Edited version of your written advice

Authorisation Number: 1012762375688

Ruling

Subject: Salary sacrifice for an exempt benefit

Question 1

Is the provision of recreational facilities to current employees, an exempt benefit under subsection 47(2) of the Fringe Benefits Tax Assessment Act 1986?

Answer

Yes.

Question 2

Is the amount of salary and wages foregone for the above benefit, from an effective salary sacrifice arrangement between the employer and employee?

Answer

Yes.

This ruling applies for the following periods:

1 April 2015 to 31 March 2016

1 April 2016 to 31 March 2017

1 April 2017 to 31 March 2018

1 April 2018 to 31 March 2019

The scheme commenced in 2012.

Relevant facts and circumstances

• The employer built a gymnasium and aquatic centre which opened in 20XX. The centre is owned by the employer and managed by its employees.

• The employer charges a fee for entrants to the centre and pays all costs of operating the centre.

• The employer charges fees for each visit or a registered member can pay concessional fees on a yearly basis.

• The employer has offered its employees the use of this sports and aquatic centre facilities since the opening of the centre in 20XX.

• The employer has allowed their employees to use a salary sacrifice arrangement, to pay for membership fees. The fees charged depends on what type of facility an employee will be using.

• An employee completes a salary sacrifice purchase/payment form which is sent to the human resources department for approval. The form includes all relevant details including the centres membership number to commence deductions from future pay.

Relevant legislative provisions

Fringe Benefits Assessment Act 1986 Section 38

Fringe Benefits Assessment Act 1986 Section 45

Fringe Benefits Assessment Act 1986 Subsection 47(2)

Fringe Benefits Assessment Act 1986 Subsection 136(1)

Income Tax Assessment Act 1997 Section 32-5

Income Tax Assessment Act 1997 Section 32-20

Income Tax Assessment Act 1997 Section 32-40 and

Income Tax Assessment Act 1997 Subsection 995(1)

Reasons for decision

The provision of recreational facilities located on the employer's business premises provided to current employees in respect of their employment is an exempt benefit under subsection 47(2) of the Fringe Benefits Tax Assessment Act 1986.

Detailed reasoning

The benefit provided to the employee is the employee's use of the facilities available in the centre over the course of the year.

Subsection 47(2) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) states that:

Where:

(a) a residual benefit provided to a current employee in respect of his or her employment consists of -

(i) the provision, or use, of a recreational facility; or

(ii) …; and

(a) the recreational facility … is located on business premises of -

(i) the employer; or

(ii) if the employer is a company, of the employer or of a company that is related to the employer,

the benefit is an exempt benefit.

The provision of the use of a 'recreational facility' will be exempt benefit under subsection 47(2) of the FBTAA if the following is satisfied:

1. Is a 'benefit' being provided to the employees?

The term 'benefit' is defined in subsection 136(1) of the FBTAA to include:

any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility and, without limiting the generality of the foregoing, includes a right, benefit, privilege, service or facility that is, or is to be, provided under:

(a) an arrangement for or in relation:

(ii) to the provision of, or the use of, facilities for entertaining or recreation.'

The provision of recreational facilities to employees satisfies the definition of a benefit.

The above requirement would only be satisfied if the facility is provided to current employees, and not any third parties.

2. Is the benefit provided a 'residual benefit'?

Section 45 of the FBTAA states that:

'A benefit is a residual benefit for the purposes of this Act if the benefit is not a benefit by virtue of a provision of Subdivision A of Divisions 2 to 11 (inclusive).

A benefit is a residual benefit if it is not a benefit by virtue of a provision of Subdivision A of Divisions 2 to 11 of the FBTAA. The provision and use of the sports and aquatic centre does not fall within any provision of Subdivision A of Division 2 to 11 inclusive of the FBTAA, thus section 45 of the FBTAA is met and it is a residual benefit.

However, is the benefit a tax-exempt body entertainment benefit and therefore not a residual benefit?

Section 38 of the FBTAA states that:

Where, at a particular time, a person (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 (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 employer incurs expenditure operating the recreational centre.

Where the expenditure incurred by operating the recreational centre is 'also "non-deductible exempt entertainment expenditure", as defined in subsection 136(1) of the FBTAA, the incurring of the expenditure will be deemed to constitute a benefit as described in section 38 of the FBTAA.'

Is it entertainment?

Section 136(1) of the FBTAA and section 32-10 of the Income Tax Assessment Act 1997 (ITAA 1997) states that 'entertainment' includes entertainment by way of recreation. 'Recreation' is defined in subsection 995-1(1) of the ITAA 1997 to include amusement, sport or similar leisure-time pursuits.

Thus, the employee's use of the centre facility(s) is entertainment by way of recreation under section 32-10 of the ITAA 1997.

Is the expenditure incurred in respect of provision of entertainment to employee?

Yes - the employer incurs expenditure operating the recreation centre which is in respect of provision of entertainment by way of recreation to employees.

Is the expenditure also a non-deductible exempt entertainment expenditure?

Section 136(1) of the FBTAA states that:

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

'Non-deductible entertainment expenditure' means a loss or outgoing to the extent to which:

(a) section 32-5 of the ITAA 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

(on the assumption that section 32-20 of the ITAA 1997 had not been enacted).

The operating expenditure the employer incurs would be entertainment expenditure under section 32-5 of the ITAA 1997 and would be a deductable income tax.

Where this operating entertainment would also be entertainment expenditure under s32-5 of the ITAA 1997 then the employer will have incurred 'non-deductible entertainment expenditure' which is also 'non-deductible exempt entertainment expenditure.' Under these circumstances the employer would have provided a benefit under section 38 of the FBTAA.

However, there is an exception in section 32-5 of the ITAA 1997. According to section 32-40 of the ITAA 1997, section 32-5 of the ITAA 1997 does not stop you deducting a loss or outgoing for…

3.1 'providing entertainment for payment in the ordinary course of a business that you carry on'.

The employer carries on a business of providing the use of the recreation centre to members of the public for payment of a fee. As the business is one of providing recreation which is entertainment and the activity is in the ordinary course of a business, section 32-40 of the ITAA 1997 is therefore satisfied and the employer's expenditure is not entertainment expenditure. It is not a non-deductible entertainment expenditure or non-deductible exempt entertainment expenditure within subsection 136(1) of the FBTAA.

Thus, section 38 of the FBTAA is not satisfied, and the benefit provided is a residual benefit as the benefit does not fall into any other division of the FBT legislation.

3. Is the benefit 'provided' to current employees?

Section 136(1) of the FBTAA states that the definition of 'benefit':

'includes any right, privilege, service or facility and, without limiting the generality of the foregoing, includes a right, benefit, privilege, service or facility that is, or is to be, provided under an arrangement for or in relation to: the provision of, or of the use of facilities for, entertainment, recreation or instruction.'

'Provide' in relation to a benefit includes allow, confer, give, grant or perform.

The employer allows use of the centre, which satisfies the requirement that the benefit is provided to current employees.

Furthermore, the use of the recreation facilities has to be 'in respect of' 'employment' of the 'employee'. These terms are defined in subsection 136(1) of the FBTAA.

'in respect of':

in relation to the employment of an employee, includes by reason of, by virtue of, or for or in relation directly or indirectly to, that employment'

'employment':

in relation to a person, means holding of any office or appointment, the performance of any function or duties, the engaging in of any work, or doing of any acts or things that results, will result of has resulted in the person being treated as an employee.

'employee' means:

(a) a current employee;

(b) a future employee; or

(c) a former employee

It is concluded the provision of recreation facilities to current employees is in respect of their employment.

Does the benefit consist of the provision or use of a 'recreational facility'?

Section 136(1) of the FBTAA states that:

'Recreational facility' means a facility for recreation, but does not include a facility for accommodation or a facility for drinking or dining.

'Recreation' includes:

(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 description of the nature and services of the facility falls within the definition of recreational facility.

The facility will be used predominantly for sports (netball, basketball, etc), gymnasium and swimming centres. These activities fall under the definition of recreation. The facility is provided to current employees, therefore the requirement is satisfied.

Do the premises satisfy the definition of 'recreational facility' in subsection 136(1) of the FBTAA?

The facility in question is for recreation and not a facility specifically for drinking or dining, therefore this definition is satisfied.

4. Is the recreational facility located on the 'business premises' of the employer?

Section 136(1) of the FBTAA states that:

'Business premises' in relation to a person, means premises, or a part of premises, of the person used, in whole or in part, for the purposes of business operations of the person, but does not include:

(a) premises, or a part of premises, used as a place of residence of an employee of the person or an employee of an associate of the person; or

(b) a corporate box; or

(c) boats or planes used primarily for the purpose of providing entertainment unless the boat or plane is used in the person's business of providing entertainment; or

(d) other premises used primarily for the purpose of providing entertainment unless the premises are used in the person's business of providing entertainment.

Premises of the person:

The tax office position is reflected in Taxation Ruling TR 2000/4 and paragraph 7 states, if a person has ownership of premises, or has exclusive occupancy rights as lessee of premises, the premises would ordinarily be described as 'premises of the person'.

The centre is wholly owned by the employer and the operations and management of the centre is carried out by its employees, and the centre is located on the business premises of the employer, thus the requirement of 'premises of the person' is satisfied.

Business operations:

Paragraph 9 of the TR 2000/4, the term 'business operations' include:

9 [Activities] undertaken by a person in the ordinary course of carrying a business. They also include those activities that, although not undertaken in the ordinary course of carrying on a business, are nevertheless undertaken in the course of carrying on a business. Profit making activities that fall short of being a business are also included if they have a business or commercial character.

The centre is owned and operated by the employer and the users are charged a fee for the use of the facilities stated above, therefore the centre is part of the normal business operations of the employer.

Conclusion

1. The benefit is a residual benefit;

2. The benefit is the provision or use of a recreational facility;

3. The benefit is provided to a current employee in respect of employment; and

4. The recreational facility is located on the business premises of the employer.

The provision of recreational facilities to current employees is an exempt benefit under subsection 47(2) of the FBTAA.

Question 2

Summary

An effective salary sacrifice arrangement exists which allows an employee to forego part of their future salary or wages for an exempt benefit.

Detailed reasoning

An effective salary sacrifice arrangement involves the employee foregoing part of his future salary or wages (which they would have received) in return for a benefit before the employee receives salary or wages. An employee receives cash salary or wages, when the money is deposited into their bank account.

An employee performs duties for an employer in return for an agreed amount salary or wages. An employee is entitled to receive remuneration after they have used their personal skills in performing duties for his/her employer, usually at fixed intervals.

The employer allows its current employees to forego part of their future pre-tax salary to pay for their centre membership fees. A salary sacrifice form is submitted and the employer puts this arrangement into effect. The arrangement is in accordance with TR 2001/10 and is an effective salary sacrifice arrangement.

As stated above, the benefit provided is an exempt benefit under subsection 47(2) of the FBTAA. The consequences of this arrangement means the employer does not pay any FBT on the benefit provided and the employee incurs PAYGW deductions on the reduced amount of salary and wages.

Therefore, this is an effective salary sacrifice arrangement, between the employer and employee that allows the employee to forgo part of their future salary or wages in return for an exempt benefit.

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