Edited version of your written advice

Authorisation Number: 1012754681215

Ruling

Subject: Whether or not entertainment is provided to employees.

Question 1

Does the provision of food, drink and recreation to a relevant employee whilst carrying out his or her duties during a relevant event constitute entertainment for the purposes of section 32-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

If the provision of food, drink and recreation during a relevant event constitutes the provision of a fringe benefit for the purposes of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986), will the otherwise deductible rule reduce the taxable value of any benefit to nil??

Answer

No, where entertainment is provided, an income tax deduction is expressly not allowable pursuant to section 32-5 of the ITAA 1997.

This ruling applies for the following period

Year ending 31 March 2015

The scheme commences on

1 April 2014

Relevant facts and circumstances

You have requested a private binding ruling on whether provision of food, drink and recreation to the relevant employees constitutes entertainment for the purposes of the Income Tax Assessment Act 1997 (ITAA 1997).

You have stated that the relevant employees play an integral role in your business in fostering and maintaining relationships with key customers and their representatives. They facilitate the provision of significant levels of entertainment to these customers in order to foster relationships and develop goodwill which then translates directly into increased sales for your business.

You have listed the overall objectives of the relevant employees as:

• to develop and maintain business partnerships with existing and new customers that extends to assisting various businesses to cross sell services to each other and your business's customers;

• to create growth within your business through business relationships held with existing Australian customers and other business units; and

• to drive and achieve revenue quality to pre-determined targets covering account profitability, cost budget and capital budget where and when applicable.

You have also stated that the relevant employees are required as part of their employment duties to:

1) actively host customers and potential customers at various business initiated events and functions with a view to strengthening or developing the business relationship between the customer and your business and

2) participate, on an ad-hoc basis, in various events and functions outside of normal business hours to host existing and potential customers as part of their business development role.

The relevant employees may be required to attend the following (non-exhaustive) types of events as part of the customer engagement and networking (hereinafter referred to as "relevant events"):

• Corporate golf day;

• Sports events (such as AFL, rugby, rugby league, football);

• Grand Prix and other similar events;

• Horse racing;

• Movies including premieres; and

• Theatre and concerts.

Additional information was supplied in response to our request for additional information in your letter. The following responses were provided.

1. A copy of an example of an employment contract for a relevant employee. This should include a duty statement and a job description.

A copy of example job description was provided.

2. Details of how many relevant employees attend each relevant event as defined in your ruling request.

The number of employees who attend the relevant events varies upwards from one employee depending on the nature of the event and the availability of clients to attend.

For example, at a horse racing event, there would usually be two employees for every six to eight clients. At the grand prix, the ratio would be one employee to one or more clients. At a corporate golf day, there would be a few employees only compared to well over twenty clients. At a theatre event (e.g. King Kong) it could be one employee and partner accompanying a group of eight clients and partners.

3. How many customers and potential clients will be hosted by each relevant employee who attends the relevant event?

Again this will vary depending on the nature of the event. It could be one client attending with one employee or it could be multiple clients attending with one or more employees. In some instances, the employee will attend with their spouse or partner and the client(s) will do likewise.

4. Details of what the employee would actually do at each relevant event in respect to hosting the customers or potential customers.

In hosting a client or clients at a relevant event, employees would network with the client(s), attend to any needs they may have such as food and drink, and generally be supportive of the client(s) throughout the event.

5. What costs are incurred by the employer in respect to the employee hosting each relevant event?

Typically, in relation to the relevant events, the employer's business will incur costs such as ticket costs (if applicable), food and drink costs, and some travel expenses for both clients and employees.

6. Is the employee specifically paid for their time at the event e.g. overtime or are they paid to attend as part of their remuneration package?

As the employees are all salaried workers, they are not entitled to paid overtime (if the event is outside business hours) and are not specifically paid to attend. Notwithstanding this, attendance at the relevant events is closely related to their remuneration.

Consequently, whilst not directly remunerated in attending the events, the flow on effects of hosting clients can be quite significant in terms of each relevant employee's final remuneration.

7. Any other information you feel may assist ¡n the provision of your private ruling.

No.

In addition to the above information a sample job description for the relevant employees was provided.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 63A;

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;

Income Tax Assessment Act 1997 subsection 32-10(2);

Income Tax Assessment Act 1997 section 32-20; and

Income Tax Assessment Act 1997 section 995-1.

Reasons for decision

Question 1

Section 32-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides:

SECTION 32 Meaning of entertainment

32-10(1) Entertainment means:

(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.

32-10(2) You are taken to provide entertainment even if business discussions or transactions occur.

Note: These are some examples of what is entertainment:

• business lunches

• social functions

These are some examples of what is not entertainment:

• meals on business travel

• theatre attendance by a critic

• a restaurant meal of a food writer

The term 'recreation' is defined in subsection 995-1 of the ITAA 1997 to include amusement, sport or similar leisure time pursuits.

Subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986) defines 'recreation 'to include:

(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

Taxation Ruling TR 97/17 Income Tax and fringe benefits tax: entertainment by way of food or drink provides the ATO view with regard to 'What is entertainment? (Although written in terms of food and drink, the ruling is equally applicable to recreation in terms of 'What is entertainment?').

Paragraphs 14 and 17 of TR 97/17 states:

14. The word 'entertainment', which is key to the operation of the relevant words, is defined in the Macquarie Dictionary to mean:

(a)  agreeable occupation for the mind, diversion or amusement; or

(b)  something affording diversion or amusement; or

(c)  hospitable provision for the wants of a guest.

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".'

Paragraphs 22 to 24 of TR 97/17 state that in determining whether entertainment is provided, an objective consideration of the circumstances in which the entertainment is provided is required. Paragraph 23 of TR 97/17 suggests that the following tests be applied:

(a) Why is the food, drink and recreation being provided? - Food, drink and recreation provided in a social situation where the purpose of the function is for the employees to enjoy themselves, has the character of entertainment.

(b) What in the way of food, drink and recreation is being provided? - The more elaborate the food, drink and recreation the greater the likelihood that entertainment will arise.

(c) When is the food, drink and recreation being provided?

(d) Where is the food, drink and recreation being provided?

Paragraph 24 of TR 97/17 states that whilst none of the above factors are determinative (a) and (b) are the more important.

Why is the food, drink and recreation being provided?

The facts provided state that the situations in which the recreation, food and drink are provided are all for the purpose of entertaining the clients and prospective clients of the employer business. The relevant employees are in attendance as part of their work, i.e. to facilitate entertainment and in particular to look after patrons' wellbeing at the relevant events.

The relevant employee participates because their role is facilitating and hosting the event. The employee may be required to partake in the event, however, this is purely to facilitate the provision of entertainment to these key customers so as to generate revenue for the employer's business.

What food, drink and recreation is being provided?

The type of food, drink and recreation provided to the clients has not been provided. However, the extent to which the relevant employee enjoys the benefits of the food, drink and recreation varies. In some cases the employee would attend to the needs of the patrons without seeing the show or event. In other instances, the employee would play golf or attend a sporting event whilst attending to the needs of the clients.

It is considered that to the extent the relevant employee enjoys the benefits of the food, drink and recreation that this food, drink and recreation would be considered to be of a type that is in the nature of entertainment.

When is the food, drink and recreation being provided?

TR 97/17 states at paragraph 23:

…Food or drink provided during work time …is less likely to have the character of entertainment.

You have indicated in your reply to our request for additional information that attendance at the relevant events is closely related to the relevant employees remuneration as it is a duty and responsibility of their position to host customers and potential customers at the relevant events on an ad-hoc basis. In the circumstances of this case, as the food, drink and recreation may be provided at various times, these times may be within or outside of the employee's normal work period.

Where is the food, drink and recreation being provided?

TR 97/17 states at paragraph 23:

…food or drink provided in a function room, hotel, restaurant, café, coffee shop or consumed with other forms of entertainment is more likely to have the character of entertainment …

The recreation, food and drink are provided at sporting events, golf days, racing events and theatre shows for the purpose of entertaining the clients and/or potential clients of your business.

The above locations are designed for the provision of recreational entertainment.

Has entertainment been provided?

Applying the above tests we have found that:

• The purpose of providing the food drink and recreation is to entertain the employer's business customers (not the employees).

• However, what has been provided to the relevant employees is in the nature of entertainment.

• The food drink and recreation is provided both during and outside of the relevant employee's work time. Therefore, this criterion is not considered to be determinant of whether entertainment is provided or not.

• However the food drink and recreation is provided at entertainment venues and the relevant employee is receiving entertainment, as defined.

You have argued that as the food, drink and recreation is provided to the employee as a condition of their employment that the purpose for providing the food, drink and recreation can be likened to that of two of the examples of what is not entertainment contained in the note to subsection 32-10(2) of the ITAA 1997 being:

• theatre attendance by a critic; and

• a restaurant meal of a food writer.

You also state that the example of an employee journalist at paragraph 163 of Taxation Ruling TR 98/14 Income tax: employee journalists - allowances, reimbursements and work-related deductions has application to your employee's circumstances.

You have also referred to the following as support of your argument:

• FBT NTLG Subcommittee Minutes of 23 March 1995, agenda item 11, pertaining to where a tour leader accompanied a group of employees of another employer who are partaking of the trip as part of the award system. There the ATO was of the opinion that the tour leader was clearly undertaking work responsibilities and there would be no entertainment fringe benefit.

• Taxation Ruling TR 98/14 at paragraphs 161 to 164:

161. A deduction is not allowable under section 8-1 of the ITAA 1997 for expenditure incurred in attending staff dinners or similar functions. Such expenditure qualifies as an entertainment expense under section 51AE of the ITAA 1936. The costs of attending functions such as staff dinners and farewell dinners are not incurred in the course of producing income and they are essentially a private expense.

162. In Frankcom v. F C of T (1982) 65 FLR 25; 82 ATC 4599; (1982) 13 ATR 636, a magistrate was denied a deduction for the costs of attending a cocktail party hosted by the Bar Association and Law Society and dinners given by the Queensland Stipendiary Magistrates' Association. The taxpayer's duties as a magistrate did not necessitate his attendance at social functions. Hence, the expenditure was not incidental and relevant to the taxpayer gaining his salary and also were of a private nature.

163. A deduction is generally not allowable for the cost of providing entertainment by way of food, drink or recreation (whether to the taxpayer or another person). However, if an employee journalist is required as part of their work to report on a particular social function, the costs associated with attending are deductible.

164. Example: Edwina, a reporter for a major magazine, is responsible for the paper's social and society pages. In order to gather the necessary information for her articles, Edwina is required to attend several functions a year regarded as important to the city's socialites. The cost of attending these functions is an allowable deduction to Edwina due to the specialised nature of her work as a journalist.

After considering the abovementioned facts and representations, it is considered that the purpose the food, drink and recreation are provided is to provide entertainment to both the relevant employees and the customers (or potential customers). It is not considered that your circumstances are akin to the two examples in subsection 32-10(2).

In the two examples, it is necessary for the critic to attend the theatre in performance of their employment to review the performance. Likewise, the food writer is attending the restaurant to evaluate the food as part of his role as a food writer. Similarly, the employee journalist is attending the event to report on the particular social function. It is not considered that attendance at the events by the relevant employees is necessary in the same way as the noted exceptions in subsection 32-10(2). They are not reviewing the performances or food as per the two examples of what is not entertainment.

This decision is in line with the Explanatory Memorandum to Taxation Laws Amendment Bill (No 4) 1985 which introduced section 51AE of the Income Tax Assessment Act 1936 (ITAA 1936) (the predecessor of Division 32 of the ITAA 1997). It states in part:

Clause 9: Deductions not allowable for 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 or hospitality provided to invited guests at such events as product launches or film premieres will not be deductible.

…..

The broad effect of section 51AE will be that activities of the type that would generally be considered to constitute entertainment will be treated that way irrespective of any actual or claimed connection with business activities, discussions, etc.

Subsection 32-10(2) of the ITAA 1997 restates the purpose as outlined in the Explanatory Memorandum outlined above when it states:

You are taken to provide entertainment even if business discussions or transactions occur.

Conclusion

It is held that the general interpretation of section 32-5 of the ITAA 1997 applies to your circumstances. The exceptions outlined in the notes to subsection 32-10(2) are not considered to apply to the circumstances of your business's relevant employees. The general statement in subsection 32-10(2) has application and entertainment is considered to be provided to the business's relevant employees whilst carrying out their duties at a relevant event.

Question 2

Section 32-5 of the ITAA 1997 denies an entity a deduction under section 8-1 of the ITAA 1997 for any loss or outgoing in respect of providing entertainment. Therefore, as we have considered that entertainment is provided to the relevant employees, the 'otherwise deductible rule' would not be applicable in these circumstances.

Your expenditure in relation to the relevant employees attending the relevant events would not fall within any of the exceptions outlined in Subdivision 32B of the ITAA 1997. The expenditure would not be "otherwise deductible" to reduce the taxable value of the fringe benefit arising from the entertainment provided. The relevant employee would not be entitled to an income tax deduction if they had incurred the expenditure as section 32-5 of the ITAA 1997 expressly denies an income tax deduction.

Whilst the cost of providing the fringe benefit are expressly deductible pursuant to section 32-20 of the ITAA 1997, this will not result in any reduction in the taxable value of the fringe benefit provided to the relevant employees pursuant to section 63A of the FBTAA 1986.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).