operator. In a practical sense, the premises are not those of the employer.

50. It should be noted that situations do arise where a person has ownership of premises, while at the same time another person has exclusive occupancy rights as lessee of the premises, and so the premises could be described as premises of each of those persons. In other words, the premises could, in a particular period, be described as the premises of the owner and the premises of the lessee. However, while the Ruling at paragraphs 6 to 8 above may allow the identification of two persons, each of whom could satisfy the 'of the person' requirement, it does not automatically follow that each of those persons would satisfy the requirement that the premises be used for their 'business operations'.

51. On the other hand, the fact that particular premises are 'business premises' of a person does not necessarily preclude the premises from being 'business premises' of another person for the purposes of the FBTAA (per Merkel J in Esso Australia Ltd v. FC of T 98 ATC 4953, at 4959; (1998) 40 ATR 76, at 82; 157 ALR 652, at 658. That said, there is a practical limit to how many persons could concurrently establish that given premises are their 'business premises'. But again, this is a question of fact and degree, which can only be resolved by making a common sense judgment about the facts of each case and not by adopting any absolute rule - see Merkel J in Esso Australia Ltd v. FC of T 98 ATC 4953 at 4958; (1998) 40 ATR 76 at 81; 157 ALR 652 at 657).

The nature of Entity 1's interest in the premises is set out in their Licence Agreement. This agreement enables Entity 1 to occupy the identified premises for the permitted use but it does not provide the necessary right of control and possession to Entity 1. The particular clause of the Licence Agreement states that:

This License:is personal to the Licensee only and does not create an interest in the Site or the Premises. The license shall confer no right of exclusive occupation of the Premises to the Licensee and the Licensor may at any time and all times and from time to time exercise all of its rights in respect of the Premises including the rights to use and possess and enjoy the whole or any part of the Premises save only in so far as such rights shall:

· prevent the operation of the Licence and rights with respect to the Premises; and

· be inconsistent with the express provisions of this License.

· is granted subject at all times to the right of the Licensor to utilise the Site and the Premises for the purposes for which the Site and the Premises are vested in the Licensor.

Therefore, outlet 'A', outlet 'B' and outlet 'C' cannot be considered to be the premises of Entity 1.

The nature of Entity 2's interest in the premises is set out in their Lease Agreements. These agreements enable Entity 2 to occupy the designated areas for the permitted use but it does not provide the necessary right of control and possession to Entity 2.

In relation to outlet 'D' X's control over the premises is maintained as:

· it must consent to the permitted use of the premises by the Tenant;

· it must approve the name of the Tenant's business prior to commencing trade;

· it specifies the trading hours the premises must be open for business and when it will be closed for extended periods;

· it prohibits the Tenant from granting to any person any interest in the Premises or in the lease; and

· X is able to establish a marketing committee comprising representatives of X and the Tenant to promote the operation of the Premises and the permitted use conducted at or from them, including determining the price level and menu to apply from time to time.

In relation to the outlet 'E', outlet 'F', outlet 'G', outlet 'H', outlet 'I', outlet 'J' and outlet 'K' Lease, the recital states:

The land described in item 1 of the Schedule hereto (the Land) is vested in the Lessor for the purposes of the Lessor and for the purposes incidental hereto.

The Lease also determines the permitted use of the premises by the Lessee and prohibits the assignment or sub-letting of the premises with the consent of the Lessor, being X. It also provides that an advisory committee consisting of representatives appointed by X and the Lessee shall be established to discuss and monitor the catering operations undertaken by the Lessee.

Therefore, outlet 'D', outlet 'E', outlet 'F', outlet 'G', outlet 'H', outlet 'I', outlet 'J' and outlet 'K' cannot be considered to be the premises of Entity 2.

Business operations

The term 'business operations' is defined in subsection 136(1) of the FBTAA in relation to a government body or a non-profit company to include any operation or activity carried out by that body or company.

Consequently, as set out in paragraph 9 of TR 2000/4, business operations can include a wide range of activities.

Paragraph 41 of TR 2000/4 indicates that 'business operations' is regarded as wider than 'carrying on a business' and would include both passive and active dealings. It can include an activity that, although not undertaken in the ordinary course of carrying on a business, is nevertheless undertaken in the course of carrying on a business.

An example of this principle is provided in paragraph 10 of TR 2000/4 and states in part:

… the provision of benefits to current employees in the form of child care would be an important factor in recruiting, retaining and otherwise rewarding employees. Activities undertaken in connection with the provision of those benefits to employees would be 'business operations' of the employer.

X has entered into agreements with Entity 1 and Entity 2 to provide dining facilities on their premises to lecturers, students and visitors.. The buildings in which the dining facilities are located are owned by X.

X has been determined to have maintained control and possession of the premises subject to the agreements and subsequently these premises can be accepted as being used for the purposes of X's business operations.

Therefore, the dining facilities on the premises are considered to be business premises of X for the purpose of section 41 of the FBTAA.

As a result the meals provided to X's employees at outlet 'A', outlet 'B', outlet 'C', outlet 'D', outlet 'E', outlet 'F', outlet 'G', outlet 'H', outlet 'I' and outlet 'J' are an exempt property benefit pursuant to section 41 of the FBTAA with the exception of those benefits that are reimbursements or tax-exempt body entertainment, as these are not a property benefits under section 40 of the FBTAA.

In relation to outlet 'K' the meals provided to employees would need to meet the requirements of section 41 of the FBTAA for them to be an exempt benefit. That is the meals must be provided to and consumed by current employees of X, on a working day, on X's premises and must not be entertainment.

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