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Authorisation Number: 1012417391861

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Ruling

Subject: GST and entertainment expenses

Question

Can the entity claim input tax credits for the costs it incurs in holding the annual dinner under Division 11 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

No

Relevant facts and circumstances

You (the entity) are a government entity registered for goods and services tax (GST).

The entity's aim is to help deliver the Government's economic vision of a dynamic, innovative and sustainable economy in which business is encouraged to grow.

The entity has held black tie dinner annually since post July to recognise achievements in an industrial sector and to promote that industry in the state.

The entity engaged a contractor to manage and organise the dinner.

The dinner was attended by hundreds, of which about two percent are guests; about seven percent are entity's staff and the balance paying participants.

The dinner included a food and beverage package for guests and entertainment in the form of bands, high profile hosts and a keynote speaker. Funds were also spent on visual presentation and event graphics and presentation.

The dinner is widely viewed within the industry sector to be a networking event. The dinner included several networking opportunities for guests, including pre dinner drinks, a break entitled the 'Networking Break' and a Networking Registration concept that saw guests provided with the opportunity to fill out a form identifying another individual or company they would like to network with post the event. If the target company was receptive to the networking request, contact details would be provided to both parties.

The entity allocated funding specifically for the dinner.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Section 11-5

Section 11-15

Section 11-20

Section 69-5

Section 195-1

Income Tax Assessment Act 1997

Section 8-1

Section 32-5

Section 32-10

Section 32-40, item 3.1

Section 50-25

Section 995-1

Reasons for decision

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 states:

You make a creditable acquisition if:

a) you acquire anything solely or partly for a *creditable purpose; and

b) the supply of the thing to you is a *taxable supply; and

c) you provide, or are liable to provide, *consideration for the supply; and

d) you are *registered, or *required to be registered.

Section 11-15 sates:

You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your enterprise.

However, you do not acquire the thing for a creditable purpose to the extend that:

a) the acquisition relates to making supplies that would be *input taxed; or

b) the acquisition is of a private or domestic nature.

(Asterisks denote terms defined in section 195-1 of the GST Act)

Subsection 69-5(1) of the GST Act provides that an acquisition is not a creditable acquisition to the extent that it is a non-deductible expense.

Pursuant to section 195-1 of the GST Act, the phase 'non-deductible expense' has the meaning given by subsections 69-5(3) and (3A) of the GST Act.

Relevantly, paragraph 69-5(3)(f) of the GST Act provides that an acquisition or importation is a non-deductible expense if it is not deductible under Division 8 of the Income Tax Assessment Act 1997 (ITAA 1997) because of Division 32 of the ITAA 1997.

Further, subsection 69-5(4) of the GST Act provides that if the entity making the acquisition or importation is an exempt entity, the acquisition or importation is a non-deductible expense if it would have been a non-deductible expense under subsection (3) or (3A) had the entity not been an exempt entity.

Section 195-1 of the GST Act provides that an 'exempt entity' is as defined by in section 995-1 of the ITAA 1997.

Section 995-1 of the ITAA 1997 provides that an exempt entity is an entity, whose ordinary income and statutory income are exempt from income tax because of Division 50 or because of another Commonwealth law.

By virtue of section 50-25 item 5.1(b) of the ITAA 1997, a local governing body is an exempt entity.

Section 995-1 of the ITAA 1997 provides that local governing body means a local governing body established by or under a State law or Territory Law.

In this case, the entity, as a government entity is an exempt entity.

The entity is registered for GST. Therefore an acquisition it makes will be a creditable acquisition so long as it is not a non-deductible expense.

As the entity is exempt from income tax and therefore cannot claim deductions for expenses it incurs; in deciding whether a creditable acquisition has been made it is necessary to determine whether it would have been able to deduct the expense had it not been an exempt entity.

As such, we need to consider whether the expenses incurred in holding the annual dinner constitute an allowable deduction for the entity.

Entertainment expenses

Section 32-5 of the ITAA 1997 provides that a loss or outgoing you incur in respect of providing entertainment is not deductible under section 8-1. However there are exceptions set out in Subdivision 32B.

The term 'entertainment' is defined in section 32-10 to mean:

entertainment by way of food, drink or *recreation; or

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

(Asterisks denote terms defined in section 995-1 of the ITAA 1997)

Taxation Ruling TR 97/17 Income tax and fringe benefits tax: entertainment by way of food and drink provides the Commissioner's views on the factors to be taken into account in determining whether the provision of food or drink constitutes entertainment.

Paragraph 23 states that an objective analysis is required of all the circumstances of the following factors:

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.

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.

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.

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 this case, the entity runs an annual black tie dinner to recognise achievements in an industrial sector and to promote that industry in the state. Guests received a food and beverage package and were entertained by high profile hosts, music and a keynote speaker.

The dinner has the character of entertainment. The expenses incurred in holding the event can be classed as 'entertainment expenses'.

According to section 32-5 of the ITAA 1997, the expenses will not be deductible under section 8-1, unless an exception in subdivision 32B applies.

Section 32-40

Section 32-40, item 3.1 of the ITAA 1997 provides that section 32-5 does not stop you deducting a loss or outgoing for providing entertainment for payment in the ordinary course of a business that you carry on.

There are three conditions that must be satisfied for this exception to apply. These are as follows:

The taxpayer must be carrying on a business;

The entertainment must be provided for payment; and

The provision of entertainment must be in the ordinary course of the taxpayer's business.

Taxpayer must be carrying on a business

The phrase 'carrying on a business' is not defined in the ITAA 1997 and the question of whether a business is being carried on is a question of fact.

The Commissioner sets out his views on the indicia to be considered in determining whether a business is being carried on in Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production?

Paragraph 13 provides that the courts have held that the following indicators are relevant:

whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators;

whether the taxpayer has more than just an intention to engage in business;

whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;

whether there is repetition and regularity of the activity;

whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;

whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit;

the size, scale and permanency of the activity; and

whether the activity is better described as a hobby, a form of recreation or a sporting activity.

The Commissioner goes on to say:

15. We stress that no one indicator is decisive (Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922), and there is often a significant overlap of these indicators. For example, an intention to make a profit will often motivate a person to carry out the activity in a systematic and organised way, so that the costs are kept down and the production and the price obtained for the produce are increased.

16. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the 'large or general impression gained' (Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' (Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case.

17. Subject to all the circumstances of a case, where an overall profit motive appears absent and the activity does not look like it will ever produce a profit, it is unlikely that the activity will amount to a business.

18. The following table provides a summary of the main indicators of carrying on a business. The last three items shown are factors which support the main indicators.

Indicators which suggest a business is being carried on	Indicators which suggest a business is not being carried on
a significant commercial activity	not a significant commercial activity
purpose and intention of the taxpayer in engaging in the activity	no purpose or intention of the taxpayer to carry on a business activity
an intention to make a profit from the activity	no intention to make a profit from the activity
the activity is or will be profitable	the activity is inherently unprofitable
repetition and regularity of activity	little repetition or regularity of activity
activity is carried on in a similar manner to that of the ordinary trade	activity carried on in an ad hoc manner
activity organised and carried on in a businesslike manner and systematically - records are kept	activity not organised or carried on in the same manner as the normal ordinary business activity - records are not kept
size and scale of the activity	small size and scale
not a hobby, recreation or sporting activity	a hobby, recreation or sporting activity
a business plan exists	there is no business plan
commercial sales of product	sale of products to relatives and friends
taxpayer has knowledge or skill	taxpayer lacks knowledge or skill

In Federal Commissioner of Taxation v. Whitfords Beach Pty Ltd [1982] HCA 8; (1982) 150 CLR 355, Mason J expressed the view at paragraph 18 of his judgment:

Unfortunately there is an element of ambiguity in the expressions "business deal" and "operation of business" as there is in the adjectives "business", "commercial" and "trading" which have about them a chameleon-like hue, readily adapting themselves to their surroundings, different though they may be. In some contexts "business deal" and "operation of business" may signify a transaction entered into by a person in the course of carrying on a business; in other contexts they denote a transaction which is business or commercial in character.

In J S McMillan Pty Ltd & Ors v. Commonwealth of Australia [1997] FCA 619 (McMillan) Emmett J expressed the view that:

However, mere repetitiveness is not sufficient to constitute carrying on of a business. System and regularity are involved in the carrying on of the business but it does not necessarily follow that one who has transactions of the same kind systematically or regularly is carrying on a business in those transactions. The example of regular deposits to a bank account is sufficient to explain that proposition. Absence of a system and regularity might deny that a business is being carried on but the presence does not necessarily establish that it is (see per Barwick CJ in Hungier v Grace [1972] HCA 42; (1972) 127 CLR 210 at 217).

In McMillan, Emmett J also stated:

Clearly, there is a distinction between those functions of a Government which are purely governmental or regulatory and those functions which entail the carrying on of business.

In Mid Density Development Pty Limited v. Rockdale Municipal Council [1992] FCA 634; (1992), (1992) 39 FCR 579 (Mid Density) Davies J found that:

The carrying out of a function of government in the interests of the community is not a trading activity.

In Corrections Corporation of Australia Pty Ltd v. Commonwealth of Australia [2000] FCA 1280 (Corrections Corporation) Finkelstein J stated:

…The meaning that the word "business" is to bear, must be considered in the context in which it is used. Here that context is legislation that is, generally speaking, concerned with the conduct of trading corporations and financial corporations that compete in a market for the provision of goods and services (Part IV of the Act), or that are engaged in trade or commerce or are otherwise involved in the provision of goods and services (Part V of the Act). Thus it is plain enough that the "carrying on of a business" that will bring the Commonwealth under the Trade Practice Act is intended to refer to activities undertaken in a commercial enterprise or as a "going concern". Ordinarily, a commercial enterprise is one that the proprietor conducts with a view to a profit.…

… operating a detention centre is not a trading or commercial activity of the executive branch. … Maintaining and operating a prison may be described by some as "government business", but it does not amount to carrying on of a trading or commercial activity. … Even if what is being done could be characterised as the provision of a service, by no use of the English language could it be described as the carrying on of a business.

With regard to the authorities, it could be possible for a government entity to be 'carrying on a business'. But the relevant question in this case is whether the entity is carrying out functions of government that are, in the language of Emmett J in McMillan, "purely governmental or regulatory" or whether they are functions which entail the carrying on of a business. Whilst regard can be had to the factors set out in TR 97/11, the conclusion would be made on the basis of the impression gained from looking at all of the indicators, and whether these factors provide the operations with a 'commercial flavour'.

The entity's aim is to help deliver the Government's economic vision of a dynamic, innovative and sustainable economy in which business is encouraged to grow.

As such, it gives the overall impression that functions of the entity are carried out in order to help to grow the state's economy by supporting business policies and programs and the development of innovative industries. By doing this, the entity is helping to deliver the Government's economic vision of an innovative and sustainable economy in which business is encouraged to grow. Therefore, it could be said that any activities carried out in the spirit of achieving these objectives are carried out as part of the carrying out of functions of Government.

Although some of the indicia of the carrying on of a business may be present, the overall impression created is one of the performances of the functions of government and not functions amounting to the carrying on of a business.

As such and on the basis of the distinction made by Davies J in Mid Density, these functions would not be regarded as trading activities or activities done in carrying on a business.

The holding of the annual dinner could not be said to be the carrying on of a business by the entity. Therefore, the entity is not entitled to the exception under section 32-40, item 3.1 of the ITAA 1997.

It follows that the entertainment expenses would not have been deductible to the entity had they not been exempt from tax.

Consequently, the entity has not made a creditable acquisition for the purposes of the GST Act and is not eligible to claim input tax credits for the annual dinner held by it.

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