Edited version of your written advice

Authorisation Number: 1012768821718

Ruling

Subject: Fringe Benefits Tax and Income Tax implications relating to conference expenses.

Question 1

Is the conference a seminar for the purposes of section 32-35 of Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

(a) Will YOU incur a fringe benefit tax liability for the return airfares and transfers provided to its employees?

(b) Will YOU incur a fringe benefit tax liability for the return airfares and transfers provided to the franchisee employees?

(c) Can YOU claim an income tax deduction in relation to the return airfares and transfers provided to its employees?

(d) Can YOU claim an income tax deduction in relation to the return airfares and transfers provided to the franchisee employees?

Answer

(a) No

(b) No

(c) Yes

(d) Yes

Question 3

(a) Will YOU incur a fringe benefits tax liability for the accommodation provided to its employees?

(b) Will YOU incur a fringe benefits tax liability for the accommodation provided to the franchisee employees?

(c) Can YOU claim an income tax deduction in relation to the accommodation provided to its employees?

(d) Can YOU claim an income tax deduction in relation to the accommodation provided to the franchisee employees?

Answer

(a) No

(b) No

(c) Yes

(d) Yes

Question 4

(a) Will YOU incur a fringe benefits tax liability for the breakfasts provided to its employees?

(b) Will YOU incur a fringe benefits tax liability for the breakfasts provided to the franchisee employees?

(c) Can YOU claim an income tax deduction in relation to the breakfasts provided to its employees?

(d) Can YOU claim an income tax deduction in relation to the breakfasts provided to the franchisee employees?

Answer

(a) No

(b) No

(c) Yes

(d) Yes

Question 5

(a) Will YOU incur a fringe benefits tax liability for the gifts provided to its employees?

(b) Will YOU incur a fringe benefits tax liability for the gifts provided to the franchisee employees?

(c) Can YOU claim an income tax deduction in relation to the gifts provided to its employees?

(d) Can YOU claim an income tax deduction in relation to the gifts provided to the franchisee employees?

Answer

(a) Yes

(b) No; however, the employer of the franchise owners may have a FBT liability

(c) Yes

(d) Yes

Question 6

(a) Will YOU incur a fringe benefits tax liability for the arrival dinner provided to its employees on the arrival day?

(b) Will YOU incur a fringe benefits tax liability for the arrival dinner provided to the franchisee employees on the arrival day?

(c) Can YOU claim an income tax deduction in relation to the arrival dinner provided to its employees on the arrival day?

(d) Can YOU claim an income tax deduction in relation to the arrival dinner provided to the franchisee employees on the arrival day?

Answer

(a) No

(b) No

(c) Yes

(d) Yes

Question 7

(a) Will YOU incur a fringe benefits tax liability for the gala dinner provided to its employees?

(b) Will YOU incur a fringe benefits tax liability for the gala dinner provided to the franchisee employees?

(c) Can YOU claim an income tax deduction in relation to the gala dinner provided to its employees?

(d) Can YOU claim an income tax deduction in relation to the gala dinner provided to the franchisee employees?

Answer

(a) Yes

(b) No; however, the employer of the franchise owners may have a FBT liability

(c) Yes

(d) Yes if a fringe benefit is provided to the franchisee employees

Question 8

(a) Will YOU incur a fringe benefits tax liability for the room hire and room set up for the conference in relation to its employees?

(b) Will YOU incur a fringe benefits tax liability for the room hire and room set up for the conference in relation to the franchisee employees?

(c) Can YOU claim an income tax deduction in relation to the room hire and room set up for the conference?

Answer

(a) No

(b) No

(c) Yes

Question 9

(a) Will YOU incur a fringe benefits tax liability for the morning teas and lunches provided to its employees at the conference?

(b) Will YOU incur a fringe benefits tax liability for the morning teas and lunches provided to the franchisee employees at the conference?

(c) Can YOU claim an income tax deduction in relation to the morning teas and lunches provided to its employees at the conference?

(d) Can YOU claim an income tax deduction in relation to the morning teas and lunches provided to the franchisee employees at the conference?

Answer

(a) No

(b) No

(c) Yes

(d) Yes

Question 10

(a) Will YOU incur a fringe benefits tax liability for recreational activities provided to its employees?

(b) Will YOU incur a fringe benefits tax liability for recreational activities provided to the franchisee employees?

(c) Can YOU claim an income tax deduction in relation to the recreational activities provided to its employees?

(d) Can YOU claim an income tax deduction in relation to the recreational activities provided to the franchisee employees?

Answer

(a) Yes

(b) No; however, the employer of the franchise owners may have a FBT liability

(c) Yes

(d) Yes if a fringe benefit is provided to the franchisee employees

Question 11

(a) Will YOU incur a fringe benefits tax liability for the dinners provided to its employees following the recreational activities?

(b) Will YOU incur a fringe benefits tax liability for the dinners provided to the franchisee employees following the recreational activities?

(c) Can YOU claim an income tax deduction in relation to the dinners provided to its employees following the recreational activities?

(d) Can YOU claim an income tax deduction in relation to the dinners provided to its franchisee employees following the recreational activities?

Answer

(a) Yes

(b) No; however, the employer of the franchise owners may have a FBT liability

(c) Yes

(d) Yes if a fringe benefit is provided to the franchisee employees

This ruling applies for the following periods

Year ended 31 March 2015 for the questions relating to fringe benefits tax

Year ended 30 June 2015 for the questions relating to income tax

Relevant facts

Each year, you organise an exclusive conference for employees of franchisees who achieve certain set targets. These conferences are generally held in good quality venues at a holiday destination.

You pay all of the costs of attendance at the conference by the franchisees employees and your key employees who attend.

The costs paid include:

• airfares;

• accommodation;

• breakfasts;

• gifts to participants;

• arrival dinner;

• a gala dinner;

• room hire and set up;

• morning teas and lunches;

• recreational activities; and

• a dinner at the end of the recreational activities.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 40

Fringe Benefits Tax Assessment Act 1986 Section 44

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 Division 32

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

In your ruling application you asked a series of questions concerning:

• the fringe benefits tax implications of the benefits provided at the conference; and

• the deductibility of the expenses incurred in relation to the conference.

In general terms, the answers to both of these issues depend upon the income tax provisions as they relate to:

• the employee (a fringe benefits tax liability will not arise in relation to the benefits provided if the employee would have been able to claim an income tax deduction for the expenses if he or she had incurred the expenses); and

• you (in terms of claiming an income tax deduction for the expenses you incurred).

The general income tax provision that relates to the deductibility of the expenses is section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

Section 8-1 of the ITAA 1997 states:

(1) You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

(2) However, you cannot deduct a loss or outgoing under this section to the extent that:

(a) it is a loss or outgoing of capital, or of a capital nature; or

(b) it is a loss or outgoing of a private or domestic nature; or

(c) it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or

(d) a provision of this Act prevent you from deducting it.

However, this general provision is subject to section 32-5 of the ITAA 1997.

Section 32-5 of the ITAA 1997 prevents an income tax deduction being claimed under section 8-1 for expenditure that is a loss or outgoing in respect of providing entertainment, unless the loss or outgoing comes within Subdivision 32-B of the ITAA 1997.

Section 32-10(1) of the ITAA 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.

Section 32-10(2) of the ITAA 1997 confirms that you are taken to provide entertainment even if business discussions or transactions occur.

For the purposes of this ruling the relevant exceptions within Subdivision 32-B are contained in:

• section 32-20 which enables a deduction to be claimed for expenses incurred in providing entertainment where the entertainment results in a fringe benefit; and

• section 32-35 which enables a deduction to be claimed for expenses incurred in providing entertainment that is reasonably incidental to attending a seminar that goes for at least 4 hours.

1. Is the conference a seminar for the purposes of section 32-35 of the ITAA 1997?

As set out above, section 32-35 of the ITAA 1997 enables a deduction to be claimed for entertainment expenses that are reasonably incidental to attending a seminar that goes for at least 4 hours.

Section 32-35 of the ITAA 1997 states:

Seminar expenses
Item	Section 32-5 does not stop you deducting a loss or outgoing for …	But the exception does not apply if …
2.1	providing food, drink, accommodation or travel to an individual (including yourself) that is reasonably incidental to the individual attending a seminar that goes for at least 4 hours.	(a) the seminar is a business meeting; or (b) the seminar's main purpose is to promote or advertise a business (or prospective business) or its goods or services; or (c) the seminar's main purpose is to provide entertainment at, or in connection with, the seminar.

For the expenses to come within this exception it is necessary for the following conditions to be met:

(i) the expenses to be reasonably incidental to the attendance at a seminar;

(ii) the seminar must go for at least four hours;

(iii) the seminar must not be a business meeting;

(iv) the main purpose of the seminar must not be to promote or advertise a business, or its goods or services; and

(v) the main purpose of the seminar must not be to provide entertainment.

These conditions are considered below:

(i) Are the expenses reasonably incidental to the attendance at a seminar?

Seminar is defined in subsection 32-65(1) of the ITAA 1997 which states:

Seminar includes a conference, convention, lecture, meeting (including a meeting for the presentation of awards), speech, "question and answer session", training session or educational course.

It is accepted that the conference comes within this definition.

(ii) Did the seminar go for at least four hours?

In determining whether the seminar went for at least four hours subsection 32-65(20 of the ITAA 1997 states:

In working out whether a *seminar goes for at least 4 hours the following are taken not to affect the seminar's continuity, nor to form part of it:

(a) any part of the seminar that occurs during a meal;

(b) any break during the seminar for the purpose of a meal, rest or *recreation.

The conference includes the following events:

As these events are more than four hours it is accepted the seminar went for at least four hours.

(iii) Is the seminar a business meeting?

Subsection 32-65(3) of the ITAA 1997 sets out when a seminar will be a business meeting. Subsection 32-65(3) states:

A seminar is a business meeting if its main purpose is for individuals who are (or will be) associated with the carrying on of a particular business to give or receive information, or discuss matters, relating to the business.

However, the seminar is not a business meeting if it:

(a) is organised by (or on behalf of) an employer solely for either or both of these purposes:

(i) training the employer and the employer's employees (or just those employees) in matters relevant to the employer's business (or prospective business);

(ii) enabling the employer and the employer's employees (or just those employees) to discuss general policy issues relevant to the internal management of the employer's business; and

(b) is conducted on property that is occupied by a person (other than the employer) whose business includes organising seminars or making property available for conducting seminars.

It is accepted the main purpose of the conference is not for individuals who are associated with a particular business to give or receive information, or discuss matters relating to the particular business.

(iv) Is the main purpose of the seminar to promote or advertise a business, or its goods or services?

The main purpose of the seminar is not to promote or advertise a business.

The events are a series of lectures, meetings, including a presentation of awards, and training exercises with the total time exceeding four hours. It is accepted that the conference is a seminar for the purposes of section 32-65 of the ITAA 1997.

(v) Is the provision of entertainment the main purpose of the seminar?

The case of FC of T v Amway of Australia Ltd FCFCA 273; 2004 ATC 4893 (Amway) provides assistance in determining the dominant purpose in incurring the expenses.

Attendance at the annual Australian Leadership Seminars (ALS) was by invitation only and the seminars were held at holiday destinations, mostly overseas. The attendees travelled and stayed at Amway's expense. They participated in a number of business sessions as well as recreational activities and gala dinners. In order to determine the deductibility of the costs incurred in hosting the seminars the Court was required to determine the purpose of the seminar. The Court held that the costs of the airfares and accommodation were expended to bring the attendees to a seminar, not in order to provide them with food, drink and recreation. Therefore, the travel and accommodation costs were held not to have been incurred for the purpose of facilitating entertainment, provided by way of food, drink and recreation and were fully deductible to Amway.

In discussing the findings and conclusions of fact drawn by the Primary Judge, Hill, Sundberg and Kenny JJ stated:

12. In relation to an ALS, his Honour found that, from Amway's point of view, "an ALS was solely for business purposes". More generally, he found that "an ALS was a serious business occasion for all concerned"; "there were serious business purposes served by an ALS", and "an ALS is an important business occasion for a distributor in various ways". …

13. His Honour also held that "[t]he existence of seminars was designed to (and did) motivate the network of distributors by acting as a reward for and an incentive towards success". He remarked that, "Amway certainly publicised the seminars on that basis" and that

"[a} powerful message of wealth and prestige which could be aspired to with success in in the business was conveyed in various ways". His Honour said:

"[A] ALS was designed to be, and was seen to be, an attractive event because of the exotic location, the standard of the venue and the opportunity it provided for combining business with pleasure. The element of hospitality afforded to a distributor (and so, entertainment) was not slight or insignificant."

14. In summary, his Honour accepted that:

"[A] purpose of the seminar was to enable the participants to give information relating to the business to, receive information relating to the business from, and discuss matters relating to the business with other participants in the business. However, another purpose of the seminar from Amway's point of view was to provide both a reward and an incentive to the distributors who attended and to those who had not yet attended but aspired to do so."

As between these purposes, his Honour said "I am satisfied that business is the principal purpose of an ALS and that the other purposes are ancillary, although significant".

17. His Honour went on to hold that "[t]he fares and accommodation were expended to bring distributors to a business seminar, not in order to provide the participants with food, drink and recreation".

The conference has similar characteristics to the ALS in Amway as it has a serious business purpose and is an important business occasion for the franchise owners. The existence of seminars was designed to (and did) motivate the franchisee owners by acting as a reward for and an incentive towards success. The purpose of the conference was to enable the franchisee owners to give information relating to the business, receive information relating to the business, and discuss matters relating to the business with other franchisee owners in the business. However, another purpose of the conference was to provide both a reward and an incentive to the franchisee owners.

Therefore, it is accepted that the seminar's main purpose was not the provision of entertainment.

Conclusion

As all of the requirements of section 32-35 are met it is accepted that section 32-5 of the ITAA 1997 will not prevent an income tax deduction being claimed for providing food, drink, accommodation or travel that is reasonably incidental to the attendance at the seminar.

2. Will a fringe benefit tax liability arise from the costs of the return airfares and transfers?

In general terms a fringe benefit will arise when a benefit is provided to an employee as a result of the employee's employment if the benefit is not an exempt benefit.

2(a) Travel provided to employees

As the travel provided to employees is not an exempt benefit, it will be a fringe benefit as it is a benefit provided by the employer to the employee as a result of the employee performing employment duties.

In determining the taxable value of the benefit it is necessary to determine the type of benefit being provided. The Fringe Benefits Tax Assessment Act 1986 (FBTAA) is divided into 12 different categories of benefits. Each category has its own valuation rules.

The provision of the airfares and transfers are a benefit that does not fall within one of the specific categories of benefits in Subdivision A of Divisions 2 to 11 of the FBTAA and therefore, according to section 45 of the FBTAA, the provision of the return airfares and transfers constitutes a residual benefit.

The taxable value of a residual fringe benefit can be reduced in certain circumstances by the use of the otherwise deductible rule contained in section 52 of the FBTAA. 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 2001/20) summarises the operation of the otherwise deductible rule. Paragraph 112 of 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 determining whether the employee would have been entitled to claim an income tax deduction for the expenditure it is necessary to consider the following two questions:

(a) Would a deduction have been allowed under section 8-1 of the ITAA 1997?

(b) Would section 32-5 of the ITAA 1997 prevent a deduction being claimed under section 8-1?

(a) Would a deduction have been allowed under section 8-1 of the ITAA 1997?

Guidance as to the deductibility of the expenses is provided in paragraphs 63 to 70 of Taxation Ruling TR 98/9 Income tax: deductibility of self-education expenses incurred by an employee or a person in business. These paragraphs state:

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 (199 ) 173 CLR 1 at 17; 91 ATC 4950 at 4957 and 4958; (1991) 22 ATR 613 at 622).

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.

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 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.

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.

In applying these examples, it is accepted that where the employees only travel to attend the conference the travel costs would be deductible for the employee as the main purpose of attending the conference is the gaining or producing of income.

However, it should be noted that if the employee was to extend their stay at the holiday location, it may become necessary to apportion the costs to take account of the private purpose.

(a) Would section 32-5 of the ITAA 1997 prevent a deduction being claimed under section 8-1?

As discussed above, section 32-5 of the ITAA 1997 prevents an income tax deduction being claimed under section 8-1 of the ITAA 1997 where the expenditure is a loss or outgoing in respect of providing entertainment.

The cost of flights can be considered to be entertainment where:

• the flight is recreational entertainment (under paragraph 32-10(1)(a) of the ITAA 1997; or

• is travel to do with providing entertainment by way of food, drink or recreation (under paragraph 32-10(1)(b) of the ITAA 1997.

It is accepted that neither of these situations exist in the situation being considered as the flights are undertaken for the purpose of attending the conference. Therefore, in accordance with the decision in Amway it is accepted that the flights did not involve the provision of entertainment.

Summary

A fringe benefits tax liability will not arise from the flights provided to the employees as the flights are solely for the purpose of attending the conference, rather than the provision of entertainment. Therefore, the otherwise deductible rule will reduce the taxable value of the fringe benefit that arises from the flights to nil.

2(b) Travel provided to franchisee employees

As set out above, you will only have a fringe benefits tax liability where a fringe benefit is provided to your employee, or an associate of your employee.

As the franchisee employees are not your employees, or an associate of your employees you will not have a fringe benefits tax liability in relation to the travel provided to the franchisee employees.

However, depending upon the circumstances in which the travel is provided to the franchisee employees and whether the employee extends their stay at the conference location or undertakes further private travel, a fringe benefits tax liability may arise for the franchisees.

2(c) Can you claim an income tax deduction for the cost of the return airfares and transfers provided to your employees?

As a fringe benefit will arise from the provision of the flights to your employees you are able to claim an income tax deduction for the cost of the flights.

2(d) Can you claim an income tax deduction in relation to the return airfares and transfers provided to the franchisee employees?

Although a fringe benefit may not arise from the provision of the flights to franchisee employees, the cost of these flights is deductible under subsection 8-1 of the ITAA 1997 as an outgoing incurred in carrying on a business for the purpose of gaining or producing assessable income.

3. Will a fringe benefits tax liability arise from the cost of the accommodation:

(a) provided to employees?

For the same reasons discussed above in relation to the flights, the provision of accommodation to your employees is a residual fringe benefit which will have a nil taxable value due to the application of the otherwise deductible rule.

(b) provided to franchisee employees?

For the reasons discussed above in relation to the flights you will not have a fringe benefits tax liability for the accommodation provided to the franchisee employees.

(c) Can you claim an income tax deduction for the cost of the accommodation provided to your employees?

For the same reasons discussed above in relation to the flights you will be able to claim an income tax deduction for the cost of the accommodation provided to your employees.

(d) Can you claim an income tax deduction in relation to the accommodation provided to the franchisee employees?

For the same reasons discussed above in relation to the flights you will be able to claim an income tax deduction for the cost of the accommodation provided to the franchisee employees.

4. Will a fringe benefits tax liability arise from the breakfasts:

(a) provided to your employees?

A property fringe benefit arises from the food and drink provided to employees at breakfast. In determining whether the taxable value of this fringe benefit can be reduced to nil under the otherwise deductible rule it is necessary to consider the following two questions:

(a) Would a deduction have been allowed under section 8-1 of the ITAA 1997?

(b) Would section 32-5 of the ITAA 1997 prevent a deduction being claimed under section 8-1?

(a) Would a deduction have been allowed under section 8-1 of the ITAA 1997?

The employees are travelling when they attend the conference. The general rule for the deductibility of food consumed while travelling is set out in ATO Interpretative Decision ATO ID 2002/807 Income Tax Deductions: meal expenses whilst on overnight travel which states:

Generally, meal expenses are not allowable as a deduction under section 8-1 of the ITAA on the basis there isn't a sufficient connection between the expenditure and the income earning activities of a taxpayer. However, there is, no general proposition that meal expenses can never be deductible: FC of T v. Cooper 91 ATC 4396; (1991) ATR 1616, Roads and Traffic Authority of NSW v. FC of T 93 ATC 4508; (1993) 26 ATR 76, Re Carlow and FC of T 95 ATC 2166; (1995) 31 ATR 1190, AAT decision in Case 9/96 96 ATC 186.

The deductibility of expenditure on meals will depend on the essential character of the expenditure on the basis of the facts of each case. In this case, the relevant expenses are considered to be incurred in carrying on the business as the business requires overnight travel. The meal expenses are not considered to be private in nature.

As a result, the taxpayer's meal expenses incurred while travelling overnight in the course of the taxpayer's business, are deductible under section 8-1 of the ITAA 1997, provided the relevant substantiation provisions of the ITAA 1997 are satisfied.

As the employees are travelling, the costs of the food and drink consumed at breakfast would be deductible.

(b) Would section 32-5 of the ITAA 1997 prevent a deduction being claimed under section 8-1?

Guidance for considering whether food and drink constitutes the provision of entertainment is provided in Taxation Ruling TR 97/17 Income tax and fringe benefits tax: entertainment by way of food or drink.

In relation to meals provided to an employee who is travelling in the course of their employment, paragraph 21 of TR 97/17 states:

Where an employee is travelling in the course of performing their employment duties, the food or drink provided is consumed as a result of the work-related travel. In the absence of supplementary entertainment, the food or drink is not provided by the employer in order to confer entertainment on that employee. Therefore, the meal does not have the character of entertainment.

As no supplementary entertainment is provided with the breakfasts it is accepted they do not constitute the provision of entertainment.

Conclusion

The provision of the breakfasts to employees will be a fringe benefit which will have a nil taxable value as the employees would have been able to claim an income tax deduction for the cost of the breakfasts if they had not been provided.

4(b) Will you incur a fringe benefits tax liability for the breakfasts provided to the franchisee employees?

For the reasons discussed above in relation to the flights you will not have a fringe benefits tax liability for the breakfasts provided to the franchisee employees.

4(c) Can you claim an income tax deduction for the cost of the breakfasts provided to your employees?

For the same reasons discussed above in relation to the flights you will be able to claim an income tax deduction for the cost of the breakfasts provided to your employees.

4(d) Can you claim an income tax deduction in relation to the accommodation provided to the franchisee employees?

For the same reasons discussed above in relation to the flights you will be able to claim an income tax deduction for the cost of the breakfasts provided to the franchisee employees.

5. Will a fringe benefits tax liability arise from:

(a) the gifts provided to your employees?

Each attendee receives a gift at the conference.

It is accepted that each gift will be a property fringe benefit. As discussed above, the taxable value of a property benefit can be reduced under the 'otherwise deductible' rule in section 44 of the FBTAA. A gift is of a private or domestic nature, and is not related to the employee producing or gaining their assessable income. If the employee incurred the expense on the gift, the expense would not have been deductible under section 8-1 of the ITAA 1997.

Therefore, a fringe benefits tax liability will arise from the gifts provided to your employees as the taxable value of the property benefit arising from the provision of the gift cannot be reduced by the otherwise deductible rule.

(b) the gifts provided to the franchisee employees?

For the reasons discussed above, you will not have a fringe benefits tax liability in relation to the gifts provided to the franchisee employees as they are not your employees.

However, a fringe benefits tax liability may arise for the franchisees.

(c) Can you claim an income tax deduction in relation to the gifts provided to your employees?

For the reasons discussed above, you will be able to claim an income tax deduction for the cost of the gifts provided to your employees as a fringe benefit will arise from the provision of the gifts.

(d) Can you claim an income tax deduction in relation to the gifts provided to the franchisee employees?

For the reasons discussed above, you will be able to claim an income tax deduction for the cost of the gifts provided to franchisee employees as the cost is an outgoing incurred in carrying on a business for the purpose of gaining or producing assessable income.

6. Will you incur a fringe benefits tax liability for the arrival dinner provided to:

(a) employees?

The welcome or arrival dinner comprised a sit down meal and drinks (including beer and wine) plus a disc jockey (DJ).

As discussed above, the provision of the arrival dinner will be a fringe benefit and in considering the whether the taxable value can be reduced to nil it is necessary to consider the following two questions:

(a) Would a deduction have been allowed under section 8-1 of the ITAA 1997?

(b) Would section 32-5 of the ITAA 1997 prevent a deduction being claimed under section 8-1?

(a) Would a deduction have been allowed under section 8-1 of the ITAA 1997?

As discussed above, the employees in attending the conference are travelling. Therefore, the cost of the food and drink consumed at the arrival dinner are deductible under section 8-1.

(b) Would section 32-5 of the ITAA 1997 prevent a deduction being claimed under section 8-1?

For the purpose of considering whether food and drink constitutes the provision of entertainment, paragraph 23 of TR 97/17 provides the following tests:

It can be seen that the determination of whether or not the provision of food or drink constitutes entertainment requires an objective analysis of all the circumstances surrounding that provision. We are of the view that the following are relevant factors that should be considered in undertaking any objective analysis:

(a) Why is the food or drink being provided. This test is a 'purpose test'. For example, food or drink provided for the purpose of refreshment does not generally have the character of entertainment, whereas food or drink provided in a social situation where the purpose of the function is for employees to enjoy themselves has the character of entertainment.

(b) What food or drink is being provided. As noted above, morning and afternoon teas and light meals are generally not considered to constitute entertainment. However, as light meals become more elaborate, they take on more of the characteristics of entertainment. The reason for this is that the more elaborate a meal, the greater the likelihood that entertainment arises from the consumption of the meal.

(c) When is the food or drink being provided. Food or drink provided during work time, during overtime or while an employee is travelling is less likely to have the character of entertainment. This is because in the majority of these cases food provided is for a work-related purpose rather than an entertainment purpose. This, however, depends upon whether the entertainment of the recipient is the expected outcome of the provision of the food or drink. For example, a staff social function held during work time still has the character of entertainment.

(d) Where is the food or drink being provided. Food or drink provided on the employer's business premises or at the usual place of work of the employee is less likely to have the character of entertainment; refer to the reasons in (b) and (c) above. However, food or drink provided in a function room, hotel, restaurant, café, coffee shop or consumed with other forms of entertainment is more likely to have the character of entertainment. This is because the provision of the food or drink is less likely to have a work-related purpose.

Applying these factors to the arrival dinner:

Why is the food or drink being provided? The food and drink provided was a sit down meal with alcohol. This is considered to be more than refreshment and is provided in a social situation and has the character of entertainment.

What food or drink is being provided? A sit down meal with alcohol is considered to be more elaborate than morning and afternoon teas or light meals, and has the character of entertainment.

When is the food or drink being provided? The food and drink is being provided while employees are travelling on business and is less likely to have the character of entertainment.

Where is the food or drink being provided? The food or drink is provided off the employer's business premises at an overseas hotel and has the character of entertainment.

On balance, the provision of food and drink at the arrival dinner will not constitute the provision of entertainment. Although the meal includes the provision of alcohol, constitutes entertainment paragraph 64 of TR 97/17 states that the provision of alcohol does not automatically result in the provision of meal entertainment. This is illustrated by the examples provided at paragraphs 66 to 69 of TR 97/17.

Paragraphs 66 to 69 of TR 97/17 state:

Example 3.1

66. An employee who is travelling on a business trip takes an evening meal at a restaurant. The meal is accompanied by the consumption of some wine.

67. In this situation the employee is travelling in the course of his or her employment and the meal purchased is of a type that is normally consumed at home. It is impractical to suggest that drinking wine in these circumstances changes the nature of the meal. The food or drink does not amount to meal entertainment. It is consumed by the employee while undertaking work-related travel.

Example 3.2

68. An employee of an engineering firm attends a Continuing Professional Development (CPD) session conducted at a local function centre. The employer reimburses the employee for the cost of the registration fee. At the end of the session, the CPD provider supplies the participants with finger foods and a choice of refreshments including tea, coffee, beer, wine and soft drink. The employee consumes some wine while partaking of the finger foods.

69. When applying the tests in paragraph 23 above to this example, it is reasonable to conclude that the consumption of the wine or beer forms only an incidental part of the meal. It does not result in the food or drink amounting to the provision of meal entertainment.

The food and drink consumed at the arrival dinner is similar to these examples. Therefore, in applying the principles contained within these examples it is accepted that the food and drink consumed by the employees did not amount to the provision of entertainment.

Conclusion

The provision of the food and drink at the arrival dinner will be a fringe benefit with a nil taxable value as the employees would have been able to claim an income tax deduction for the cost of the meal if they had incurred the expense.

(b) the arrival dinner provided to the franchisee employees?

For the reasons discussed above, you will not have a fringe benefits tax liability in relation to the gifts provided to the franchisee employees as they are not your employees.

(c) Can you claim an income tax deduction in relation to the arrival dinner provided to your employees?

For the reasons discussed above, you will be able to claim an income tax deduction for the cost of the arrival dinner provided to your employees as a fringe benefit will arise from the provision of the dinner.

(d) Can you claim an income tax deduction in relation to the arrival dinner provided to the franchisee employees?

For the reasons discussed above, you will be able to claim an income tax deduction for the cost of the arrival dinner provided to franchisee employees as the cost is an outgoing incurred in carrying on a business for the purpose of gaining or producing assessable income.

7. Will a fringe benefits tax liability arise from the gala dinner provided to:

(a) your employees

On the final evening of the conference, you have a sit down meal with drinks (including beer and wine) and dancers as entertainment at a gala or farewell dinner.

As discussed above, the provision of the gala dinner will be a fringe benefit and in considering whether the taxable value can be reduced to nil it is necessary to consider the following two questions:

(a) Would a deduction have been allowed under section 8-1 of the ITAA 1997?

(b) Would section 32-5 of the ITAA 1997 prevent a deduction being claimed under section 8-1?

(a) Would a deduction have been allowed under section 8-1 of the ITAA 1997?

For the reasons discussed above, the cost of the gala dinner would come within section 8-1 of the ITAA 1997 as the dinner is food and drink consumed whilst the employees are travelling.

(b) Would section 32-5 of the ITAA 1997 prevent a deduction being claimed under section 8-1?

Applying the factors discussed in paragraph 23 of TR 97/17 to the gala dinner:

Why is the food or drink being provided? The food and drink provided was a sit down meal with alcohol. This is considered to be more than refreshment and is provided in a social situation and has the character of entertainment.

What food or drink is being provided? A sit down meal with alcohol is considered to be more elaborate than morning and afternoon teas or light meals, and has the character of entertainment.

When is the food or drink being provided? The food and drink is being provided while employees are travelling on business. While this indicates it is less likely to have the character of entertainment, associated entertainment in the form of dancers is provided at the dinner.

Where is the food or drink being provided? The food or drink is provided off the employer's business premises at an overseas hotel and has the character of entertainment.

On balance, the provision of food and drink at the gala dinner will constitute the provision of entertainment as it is an elaborate meal that is provided at a social event in conjunction with a floor show.

Conclusion

A fringe benefits tax liability will arise in relation to the gala dinner provided to employees as section 32-5 of the ITAA 1997 would prevent the employee from claiming an income tax deduction under section 8-1 of the ITAA 1997 for the expenditure.

(b) the gala dinner provided to the franchisee employees?

For the reasons discussed above, you will not have a fringe benefits tax liability in relation to the gifts provided to the franchisee employees as they are not your employees.

However, a fringe benefit may arise for the franchisees.

(c) Can you claim an income tax deduction in relation to the gala dinner provided to your employees?

For the reasons discussed above, you will be able to claim an income tax deduction for the cost of the gala dinner provided to your employees as a fringe benefit will arise from the provision of the dinner.

(d) Can you claim an income tax deduction in relation to the arrival dinner provided to the franchisee employees?

The claiming of an income tax deduction for the cost of the gala dinners provided to franchisee employees will depend upon whether a fringe benefit is provided to these employees. If a fringe benefit is provided, you will be able to claim an income tax deduction for the expenditure.

8. Will you incur a fringe benefits tax liability for the room hire and room set up for the conference in relation to its employees?

The costs incurred for the room hire and room set up for the conference do not involve the provision of a benefit to an employee or an associate of an employee. Therefore, a fringe benefits tax liability will not arise from the room hire and set up costs.

Can you claim an income tax deduction in relation to the room hire and room set up for the conference?

The cost of the room hire and room set up is an outgoing incurred in carrying on a business for the purpose of gaining or producing assessable income and is not prevented from being a deduction for any of the reasons contained in subsection 8-1(2) of the ITAA 1997. Therefore, it is accepted that the costs incurred in the room hire and room set up are deductible under section 8-1 of the ITAA 1997.

9. Will you incur a fringe benefits tax liability for the morning teas and lunches provided at the conference to:

(a) your employees?

The provision of the morning teas and lunches will be a property benefit.

In accordance with the discussion above, the taxable value of the property benefit will be reduced to nil as the employees could claim an income tax deduction for the cost of the morning teas and lunches under section 8-1 of the ITAA 1997 as they are travelling and section 32-5 of the ITAA 1997 would not prevent an income tax deduction from being claimed as the food and drink consumed does not amount to the provision of meal entertainment.

(b) the morning teas and lunches provided to the franchisee employees?

For the reasons discussed above, you will not have a fringe benefits tax liability in relation to the morning teas and lunches provided to the franchisee employees as they are not your employees.

(c) Can you claim an income tax deduction in relation to the morning teas and lunches provided to your employees?

For the reasons discussed above, you will be able to claim an income tax deduction for the cost of the morning teas and lunches provided to your employees as a fringe benefit will arise from the provision of the dinner.

(d) Can you claim an income tax deduction in relation to the morning teas and lunches provided to the franchisee employees?

For the reasons discussed above, you will be able to claim an income tax deduction for the cost of the morning teas and lunches provided to franchisee employees as the cost is an outgoing incurred in carrying on a business for the purpose of gaining or producing assessable income.

10. Will you incur a fringe benefits tax liability for recreational activities provided to

(a) your employees?

While at the conference, participants are able to participate in various recreational activities. The provision of these activities is a residual fringe benefit.

In considering whether the employee would have been able to claim an income tax deduction for the costs of these activities, it is relevant to note that the term 'entertainment' is defined to include entertainment by way of recreation.

Recreation is defined in section 995-1 of the ITAA 1997 as:

recreation includes amusement, sport of similar leisure-time pursuits

The recreational activities are considered to be a leisure-time pursuit that involves the provision of entertainment. Therefore, they constitute the provision of entertainment.

Conclusion

The recreational activities are residual fringe benefits that involve the provision of entertainment. Although the cost of these activities may have come within section 8-1 of the ITAA 1997 if the employees had paid for the activities, section 32-5 of the ITAA 1997 would have prevented the employees from claiming an income tax deduction for the expenditure.

Therefore, the otherwise deductible rule will not apply to the expenditure and a fringe benefits tax liability will arise from the recreational activities undertaken by your employees.

(b) the recreational activities provided to the franchisee employees?

For the reasons discussed above, you will not have a fringe benefits tax liability in relation to the recreational activities provided to the franchisee employees as they are not your employees.

However, a fringe benefit may arise for the franchisees.

(c) Can you claim an income tax deduction in relation to the recreational activities provided to your employees?

For the reasons discussed above, you will be able to claim an income tax deduction for the cost of the recreational activities provided to your employees as a fringe benefit will arise from the provision of the recreational activities.

(d) Can you claim an income tax deduction in relation to the recreational activities provided to the franchisee employees?

The claiming of an income tax deduction for the cost of the recreational activities provided to franchisee employees will depend upon whether a fringe benefit is provided to these employees. If a fringe benefit is provided, you will be able to claim an income tax deduction for the expenditure.

11. Will a fringe benefits tax liability arise from the dinners provided at the conclusion of the recreational activities:

(a) to employees

As discussed in question 10(a) above, the recreational activities are considered to be entertainment.

The dinner and drinks provided on the cruise as part of the recreational activities will be fringe benefits that will also constitute the provision of entertainment.

Therefore, the 'otherwise deductible' rule will not apply as section 32-5 of the ITAA 1997 would prevent the employee from claiming an income tax deduction for the expenditure.

You will therefore have a fringe benefits tax liability in relation to the dinners provided at the conclusion of the recreational activities.

(b) the dinners provided to the franchisee employees?

For the reasons discussed above, you will not have a fringe benefits tax liability in relation to the dinners provided to the franchisee employees as they are not your employees.

However, a fringe benefit may arise for the franchisees.

(c) Can you claim an income tax deduction in relation to the dinners provided to your employees?

For the reasons discussed above, you will be able to claim an income tax deduction for the cost of the dinners provided to your employees as a fringe benefit will arise from the provision of the dinners.

(d) Can you claim an income tax deduction in relation to the dinners provided to the franchisee employees?

The claiming of an income tax deduction for the cost of the dinners provided to franchisee employees will depend upon whether a fringe benefit is provided to these employees. If a fringe benefit is provided, you will be able to claim an income tax deduction for the expenditure.

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