Edited version of your private ruling

Authorisation Number: 1012457635193

Ruling

Subject: Fringe benefits tax - residual benefits - travel expenses

Question 1

Will a fringe benefit arise from the payment of the travel allowance?

Answer

No

Question 2

Can the taxable value of the residual fringe benefits that arise from the provision of the accommodation and flights be reduced by the use of the otherwise deductible rule in scenario 1?

Answer

Yes. However, a tax-exempt body entertainment benefit will arise from the provision of the flights. The taxable value of the tax-exempt body entertainment benefit will be 50% of the cost of the airfares.

Question 3

Can the taxable value of the residual fringe benefits that arise from the provision of the accommodation and flights be reduced by the use of the otherwise deductible rule in scenario 2?

Answer

Yes. However, a tax-exempt body entertainment benefit will arise from the provision of the flights. The taxable value of the tax-exempt body entertainment benefit will be 50% of the cost of the airfares.

Question 4

Can the taxable value of the residual fringe benefits that arise from the provision of the accommodation and flights be reduced by the use of the otherwise deductible rule in scenario 3?

Answer

Yes. However, a tax-exempt body entertainment benefit will arise from the provision of the flights. The taxable value of the tax-exempt body entertainment benefit will be 50% of the cost of the airfares.

Question 5

Can the taxable value of the residual fringe benefits that arise from the provision of the accommodation and flights be reduced by the use of the otherwise deductible rule in scenario 3a?

Answer

Yes. However, a tax-exempt body entertainment benefit will arise from the provision of the flights. The taxable value of the tax-exempt body entertainment benefit will be 50% of the cost of the airfares.

Question 6

Can the taxable value of the residual fringe benefits that arise from the provision of the accommodation and flights be reduced by the use of the otherwise deductible rule in scenario 4?

Answer

Yes. However, a tax-exempt body entertainment benefit will arise from the provision of the flights to and from Australia. The taxable value of the tax-exempt body entertainment benefit will be 50% of the cost of the airfares.

Question 7

Can the taxable value of the residual fringe benefits that arise from the provision of the accommodation and flights be reduced by the use of the otherwise deductible rule in scenario 5?

Answer

Yes. However, a tax-exempt body entertainment benefit will arise from the provision of the flights. The taxable value of the tax-exempt body entertainment benefit will be 50% of the cost of the airfares.

Question 8

Can the taxable value of the residual fringe benefits that arise from the provision of the accommodation and flights be reduced by the use of the otherwise deductible rule in scenario 6?

Answer

Yes. However, a tax-exempt body entertainment benefit will arise from the provision of the flights. The taxable value of the tax-exempt body entertainment benefit will be 50% of the cost of the airfares.

Question 9

Can the taxable value of the residual fringe benefits that arise from the provision of the accommodation and flights be reduced by the use of the otherwise deductible rule in scenario 7?

Answer

Yes

This ruling applies for the following periods:

A number of fringe benefits tax years commencing in the 2014 fringe benefits year

The scheme commences on:

In the fringe benefits tax year ending 31 March 2014

Relevant facts and circumstances

You are an income tax exempt organisation.

Circumstances will arise where you and an employee agree that there is a need for an employee to travel interstate or overseas for a business purpose.

The requirement for the employee to travel will be approved by a senior employee with the appropriate authority.

When an employee travels for a work related purpose you will:

· prior to their departure, book and pay for a return flight to and from the location the employee is required to travel to

· prior to their departure, book and pay for the accommodation for the period during which the employee is travelling for work related purposes

· pay to the employee, a travel allowance for food and drink, and incidentals in accordance with the amounts provided for these categories in the relevant tables in Taxation Determination TD 2012/17 Income Tax: what are the reasonable travel and overtime meal allowance expense amounts for the 2012-13 income year (TD 2012/17)

Any additional expenditure will be paid for by the employee.

Prior to departure the employee may negotiate to take additional personal leave days during the period of work related travel.

Your general policy in relation to the provision of flights and employee's negotiating additional leave, is that if the cost of the flights as requested by the employee is not more expensive than the flights the employee would have been required to take directly into and out of the place they must travel to for the work related purpose, then such a request from an employee will generally be considered.

No accommodation costs or travel allowance will be paid for non work related travel days.

You have sought a ruling in relation to the fringe benefits tax treatment of the travel expenses provided to an employee in the following scenarios:

Scenario 1

An employee is required to travel to an overseas location for a work related purpose for eight days.

Prior to departure the employee negotiates to have a period of 10 days of personal leave immediately following the eight days of work related travel.

During the period of personal leave the employee intends to travel independently to another overseas location.

You pay for both the departing flight and the return flight.

You agree to pay for the flights both ways as this flight is not more expensive than the return flight to and from the overseas location that they employee was required to travel to, which you would have provided if the employee was simply conducting the work related travel with no private component.

Scenario 2

An employee is required to travel overseas for a work related purpose for eight days.

Prior to departure the employee negotiates to have a period of 10 days of personal leave immediately following the eight days of work related travel. The personal leave is taken at the same location as the work related travel.

You pay for the cost of the return flight from Australia to the overseas location and back again.

Scenario 3

An employee is required to travel interstate for a work related purpose for two days. However, the two days of work related travel are not consecutive days.

The two days of work related travel are separated by a period of two days of personal leave.

The two days of personal leave between the two days of work related travel are taken by the employee at your direction.

Prior to departure the employee negotiates to have a further period of three days of personal leave following the conclusion of the work related component of the travel.

Summary of travel:

· one day of work related travel

· two days of personal leave taken at your direction

· one day work related travel

· three days of personal leave

You pay for the cost of the return flight into and out of the same interstate location.

You pay for the accommodation, and pay the employee a travel allowance for the two days of work related travel only.

Scenario 3a

This scenario is the same as scenario 3 above except that the two days of personal leave taken between the two days of work related travel are taken at the request of the employee.

You require the employee to travel interstate for two separate work related events on two separate days with a break of two days between the two events.

You intend to fly your employee back to their usual place of employment between the two days of work related travel, flying them to the interstate location only for the specific work related days. However given the timing of the two work related events, prior to their departure your employee requests to stay in the interstate location between the two days of work related travel and take two days of personal leave.

Scenario 4

An employee is required to travel overseas to two closely located countries for a work related purpose.

The employee travels to the first country for two days of work related travel.

The employee then has three days of personal leave in that country before travelling to the second country for the second work related component.

The employee stays in the second country for three days for work related purposes.

The employee then spends one week in the second country on personal leave, which they negotiated with you prior to their departure.

The employee then returns to Australia from the second country.

The three days of personal leave taken by the employee in the first country between the employee's work duties in the first and second countries are taken at your direction due to the impracticality and cost of the employee flying back to Australia following the first work related component and then to the second country in that period of time.

As you require the employee to travel to both countries for work related purposes, you pay for all of the flights, Australia to the first country, the first country to the second country and, the second country to Australia.

You pay for the accommodation and pay the employee a travel allowance for the five days of work related travel only.

You do not pay for the accommodation or pay the employee a travel allowance for the days of personal leave between the two work components or during the week of leave taken at the end of the trip.

Scenario 5

An employee is required to travel interstate for a work related purpose for two days.

Prior to departure the employee negotiates to take an additional five days of personal leave immediately following the two days of work related travel.

During the period of personal leave the employee travels to other locations and makes the return flight from a different location than the location they flew in to. You agree to pay for this return airfare as it is no more expensive than the cost of the flight that you would have provided had the employee returned from the location they travelled to for work immediately following the business component of the trip.

Scenario 6

An employee is required to travel interstate for a work related purpose for two days (Thursday and Friday).

Instead of making the return flight on the Friday evening or night the employee stays at the interstate location for the weekend and makes the return flight on the following Monday morning. This is negotiated at the employee's request and the cost of this return flight is not more expensive than the cost of the return flight that the employee would have had to take had they returned immediately following the business component.

Scenario 7

This scenario is the same as scenario 6 except that the work related component is longer (five days, Monday to Friday).

Again instead of making the return flight on the Friday evening or night, the employee stays in the interstate location for the weekend and makes the return flight on the following Monday morning. Therefore, the employee travels for five work related days and two personal days.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 38

Fringe Benefits Tax Assessment Act 1986 section 39

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)

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 32-5

Income Tax Assessment Act 1997 section 32-10

Taxation Administration Act 1953 section 12-35

Reasons for decision

1. Will a fringe benefit arise from the payment of the travel allowance?

In each of the scenarios you will pay your employee a bona fide travel allowance for the days that the employee is travelling for work purposes.

Subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) defines the meaning of a 'fringe benefit' as follows:

fringe benefit, in relation to an employee, in relation to the employer of the employee, in relation to a year of tax, means a benefit:

…

in respect of the employment of the employee, but does not include:

(f) a payment of salary or wages or a payment that would be salary or wages if salary of wages included exempt income for the purposes of the Income Tax Assessment Act 1936;

…

'Salary or wages' is also defined in subsection 136(1) of the FBTAA as:

salary or wages means:

(a) a payment from which an amount must be withheld (even if the amount is not withheld) under a provision in Schedule 1 to the Taxation Administration Act 1953 listed in the table, to the extent that the payment is assessable income; and

....

Withholding payments covered

Item Provision Subject matter

1 Section 12-35 Payment to employee

…

The payments to employees referred to in section 12-35 of the Taxation Administration Act 1953 include 'salary, wages, commission, bonuses or allowances' paid to an individual as an employee.

Taxation Ruling TR 92/15 Income tax and fringe benefits tax: the difference between an allowance and a reimbursement (TR 92/15) clarifies the taxation treatment of allowances paid to employees:

1. This Ruling explains the difference between an allowance and a reimbursement for the purposes of determining whether a payment is a fringe benefit under the Fringe Benefits Tax Assessment Act 1986 ("FBTAA"), or whether that payment is assessable income under the Income Tax Assessment Act 1936 ("ITAA"). Other than living-away-from-home allowances, most allowances will fall for consideration under the ITAA. On the other hand, most reimbursements will fall for consideration under the FBTAA.

2. A payment is an allowance when a person is paid a definite predetermined amount to cover an estimated expense. It is paid regardless of whether the recipient incurs the expected expense. The recipient has the discretion whether or not to expend the allowance.

As the amount paid is a predetermined amount to cover an estimated expense it will be an allowance.

In general terms, the definition of living-away-from-home allowance in section 30 of the FBTAA provides that an allowance will be a living-away-from-home allowance if it is paid for additional expenses for which the employee is not able to claim an income tax deduction that are incurred as a result of the duties of employment requiring the employee to live away from his or her normal residence.

The allowance is a bona fide travel allowance as defined in TR 2004/6. In discussing whether a travel allowance will be a living-away-from-home allowance paragraph 35 of Miscellaneous Taxation Ruling MT 2030 Fringe benefits tax: living-away-from-home allowance benefits states:

35. … travelling allowances form part of the employee's assessable income against which appropriate deductions may be allowed for the cost of meals, accommodation and incidental expenses incurred while the employee is travelling in the course of carrying out the duties of employment.

Therefore, as the allowance is a bona fide travel allowance it will form part of the employee's assessable income and will not be a living-away-from-home allowance. As it forms part of the employee's assessable income, it will come within the salary or wages definition and will not be a fringe benefit.

2. Can the taxable value of the residual fringe benefits that arise from the provision of the accommodation and flights be reduced by the use of the otherwise deductible rule in scenario 1?

In addition to paying a travel allowance, you will also book and pay for the cost of the employee's accommodation for the work related travel days and the associated flights. The provision of the accommodation and flights will be a fringe benefit.

To determine the taxable value of the fringe benefit that will arise from the provision of the accommodation and flights it is necessary to initially consider the type of benefit that is being provided. The FBTAA is divided into 13 types of benefits. Each type has its own valuation rules.

For the purpose of this ruling, the relevant types to consider are:

· tax-exempt body entertainment benefits as defined in section 38; and

· residual benefits as defined in section 45.

If the benefit is a residual benefit the taxable value of the benefit is able to be reduced using the 'otherwise deductible rule'. In general terms, this rule enables the taxable value of a residual fringe benefit to be reduced by the amount the employee would have been entitled to claim as an income tax deduction if the benefit had not been provided as a fringe benefit. However, the 'otherwise deductible rule' does not apply to a tax-exempt body entertainment benefit.

Therefore, in determining whether the otherwise deductible rule will enable the taxable value of the fringe benefit that arises from the provision of accommodation or flights it is necessary to initially determine the type of benefit that is being provided. Guidance for doing this is provided in part 15.7 of Fringe benefits tax: a guide for employers which states:

Two employees of a tax-exempt body have dinner together while travelling on business overnight. They see a show at the casino in the city they are staying, and the fee to the show includes dinner. Their employer reimburses them for the cost of the show entry (which includes meals).

This expenditure is entertainment, and is therefore tax-exempt body entertainment. The expense payment fringe benefit valuation rules could not apply in this circumstance as this is a tax-exempt body entertainment fringe benefit.

In applying this example, it is necessary to consider the specific provision (tax-exempt body entertainment) before the general provisions (residual).

This is further supported by paragraph 9 in Taxation Ruling TR 97/17 Income tax and fringe benefits tax; entertainment by way of food or drink (TR 97/17).

Paragraph 9 of TR 97/17 states:

Where a meal falls within a specific FBT provision (e.g., as a board fringe benefit or a tax-exempt body entertainment fringe benefit) then, in absence of an election made under Division 9A, the taxable value of the benefit is determined under that specific provision rather than the more general sections dealing with expense payment and property fringe benefits….

Will a tax-exempt body entertainment benefit arise from the provision of the accommodation and flights?

Tax-exempt body entertainment benefits are defined in section 38 of the FBTAA, which states:

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.

The term 'non-deductible exempt entertainment expenditure' is defined in subsection 136(1) of the FBTAA to mean:

non-deductible entertainment expenditure to the extent to which it is not incurred in producing assessable income.

Non-deductible entertainment expenditure is also defined in subsection 136(1) of the FBTAA as:

a loss or outgoing to the extent to which:

(a) 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

(b) 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;

Section 32-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states:

To the extent that you incur a loss or outgoing in respect of providing ^*entertainment, you cannot deduct it under section 8-1. However, there are exceptions, which are set out in Subdivision 32-B.

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

(i) entertainment is provided to an employee (or an associate of an employee),

(ii) the expenditure incurred in providing the entertainment was not incurred in producing assessable income, and

(iii) section 32-5 of the ITAA 1997 would have prevented the person who incurred the expenditure from claiming an income tax deduction for the expenditure under section 8-1 of the ITAA 1997 if it had been incurred in producing assessable income.

Each of these requirements are considered below.

(i) Will the flights and accommodation constitute the provision of entertainment?

Subsection 136(1) of the FBTAA states that 'entertainment has the meaning given by section 32-10 of the Income Tax Assessment Act 1997' (ITAA 1997).

Subsection 32-10(1) of the ITAA 1997 defines 'entertainment' as:

(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.

'Recreation' is defined under subsection 136(1) of the FBTAA as:

(a) amusement;

(b) sport or similar leisure-time pursuits; and

(c) recreation or amusement provided on, or by means of, a vehicle, ship, vessel or

aircraft

The Macquarie Dictionary provides the following meaning of recreation:

1. refreshment by means of some pastime, agreeable exercise, or the like.

2. a pastime, diversion, exercise, or other resource affording relaxation and enjoyment.

3. the act of recreating.

4. the state of being recreated.

The Macquarie Dictionary provides the following definition of amusement:

1. the state of being amused; enjoyment.

2. that which amuses; pastime; entertainment.

3. a mechanical entertainment, as a merry-go-round at a fair.

In interpreting the entertainment provisions contained in Division 32 of the ITAA 1997, it is also relevant to refer to the previous entertainment provisions that were contained within section 51AE of the Income Tax Assessment Act 1936 (ITAA 1936).

The term 'provision of entertainment' was defined in subsection 51AE(3) to mean:

the provision (whether to the taxpayer or to another person and whether gratuitously, pursuant to an agreement or otherwise) of:

(a) entertainment by way of food, drink or recreation; or

(b) accommodation or travel in connection with, or for the purpose of

facilitating, entertainment to which paragraph (a) applies (whether or not the accommodation or travel is also in connection with something else or for another purpose),

whether or not-

(c) business discussions or business transactions occur;

(d) in connection with the working of overtime or otherwise in connection with

the performance of the duties of any office or employment;

(e) for the purposes of promotion or advertising; or

(f) at or in connection with a seminar.

The Explanatory Memorandum to Taxation Laws Amendment Bill (No. 4) 1985, which introduced section 51AE included the following:

Clause 9 proposes to insert new section 51AE in the Principal Act to introduce a general prohibition on the deduction of entertainment expenses.

…

Typical kinds of entertainment that will no longer attract deductibility include business lunches and drinks, dinners, cocktail parties, and staff social functions. Similarly, expenditure incurred in entertainment of staff, business associates, clients, etc., by way of sightseeing tours, access to sporting or theatrical events and hospitality provided to invited guests at such events as product launches or film premieres will not be deductible.

…

"recreation" is defined to include amusement, sport or similar leisure-time pursuits, and recreation or amusement provided on, or by means of, vehicles, vessels or aircraft, e.g., joy flights or sightseeing tours.

…

By paragraph (3)(b) accommodation or travel is to be treated as entertainment to the extent to which it is incidental to the provision of entertainment. As such the cost of travel and accommodation associated with, for example, entertaining a client over a weekend at a tourist resort would be subject to the operation of the entertainment expense prohibition. Costs associated with the use of aircraft, boats or vehicles directly in providing entertainment (e.g., by way of joy flights or sightseeing tours) are brought within the meaning of entertainment through the definition of recreation.

The Full Federal Court in FC of T v Amway of Australia Ltd FCFCA 273; 2004 ATC 4893, in discussing the meaning of 'provision of entertainment' in relation to amounts spent for accommodation, travel and other incidental expenditure incurred in relation to the holding of certain seminars, said at ATC 4909:

60. In modern Australian usage it may be said that the concept of ``to give pleasure'' and ``hospitality'' underlie the meaning of the word ``entertainment'' when used in connection with matters such as food or drink. Whether the provision of food or drink falls within the definition of the ``provision of entertainment'' is not, in our view, to be determined by reference to subjective matters such as the purpose of some person. Rather, it involves a matter of characterisation. What is required is that regard be had to the essential character of what is provided. Regard will need to be had to all the relevant circumstances such as the locale where the food or drink is provided, the quality of the food or drink, the occasion for its provision, its cost and its nature. Clearly expenditure on the gala dinner would be entertainment. Indeed counsel for Amway did not suggest otherwise. By contrast the provision during a working session by an employer of sandwiches or coffee and tea to an employee would not be. Each item of expenditure would need to be considered having regard to all the circumstances. …

61. The question of deductibility of accommodation and travel expenses is perhaps more difficult.

62. Clause (b) of s 51AE(3) has two limbs. The first requires consideration of whether the provision of accommodation or travel is ``in connection with'' the entertainment or perhaps the provision of entertainment by way of food, drink or recreation. Only the second limb requires consideration of purpose. The relevant purpose is the facilitation of such entertainment.

63. The first limb requires, as already noted, a connection. The Commissioner submits that the word ``connection'' requires merely that there be a relationship of some sort between the provision of the accommodation or travel and the relevant entertainment. For Amway, it is submitted that the connection must be one which is substantial and not remote.

64. As the learned Primary Judge pointed out, the meaning of the word ``connection'' will always depend upon the context in which it appears. His Honour referred to
Workers Compensation Board of Queensland v Technical Products Pty Ltd (1988) 165 CLR 642 at 653-654, FC of T v Scully 2000 ATC 4111 at 4121; (2000) 201 CLR 148 at 171 and Minister for Immigration and Multicultural Affairs v Singh (2000) 98 FCR 469 at 477. We agree.

65. In its broadest sense connection signifies any relationship between two subject matters no matter how remote. If the word connection is used in a very broad sense there would seem little point in the alternative limb of paragraph (b) as accommodation or travel for the purpose of facilitating the entertainment, could be seen to have at least a remote connection with that entertainment. It may be accepted, as the Commissioner submits, that the connection must be proximate. A remote connection will not suffice. Rather what is required is a substantial connection between the provision of accommodation or travel on the one hand and entertainment on the other.

66. It may be noted here that the legislature has made it clear that the provision of accommodation or travel may fall within the definition whether or not the travel is at or in connection with a seminar. Clearly, however, not all travel or accommodation which is at or in connection with a seminar was intended to be excluded from deductibility. Were it otherwise the subsection would be differently drafted. What is required is that there be a real relationship between the provision of accommodation or travel on the one hand, and the entertainment by way of food, drink or recreation which is provided to the recipient of the accommodation or travel to a seminar on the other hand. It is arguable that that connection exists in the present case. However, as will be seen, we do not find it necessary to decide the question.

67. The second limb is concerned with the purpose of the provision of accommodation or travel. With respect to the learned Primary Judge, we do not see that purpose is relevant to the first limb. It is only relevant to the second limb. We think the better view is that the purpose referred to in paragraph (b) is to be ascribed objectively rather than subjectively, that is to say that the relevant purpose is to be inferred from the objective circumstances. It is not necessary for the Commissioner to reach into the mind of the provider to ascertain purpose.

68. Prima facie, a reading of paragraph (b) suggests that the enquiry is to be directed at ascertaining the sole purpose of the provision of accommodation or travel. However, the fact that the subsection continues to provide that expenditure may fall within the definition whether or not it is ``for the purposes of promotion or advertising'' would suggest that the words ``the purpose'' do not signify sole purpose but rather something less than that, unless paragraph (e) was not intended to apply to a case falling within paragraph (b).

Further guidance is provided by paragraphs 2 and 3 of Taxation Determination TD 94/55 Income tax: when does providing an item of property constitute the provision of entertainment within the meaning of subsection 32-10(1) of the Income Tax Assessment Act 1997? (TD 94/55), which state:

2. In determining whether providing an item of property constitutes the provision of entertainment, 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.

3. In practice, the provision of entertainment can be determined by reference to the following characteristics:

* Timeliness

· entertainment occurs soon after provision of the item of property;

· the usefulness of the item of property expires after consumption; or

· the item of property is returned at the completion of use.

* Direct Connection

There should be a direct connection between the item of property and the entertainment:

· the entertainment should arise from the use of the item of property;

· the entertainment is the expected outcome of the provision of the property.

TD 94/55 also provides examples of costs which generally will not constitute the provision of entertainment and costs that generally will constitute the provision of entertainment. The example of costs that generally will constitute the provision of entertainment includes costs incurred in providing holiday accommodation.

Further guidance can be obtained from paragraphs 15 to 18 of TR 97/17 which state:

15. The suggested interpretation that the provision of food or drink in any circumstance constitutes entertainment for purposes of Division 32 is based on the premise that the diversion or amusement required occurs merely by the provision of food or drink. In other words 'entertainment by way of food [or] drink' as used in paragraph 32-10(1)(a) of the ITAA must be construed to refer to bodily not mental gratification.

16. Support for this interpretation is found in the approach taken by the English courts in the construction of similar kinds of words used in regulating refreshment houses (see Taylor v. Oram and Another (1862) 1 H & C 370). In that case, Pollock CB at 376 took the view that in the context of the relevant English legislation the word 'entertainment' is only another expression for 'refreshment'. In addition, it can be argued that as it was necessary to extend the meaning of the word 'recreation' found in paragraph 32-10(1)(a) of the ITAA to include 'amusement', no independent element of either amusement or diversion is required where what occurs is the mere provision of food or drink.

17. The other view that an element of entertainment is required before the provision of food or drink becomes meal entertainment is based on the ordinary meaning of the word 'entertainment' by itself. As was suggested by the Lord Justice-Clerk (Lord Thomson) in Bow and Others v. Heatly (1960) SLT 311 at 313:

'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.'

In the same case, Lord Patrick at 313 made the following relevant observation:

'Parliament ... left the term "entertainment" to receive its meaning in ordinary language, and that meaning in this connection is "amusement".'

18. We take the view that the above latter interpretation represents the better view of the law. …

In applying these guidelines to the provision of accommodation and flights, it can be concluded that entertainment will not arise whenever accommodation or flights are provided. However, the provision of accommodation or flights will constitute the provision of entertainment where:

· it is something affording diversion, amusement or is a leisure-time pursuit (paragraph 32-10(1)(a) of the ITAA 1997); or

· has the necessary connection with the provision of entertainment (paragraph 32-10(1)(b) of the ITAA 1997).

Accommodation and flights provided to an employee whilst on holidays will come within both of these paragraphs as it is something affording diversion or amusement and it is to do with providing entertainment by way of recreation. By contrast, accommodation or flights provided solely for work related purposes will not come within either dot point.

Support for this approach is provided in part 14.1 of Fringe benefits tax: a guide for employers which states:

Some examples of the provision of entertainment are:

· …

· providing entertainment to employees and clients by providing access to sporting or theatrical events, sightseeing tours, holidays and so on

· accommodation and travel when it is provided in connection with, or to facilitate, activities such as entertaining clients and employees over a weekend at a tourist resort, or providing them with a holiday.

Further, part 14.12 of Fringe benefits tax: a guide for employers states:

When you give an employee a plane ticket for travel to a holiday destination … this will be entertainment …

Therefore, accommodation and flights that are for a private purpose such as having a holiday will involve the provision of entertainment. By contrast, accommodation and flights provided solely for a work-related purpose will not involve the provision of entertainment.

(ii) Is the entertainment expenditure incurred in producing assessable income?

As you are an income tax exempt body, any entertainment expenditure will not be incurred in producing assessable income.

(iii) If the expenditure had been incurred in producing assessable income would section 32-5 of the ITAA 1997 have prevented an income tax deduction being claimed for the expenditure?

The tables in sections 32-30 to 32-50 of the ITAA 1997 set out the situations in which section 32-5 does not prevent a deduction being claimed for entertainment expenses. From the information provided, none of these exceptions appear to apply to the portion of the flights and accommodation that relate to private travel.

Conclusion

Therefore, a tax-exempt body entertainment benefit can arise from the payment of the accommodation or flight expenses.

What type of benefit will be provided if the accommodation or flight has both business and private purposes?

As discussed above, a tax-exempt body entertainment fringe benefit will arise where the flight or accommodation is solely for private purposes and a residual fringe benefit will arise where the flight or accommodation is solely provided for work purposes.

The issue raised in your ruling application is what type of benefit will be provided where the benefit (e.g. a flight) is provided to enable the employee to undertake their employment duties and have a holiday?

Guidance for determining the answer to this question is provided by the valuation rule for tax-exempt body entertainment benefits in section 39 of the FBTAA. Section 39 states:

… the taxable value of a tax-exempt body entertainment fringe benefit … is so much of the expenditure referred to in section 38 as is attributable to the provision of the entertainment referred to in that section.

This indicates that if the expenditure has a dual purpose the expenditure can be apportioned with the portion that relates to the private travel being tax-exempt body entertainment and the balance being a residual benefit.

Support for this approach is provided by section 32-5 of the ITAA 1997 and the definition of 'non-deductible entertainment expenditure' in subsection 136(1) of the FBTAA.

Section 32-5 of the ITAA 1997, which restricts deductions that can be claimed for entertainment expenses, begins with the phrase 'To the extent'. This indicates that the expenditure can be apportioned, and that section 32-5 does not prevent an income tax deduction being claimed for the portion that is not in respect of the provision of entertainment.

Similarly, the definition of 'non-deductible entertainment expenditure' in subsection 136(1) of the FBTAA refers to a loss or outgoing 'to the extent' to which section 32-5 of the ITAA applies to it.

In determining the portion of the expenditure that will be considered to be a tax-exempt body entertainment benefit and the portion that will be a residual benefit it is relevant to use the guidelines that are used to determine whether an employee can claim an income tax deduction for travel expenditure. These guidelines are provided in Taxation Ruling TR 98/9 Income tax: deductibility of self education expenses.

The general rule that applies in relation to expenses incurred in attending a work related conference or seminar is set out in paragraph 17 of TR 98/9 which states:

… The essential character is to be determined by an objective analysis of all the surrounding circumstances. There are circumstances where apportionment under section 8-1 is required. For example, if a study tour or attendance at a work-related conference or seminar is undertaken for income-earning purposes and for private purposes, it is appropriate to apportion the expenses between the purposes. If the income-earning purpose is merely incidental to the main private purpose, only the expenses which relate directly to the former purpose are allowable. However, if the private purpose is merely incidental to the main income-earning purpose, apportionment is not appropriate.

This general rule is further expanded in paragraph 63:

(e) The intention or purpose in incurring the expense may be an element in determining whether the expense is allowable.

63. An expense is deductible under section 8-1 when the essential character is that of an income producing expense. The essential character is to be determined by an objective analysis of all the surrounding circumstances (see Fletcher & Ors 9199) 173 CLR 1 at 17; 91 ATC 4950 at 4957 and 4958; (1991) 22 ATR 613 at 622).

Where only part of the travel is work related further guidelines are provided by paragraphs 64 to 70 of TR 98/9.

Paragraph 64 provides the general rule that is to be applied where the private purpose is merely incidental to the work related purpose:

64. If the purpose of a study tour or attendance at a work-related conference or seminar is the gaining or producing of income, the existence of an incidental private purpose does not affect the characterisation of the related expenses as wholly incurred in gaining assessable income.

Where the private purpose is more than incidental to the business purpose the general rules to be used are set out in paragraphs 65 and 66 as follows:

65. Both Ronpibon Tin NL (78 CLR at 59; 8 ATD at 437) and Fletcher & Ors (173 CLR at 16; 91 ATC at 4957; 22 ATR at 621) recognise there are at least two kinds of expenditure that require apportionment under section 8-1. The first is expenditure in respect of a matter where distinct and severable parts are devoted to gaining income and other parts are devoted to some other end. If a study tour or work-related conference or seminar was mainly devoted to a private purpose, such as having a holiday, and the gaining or producing of income was merely incidental to the private purpose, only those expenses directly attributable to the income-earning purpose would be allowable.

66. The second kind of apportionable expenditure is a single outlay that serves both an income-earning purpose and some other purpose indifferently. While the High Court recognised that there can be no precise arithmetical division on the facts in such cases, it said there must be some fair and reasonable division on the facts of each case. For example, if a study tour or work-related conference or seminar is undertaken equally for income-earning purposes and private purposes, it would be appropriate to apportion the expenses equally between the purposes.

Paragraphs 67 to 70 provide three examples that illustrate the application of these general rules. They state:

67. Example: Glenn, a qualified architect, attends an eight-day work-related conference in Hawaii on trends in modern architecture. One day of the conference involves a sight-seeing tour of the island and a game of golf is held on the final afternoon of the conference. As the main purpose of attending the conference is the gaining or producing of income, the total cost of the conference (air fares, accommodation and meals) is allowable.

68. The existence of private pursuits, such as the island tour and the game of golf, is purely incidental to the main purpose and does not affect the characterisation of the conference expenses as wholly incurred in gaining assessable income.

69. Example: Jenny, a doctor, was holidaying in Cairns when she became aware of a work-related seminar on the current treatment of cancer patients. The cost of the half-day seminar was $200. Jenny is able to claim a deduction for the cost of the seminar because it is directly attributable to an income-earning purpose. However, no part of her air fare to Cairns or her holiday accommodation is an allowable deduction.

70. Example: Francesco, a paediatrician, has 2 equal purposes when he decides to attend a five-day international conference on paediatrics in Singapore to be followed by a seven-day holiday in Thailand. The conference package is $2,500 ($1,000 return air fare, $500 for the cost of the conference and $1,000 for accommodation and meals at the conference venue.). Francesco paid another $2,000 for accommodation, meals and car hire for the 7 day holiday in Thailand. Francesco is allowed a deduction of $1,500 for the conference cost and the accommodation and meals expenses at the conference. Only half of the return air fare ($500) is allowed as the expense was incurred for two equal purposes, one income-earning and the other private. The other expenditure of $2,000 relating to the holiday in Thailand is private in nature and not allowable as a deduction.

Further guidance is provided by paragraphs 311 and 312 of Taxation Ruling TR 1999/10 Income tax and fringe benefits tax: Members of Parliament - allowances, reimbursements, donations and gifts, benefits, deductions and recoupments (TR 1999/10). These paragraphs state:

311. Travel expenses that are unconnected with a Member's work-related activities are not allowable deductions. They are not incurred in the course of gaining or producing assessable income and, in any case, are of a private or domestic nature.

312. Example: A Member flies from her New South Wales country electorate to Sydney to attend Parliamentary sittings for five days. On the conclusion of those sittings, she is joined by her family for a holiday in Sydney that extends for two days. Although she incurs accommodation and other expenses in Sydney for seven days, no part of the expenses incurred in respect of the two day holiday period is allowable as a deduction. However, she would be entitled to claim the full cost of her return fare because the main purpose of the travel was work-related.

In applying these guidelines:

· a residual fringe benefit will arise from the accommodation and flight expenditure where the expenses are either solely work related or where the factors indicate that any private purpose was merely incidental to the work related purpose;

· a tax-exempt body entertainment benefit will arise from the accommodation and flight expenditure where the expenses are either solely private or where the factors indicate that any work related purpose was merely incidental to the private purpose; and

· both a residual benefit and a tax-exempt body entertainment benefit will arise if the accommodation or flights are provided equally for work related purposes and private purposes. In such a situation, it is appropriate to apportion the expenses equally between the two purposes.

In determining whether the private purpose is incidental to the business purpose where both work related and private travel occur, TR 98/9 refers to factors such as the relative time periods, the presence of accompanying persons and whether there is travel to other destinations.

The valuation of the tax-exempt body entertainment fringe benefits

As set out above, the taxable value of a tax-exempt body entertainment benefit under section 39 of the FBTAA is the amount of the expenditure that is attributable to the provision of entertainment. This value can not be reduced by the otherwise deductible rule.

The valuation of the residual fringe benefits

The taxable value of a residual fringe benefit that arises from the provision of accommodation or flights will be the amount of the expenditure that is not a tax-exempt body entertainment benefit under either paragraph 50(a) or 51(a) of the FBTAA. This value can be reduced in certain circumstances by use of the otherwise deductible rule contained in section 52 of the FBTAA.

Section 52 of the FBTAA states:

52 Reduction of taxable value - otherwise deductible rule

(1) Where:

(a) the recipient of a residual fringe benefit in relation to an employer in relation to a year of tax is an employee of the employer; and

(b) if the recipient had, at the comparison time, incurred and paid unreimbursed expenditure (in this subsection called the gross expenditure), in respect of the provision of the recipients benefit, equal to the amount that, but for this subsection and Division 14 and the recipients contribution, would be the taxable value of the residual fringe benefit in relation to the year of tax - a once-only deduction (in this subsection called the gross deduction) would, or would if not for section 82A of the Income Tax Assessment Act 1936, and Divisions 28 and 900 of the Income Tax Assessment Act 1997, have been allowable to the recipient under either of those Acts in respect of the gross expenditure; and

(ba) the amount (in this subsection called the notional deduction calculated in accordance with the formula

GD - RD

…

exceeds nil; and

…

The recipient gives to the employer, before the declaration date, a declaration, in a form approved by the Commissioner, in respect of the recipients benefit; and

…

the taxable value, but for Division 14, of the residual fringe benefit in relation to the year of tax is the amount calculated in accordance with the formula:

TV - ND

Taxation Ruling TR 2001/2 Fringe benefits tax: the operation of the new fringe benefits tax gross-up formula to apply from 1 April 2000 (TR 2001/2) summaries the operation of the otherwise deductible rule. TR 2001/2 states:

The taxable value of certain fringe benefits may be reduced to the extent that the employee would have been able to claim an income tax deduction had the employee themselves incurred the expense. The otherwise deductible rule applies to reduce the taxable value of either an airline transport fringe benefit, a board fringe benefit, an expense payment fringe benefit, a loan fringe benefit, a property fringe benefit or a residual fringe benefit. The taxable value is reduced by the hypothetical income tax deduction to which the employee would have been entitled had the employee incurred the expense…

In applying the otherwise deductible rule to the residual benefits that arise from the provision of the flights and accommodation, the taxable value of the residual benefits will be nil as the residual benefits will only arise from the work related portion of the flights and accommodation.

The calculation of the taxable value in scenario 1

Accommodation

In scenario 1 you will only pay accommodation expenses for the eight days on which the employee is undertaking work related travel. You will not pay for the accommodation used by the employee on the 10 days he or she is on leave. As the accommodation expenses solely relate to the work related travel, the provision of the accommodation will be a residual fringe benefit with a nil value.

Flights

In scenario 1 your employee travels overseas for 18 days. The employee initially travels to country 1 for a work purpose for eight days. The employee then has a period of 10 days of personal leave immediately following the eight days of work related travel, during which they travel independently to country 2.

In applying the principles discussed above, the facts indicate only eight of the 18 days were for work purposes and the employee travelled to alternative destinations. In view of the relative time spent on private travel and the travel to an alternative destination, the private purpose is more than incidental to the work related purpose. However, the fact that eight of the 18 days were for a work related purpose which could not have been undertaken if the employee had not travelled to Country 1, it is accepted that the work related purpose is more than incidental to the private purpose.

Therefore, it is considered that the provision of the flights serves the dual purposes of work related purposes and private purposes indifferently. Using the guidelines in paragraph 66 of TR 98/9, it is appropriate to treat 50% of the expenses as a tax-exempt body entertainment benefit and 50% as a residual fringe benefit on the basis of there being two equal purposes.

Conclusion

The taxable value of the residual fringe benefit that arises from the provision of accommodation in scenario 1 will be nil.

The taxable value of the residual fringe benefit that arises from the provision of the flights in scenario 1 will be nil.

The taxable value of the tax-exempt body entertainment benefit that arises from the provision of the flights in scenario 1 will be 50% of the cost of the airfares.

3. Can the taxable value of the residual fringe benefits that arise from the provision of the accommodation and flights be reduced by the use of the otherwise deductible rule in scenario 2?

Scenario 2 is the same as scenario 1 except that in scenario 2 the employee takes their personal leave in location that they have travelled to for the work related purpose. You provide a return flight into and out of the same overseas location. The employee is overseas for 18 days in total, 8 days of work related travel followed by 10 days of personal leave.

Accommodation

Refer to the reasoning provided in relation to scenario 1 at question 2 above. The same reasoning can be applied to conclude that the taxable value of the residual fringe benefit that arises from the provision of accommodation in scenario 2 will be nil.

Flights

Although the employee in scenario 2 does not travel to an alternative destination the relative length of time spent on private travel indicates the flights are undertaken both for a work related purpose and for the purpose of having a holiday. Therefore, in accordance with above discussion in relation to scenario 1:

· the taxable value of the residual fringe benefit that arises from the provision of the flights in scenario 2 will be nil; and

· the taxable value of the tax-exempt body entertainment benefit that arises from the provision of the flights in scenario 2 will be 50% of the cost of the airfares.

4. Can the taxable value of the residual fringe benefits that arise from the provision of the accommodation and flights be reduced by the use of the otherwise deductible rule in scenario 3?

In scenario 3 your employee travels interstate for two separate days that have a work related purpose. Between the two days of work related travel there is a period of two days during which you direct your employee to stay in the interstate location and take personal leave days. Following the second day of work related travel your employee has a further three days of personal leave at the interstate location.

Accommodation

You only provide accommodation to the employee on the two days of work related travel. You do not provide accommodation for the two days between the two instances of work related travel where the employee stays in the interstate location at your direction or the three days after the work related component.

As the accommodation expenses solely relate to the work related travel the provision of the accommodation will be a residual fringe benefit and you will be entitled to reduce the taxable value of the residual fringe benefit by the use of the otherwise deductible rule in accordance with section 52 of the FBTAA. As the residual fringe benefit relates to the work related expenses the otherwise deductible rule will enable the taxable value of the fringe benefit to be reduced to nil.

Flights

In considering whether the private portion of the travel in scenario 3 is incidental to the work related travel a relevant fact is the decision of the employee to have an additional three days of personal leave following the second work related day. In the context of the overall period of the trip, this three day period cannot be regarded as being incidental to the work related purpose.

Therefore, in this scenario the private purpose is considered to be at least as significant as the work related purpose and in accordance with the above discussion:

· the taxable value of the residual fringe benefit that arises from the provision of the flights in scenario 3 will be nil; and

· the taxable value of the tax-exempt body entertainment benefit that arises from the provision of the flights in scenario 3 will be 50% of the cost of the airfares.

However, the answer would have been different if the employee had not chosen to extend the length of the travel by a further three days. If the only private days had been the two days between the work related days which the employee had been directed to take at the work related location, a tax-exempt body entertainment benefit would not have arisen as the private days would have been incidental to the work related travel.

5. Can the taxable value of the residual fringe benefits that arise from the provision of the accommodation and flights be reduced by the use of the otherwise deductible rule in scenario 3a?

This scenario is the same as scenario 3 above except that the two days of personal leave taken between the two days of work related travel are taken at the request of the employee. Therefore the employee is travelling interstate for a total of two days of work related travel and five days of personal leave, taken at their request.

Accommodation

As the change in facts does not alter the provision of the accommodation the answer will be the same as question 4 above.

Flights

Although the decision by the employee not to travel home for the two days between the days on which work related duties were undertaken indicates a stronger private purpose to the travel, it is not sufficient to make the work related purpose incidental to the private purpose.

Therefore, the answer will be the same as the answer to question 4 above. However, while the change the facts does not alter the outcome where the employee chooses to extend the travel by three days for private purposes, it may alter the outcome where the additional three days are not taken (depending upon whether there are additional reasons for not returning home between the two work related days).

6. Can the taxable value of the residual fringe benefits that arise from the provision of the accommodation and flights be reduced by the use of the otherwise deductible rule in scenario 4?

In scenario 4 your employee is required to travel to both Country 1 and COUNTRY 2 for a work related purpose. The employee travels to Country 1 for two work related days and then takes three days of personal leave in Country 1, at your direction, before travelling to COUNTRY 2 for three work related days of travel. At the conclusion of the work related portion of COUNTRY 2 travel, the employee spends one week in COUNTRY 2 on personal leave.

You direct the employee to take personal leave between the two work related components of the trip in Country 1 and COUNTRY 2 due to the cost and impracticality of flying the employee back to Australia from Country 1 and then to COUNTRY 2. However, you do not pay for the employee's accommodation or pay the employee a travel allowance for these days or the days of personal leave at the conclusion of the work related component in COUNTRY 2.

You pay for all of the flights Australia to Country 1, Country 1 to COUNTRY 2, and COUNTRY 2 to Australia as all of the flights are required to enable the employee to complete the work related travel.

Accommodation

As the accommodation expenses solely relate to the work related travel the provision of the accommodation will be a residual fringe benefit and you will be entitled to reduce the taxable value of the residual fringe benefit by the use of the otherwise deductible rule in accordance with section 52 of the FBTAA. As the residual fringe benefit relates to the work related expenses the otherwise deductible rule will enable the taxable value of the fringe benefit to be reduced to nil.

Flights

Scenario 4 is similar to scenario 3 as the employee has chosen to extend the travel by a week to undertake private travel. If this had not occurred a tax-exempt body entertainment would not have arisen as the three days between the work related duties being undertaken in Country 1 and COUNTRY 2 are incidental to the work related purpose due to the impracticality and cost of flying the employee back to Australia between the two periods of work related travel.

However, the employee chose to extend the travel by seven days after the completion of the work related duties. Given the overall period of the travel is 15 days, this request by the employee means the private travel cannot be considered to be incidental to the work related travel. However, it is not sufficient for the work related travel to be considered to be incidental to the private travel.

Therefore, a tax-exempt body entertainment benefit will arise in relation to the flights from and to Australia. However, a tax-exempt body entertainment benefit will not arise from the flight from Country 1 to COUNTRY 2 as it is a one way flight which enables the employee to travel to a new location in order to complete their work related duties.

In applying the above discussion:

· the taxable value of the residual fringe benefit that arises from the provision of the flights in scenario 4 will be nil; and

· the taxable value of the tax-exempt body entertainment benefit that arises from the provision of the flights from Australia to Country 1 and from COUNTRY 2 to Australia in scenario 4 will be 50% of the cost of the airfares.

7. Can the taxable value of the residual fringe benefits that arise from the provision of the accommodation and flights be reduced by the use of the otherwise deductible rule in scenario 5?

Scenario 5 is similar to scenario 1 except the travel is interstate not overseas and is for a different period of time. In this scenario your employee travels interstate for two days for a work related purpose. Following the two days of work related travel your employee takes an additional five days of personal leave and during this time travels to other locations and makes the return flight from a different location to the location they flew in to. You agree to pay for this return airfare because it is not more expensive than the flight that would have been taken had the employee returned immediately following the business component of the trip.

On the basis of the above discussion in relation to scenario 1:

· the taxable value of the residual fringe benefit that arises from the provision of accommodation in scenario 5 will be nil;

· the taxable value of the residual fringe benefit that arises from the provision of the flights in scenario 5 will be nil; and

· the taxable value of the tax-exempt body entertainment benefit that arises from the provision of the flights in scenario 5 will be 50% of the cost of the airfares.

8. Can the taxable value of the residual fringe benefits that arise from the provision of the accommodation and flights be reduced by the use of the otherwise deductible rule in scenario 6?

In scenario 6 your employee travels interstate for two work related days (Thursday and Friday) and instead of taking their return flight on the Friday evening, they delay the flight to stay in the interstate location for the weekend, returning on the Monday morning. You pay for the return flight as the cost of this return flight is no more expensive than the cost of the return flight that the employee would have had to take had they returned immediately following the business component.

This scenario is similar to scenario 3 as an employee who has travelled interstate for work related purposes has chosen to stay at the location for the weekend. In situations such as this, the outcome may vary depending upon the number of days the employee undertakes work related duties, the reason for extending the travel period and when the employee returns home. For example, if the employee in scenario 6 had returned home on Saturday, the additional day would not be sufficient to change the private purpose of the trip from an incidental purpose.

However, the facts as given are that an employee who could have returned home on Friday chooses to travel home on Monday. As a result of this decision the period away has in effect been extended by three days (2 days at the location and an extra day travelling). Given the work related duties are only undertaken for two days this additional time is more than incidental to the time spent on work related duties.

Therefore, on the basis of the discussion in relation to scenario 3:

· the taxable value of the residual fringe benefit that arises from the provision of accommodation in scenario 6 will be nil;

· the taxable value of the residual fringe benefit that arises from the provision of the flights in scenario 3 will be nil; and

· the taxable value of the tax-exempt body entertainment benefit that arises from the provision of the flights in scenario 3 will be 50% of the cost of the airfares.

9. Can the taxable value of the residual fringe benefits that arise from the provision of the accommodation and flights be reduced by the use of the otherwise deductible rule in scenario 7?

In scenario 7 your employee travels interstate for five days (Monday to Friday) and instead of returning on the Friday evening stays in the interstate location over the two weekend days before making the return flight back. You pay for the employee's accommodation for the five work related travel days only.

Accommodation

On the basis of the discussion above, the taxable value of the residual fringe benefit that arises from the provision of accommodation in scenario 6 will be nil.

Flights

This scenario is analogous to the example discussed in paragraph 312 of TR 1999/10:

312. Example: A Member flies from her New South Wales country electorate to Sydney to attend Parliamentary sittings for five days. On the conclusion of those sittings, she is joined by her family for a holiday in Sydney that extends for two days. Although she incurs accommodation and other expenses in Sydney for seven days, no part of the expenses incurred in respect of the two day holiday period is allowable as a deduction. However, she would be entitled to claim the full cost of her return fare because the main purpose of the travel was work-related.

Applying this reasoning, in this scenario the main purpose for the provision of the flights is considered to be work related with an additional private purpose which is incidental only to the work related purpose.

Therefore in accordance with TR 98/9 and TR 1999/10, a tax-exempt body entertainment benefit will not arise and the otherwise deductible rule will reduce the taxable value of the residual benefit that arises from the provision of the flights to nil.

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