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Ruling

Subject: Tax-exempt body entertainment fringe benefits

Question 1

Are incidental expenses incurred in the running of an end of year staff celebration capable of being tax-exempt body entertainment fringe benefits under Section 38 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)?

Answer

Yes, if they satisfy the conditions of Section 38 of the FBTAA 1986.

Question 2

Can internal costs (transfer of costs between internal departments for accounting purposes) that are incurred in the running of the end of year staff celebration be tax-exempt body entertainment fringe benefits under Section 38 of the FBTAA 1986?

Answer

Yes, however they must satisfy the conditions of Section 38 of the FBTAA 1986 as set out in question 1.

Question 3

Can any tax-exempt body entertainment fringe benefits be valued using the 50/50 split method under Division 9A of the FBTAA 1986?

Answer

Yes, meal expenses can be valued using the 50/50 split method under Division 9A of the FBTAA 1986.

This ruling applies for the following periods:

Year ended 31 March 2012

Year ended 31 March 2013

Year ended 31 March 2014

The scheme commences on:

1 April 2011

Relevant facts and circumstances

The employer is exempt from income tax and uses the 50/50 split method to account for fringe benefits tax (FBT) meal entertainment.

The employer hosted an end of year staff celebration to recognise the achievement, milestones and individual/team successes made by staff during the year.

The event was held on-site at the employer's premises and during normal working hours.

Entry to this event was restricted to staff that registered their interest with the department who was responsible for organising the event.

The event consisted of an elaborate meal, drinks including alcoholic beverages and some performance based entertainment. Further expenses were incurred in the installation of staging and audio facilities, decorative elements and planning requirements of the event.

Some of the above mentioned expenses were internal departmental charges allocated between departments for accounting purposes.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Division 9A

Fringe Benefits Tax Assessment Act 1986 Division 10

Fringe Benefits Tax Assessment Act 1986 Section 37AA

Fringe Benefits Tax Assessment Act 1986 Section 38

Fringe Benefits Tax Assessment Act 1986 Section 39

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Division 32

Income Tax Assessment Act 1997 Section 32-5

Income Tax Assessment Act 1997 Section 32-10

Income Tax Assessment Act 1997 Section 50-50

Reasons for decision

Question 1

Under Division 10 of the FBTAA 1986, a tax-exempt body which is exempt from income tax may be subject to FBT on the provision of employment related entertainment to its employees.

Section 38 of the FBTAA 1986 defines tax-exempt body entertainment benefits as:

Where, at a particular time, a person (in this section 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 (in this section 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.

Therefore, a tax-exempt body entertainment fringe benefit will arise when the following three conditions are satisfied:

· the benefit is provided in respect of employment;

· the benefit constitutes the provision of entertainment; and

· the employer incurs non-deductible exempt entertainment expenditure.

1. Is the benefit provided in respect of employment?

The employer hosted an end of year celebration to recognise the achievement, milestones and individual/team successes made by staff during the year. Staff attended the event in their capacity as employees and thus the benefit was provided in respect of employment. This condition is satisfied.

2. Does the benefit provided constitute the provision of entertainment?

Section 32-10 of the Income Tax Assessment Act 1997 (ITAA 1997) and the natural meaning of the word entertainment allows for food, drink, and things that amount to recreation, to constitute entertainment. Paragraph 17 of Taxation Ruling TR 97/17 refers to the words of Lord Thomson in Bow and Others v Heatly (1960) SLT 311 at 313 where he states that entertainment is the gathering together of a number of people to carry out some activity or to be present at some activity presumably with a view of enjoying themselves.

TR 97/17 sets out the Commissioner's view on the concept of entertainment by way of food or drink for the purposes of applying the relevant provisions of the FBTAA 1986 and the ITAA 1997. The ruling does not specifically refer to the meaning of entertainment by way of recreation, but it is considered the views expressed in the ruling apply equally to entertainment by way of recreation.

Paragraph 13 of TR 97/17 states that as the words entertainment and recreation are not defined in the ITAA 1936 or 1997; they have their natural meaning, taken in the context that they appear in Division 32 of the ITAA 1997.

Paragraph 14 of TR 97/17 refers to the Macquarie Dictionary for the meaning of entertainment as agreeable occupation for the mind, diversion or amusement, or something affording diversion or amusement; or hospitable provision for the wants of a guest.

The Macquarie Concise Dictionary (third edition) defines recreation as 2. a pastime, diversion, exercise or other resource affording relaxation and enjoyment.

Paragraph 23 of TR 97/17 states 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. In TR 97/17, the Commissioner expresses the view that the following are relevant factors that should be considered in undertaking any such objective analysis:

· why is the food or drink (add or recreation) provided

· what food or drink (add or recreation) is provided

· when is the food or drink (add or recreation) provided

· where is the food or drink (add or recreation) provided

It has been concluded above that the Commissioners view should apply equally to entertainment by way of recreation.

Paragraph 24 of TR 97/17 provides that although no one of these factors will be determinative, paragraphs (a) and (b) are considered the more important.

Taxation Determination TD 94/55 further considers when an item of property may constitute the provision of entertainment through the recreation limb. TD 94/55 considers things which are not food or drink and is consistent with the principles contained in TR 97/17, such as Paragraph 2 which states:

Regard should be had to all the circumstances of the case. In particular, regard should be given to the character of the entertainment to be derived from the item of property provided. This character is distinct from the property itself and relates to the immediate and active use of the property.

TD 94/55 determines that, in practice, whether an item is capable of producing recreational entertainment can be determined by reference to the characteristics of:

· the timeliness - that is, entertainment occurs soon after provision of the item

· the usefulness - the usefulness of the item should expire after consumption or the item is returned at the completion of use; and

· a direct connection - the entertainment should arise from the use of the item and the entertainment is the expected outcome of the provision of the property.

The application of the above factors from TR 94/17, taking into account the characteristics of an item constituting recreational entertainment from TD 94/55, results in the determination of whether expenditure in relation to meals, drinks and the other items amounts to entertainment.

(a) Why is the food and drink (or recreation) being provided?

The meal and drinks were provided with the intention of being more than mere refreshments or sustenance, which suggests an entertainment focus in relation to this expenditure.

In regards to the other expenses incurred, if particular items had the purpose of creating a fun, enjoyable and celebratory occasion, then this factor would lean towards those items relating to the provision of entertainment.

If other items did not confer on the attendees the usual concept of enjoyment which is associated with entertainment, then this factor would lean towards those items not amounting to entertainment

(b) What food and drink (or recreation) is provided?

The elaborate nature of the meal increases the likelihood that entertainment arose from the consumption of the meal.

In relation to the other expenses incurred, things that are considered integral to the function being a celebration, and would be enjoyed by the attendees for only the night would lean towards those items constituting entertainment.

(c) When is the food or drink (or recreation) provided?

The food, drink and recreation were provided during work hours. Generally, food, drink and recreation provided outside of work time is more likely to involve the provision of entertainment. However, the non-compulsory nature of the attendance in this instance leads to an entertainment focus.

(d) Where is the food or drink (or recreation) provided?

The food, drink and recreation provided to employees took place on-site at the employer's premises. Generally, food, drink or recreation that is 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.

In determining whether the expenses incurred amount to entertainment for the purposes of applying Section 38 of the FBTAA 1986, we must analyse the factors above. Although the event was held at a facility owned by the employer, it does not indicate that it was of a purely business nature and therefore a non-social event. The non-compulsory requirement for staff to attend, the provision of the more elaborate food and the creation of a spectacle through the use of staging and audio facilities indicates that the purpose of the event was to celebrate the achievements of staff through the provision of entertainment.

As such, the expenses incurred in regard to the meal and drinks amounts to entertainment for the purpose of applying the other conditions of Section 38 of the FBTAA 1986.

Other expenses, such as staging and decorations in this case, created a fun, enjoyable and celebratory occasion, are considered integral to the function being a celebration, and were enjoyed by the attendees for only the event. These expenses related to the provision of entertainment by way of recreation for the purpose of applying the other conditions of Section 38 of the FBTAA 1986.

Other expenses that did not confer on the attendees the usual concept of enjoyment which is associated with entertainment, in this case event planning, did not amount to entertainment for the purpose of applying the other conditions of Section 38 of the FBTAA 1986.

3. Does the employer incur non-deductible exempt entertainment expenditure?

Subsection 136(1) of the FBTAA 1986 defines "non-deductible exempt entertainment expenditure" to mean non-deductible entertainment expenditure to the extent to which it is not incurred in producing assessable income.

Whether a person provides a tax-exempt body entertainment benefit therefore depends on the meaning of the expression non-deductible entertainment expenditure. Subsection 136(1) of the FBTAA 1986 defines non-deductible entertainment expenditure as:

· a loss or outgoing to the extent to which:

Section 32-5 of the Income Tax Assessment Act 1997 applies to it, or would apply if it were incurred in producing assessable income; and

· apart from that section, it would be deductible under section 8-1 of that Act, or would be if it were incurred in producing assessable income;

· (on the assumption that section 32-20 of the Income Tax Assessment Act 1997 had not been enacted).

1. Not incurred in producing assessable income:

The employer is exempt from a liability to pay income tax with both their ordinary and statutory income being exempt. This means that any activities that it pursues are in respect of the gaining or producing of exempt income and not assessable income. Therefore, expenditure by the employer in relation to the end of year staff celebration cannot be in respect of the gaining or producing of assessable income.

2. Non-deductable entertainment expenditure:

Section 32-5 of the ITAA 1997 provides that expenditure on entertainment is not deductible under Section 8-1. It is not the provision of food or drink or recreational expenses in itself that is made non-deductible by Section 32-5 of the ITAA 1997. It is the provision of entertainment by way of food, drink or recreation that is non-deductible. As it has been determined that certain expenses incurred by the employer related to the provision of entertainment, then it is non-deductible entertainment expenditure.

Conclusion

The end of year celebration was provided to staff in respect of their employment, the food, drinks and certain expenses constituted the provision of entertainment and the employer incurred non-deductible exempt entertainment expenditure in relation to holding the event. Therefore, certain expenses constitute tax-exempt body entertainment benefits under Section 38 of the FBTAA 1986.

Question 2

The transfer of costs between internal departments for accounting purposes can amount to tax-exempt body entertainment fringe benefits if the costs satisfy the requirements under Section 38 of the FBTAA 1986, as identified above in Question 1.

Question 3

Where tax-exempt body entertainment fringe benefits arise from providing meal entertainment, you may choose to classify these fringe benefits as meal entertainment fringe benefits. If you choose to classify a fringe benefit as a meal entertainment fringe benefit, in accordance with Section 37AA of the FBTAA 1986, you have to classify all fringe benefits arising from the provision of meal entertainment during the FBT year as meal entertainment fringe benefits.

Providing meal entertainment fringe benefits means:

· providing entertainment by way of food, drink

· providing accommodation or travel in connection with such entertainment, or

· paying or reimbursing expenses incurred in obtaining something covered by the above points.

You can choose the:

· 50:50 split method for valuing meal entertainment fringe benefits and entertainment facility leasing expenses, and/or

· 12-week method for valuing meal entertainment fringe benefits.

Only meal entertainment can be valued using the two methods mentioned above.

The taxable value of the recreation component of tax-exempt body entertainment is generally equal to the cost of the activity, for example, the cost of a band hired to play at an event.

You must decide to classify fringe benefits as meal entertainment no later than the day your FBT return is due to be lodged with us or if you do not have to lodge, by X. If no election is made to use either the 50-50 split method or the 12 week register method, then the taxable value of any meal entertainment benefits should be calculated in accordance with Section 39 of the FBTAA 1986.

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