Edited version of your written advice

Authorisation Number: 1012787409036

Ruling

Subject: Fringe Benefits Tax for membership fees for use of council facilities.

Question 1

Are your employees able to salary sacrifice, pre-tax, individual memberships for the use of a recreational facility?

Answer

Yes

Question 2

Are there any Fringe Benefits Tax (FBT) implications for you from the arrangement?

Answer

Yes

This ruling applies for the following periods

Year ended 31 March 2015

Year ended 31 March 2016

Year ended 31 March 2017

Relevant facts

You are an income tax exempt body that owns a recreational facility which is operated by a company.

You are the sole shareholder of the company.

Under a proposed arrangement you will pay the membership fees for employees who take out a membership for the use of the facility.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 20

Fringe Benefits Tax Assessment Act 1986 Section 38

Fringe Benefits Tax Assessment Act 1986 Section 45

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Income Tax Assessment Act 1997 Division 32

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

Question 1

Are your employees able to salary sacrifice, pre-tax, individual memberships for the use of a recreational facility?

An effective salary sacrifice arrangement is an arrangement between an employer and an employee, whereby the employee agrees to forgo part of their future entitlement to salary or wages in return for the employer providing them with benefits of a similar value.

Under an effective arrangement

• the employee pays income tax on the reduced salary or wages; and

• the employer may be liable to pay FBT on the fringe benefits provided.

Your employees who apply for membership of the recreation facility complete a salary sacrifice agreement, a copy is sent to your payroll office, and the employee salary or wages is reduced to allow you to pay the membership fee to the recreation facility on behalf of the employee.

There is an arrangement between you, the employer, and an employee whereby the employee agrees to forgo part of their future entitlement to salary or wage in return for you providing them with a benefit, namely, membership of the recreation facility. This is an effective salary sacrifice arrangement.

Therefore, employees are able to salary sacrifice, pre-tax, individual memberships for the recreation facility.

Question 2

Are there any Fringe Benefits Tax (FBT) implications for you from the arrangement?

In general terms, you are liable to pay fringe benefits tax when an employee receives a fringe benefit under a salary sacrifice arrangement. However, you will not be liable to pay fringe benefits tax if the benefit is an exempt benefit.

In determining whether the benefit is a fringe benefit it is necessary to initially identify the type of benefit being provided. The Fringe Benefits Tax Assessment Act 1986 (FBTAA) is divided into 12 different categories of benefit. Within each category certain benefits are classified as exempt benefits.

Under the arrangement you will pay for the employee's membership of the facility. This arrangement satisfies the definition of an expense payment benefit in section 20 of the FBTAA as follows:

Where a person (in this section referred to as the provider):

(a) makes a payment in discharge, in whole or in part, of an obligation of another person (in this section referred to as the recipient) to pay an amount to a third person in respect of expenditure incurred by the recipient; or

(b) reimburses another person (in this section also referred to as the recipient), in whole or in part, in respect of an amount of expenditure incurred by the recipient;

the making of the payment referred to in paragraph (a), or the reimbursement referred to in paragraph (b), shall be taken to constitute the provision of a benefit by the provider to the recipient.

However, as you are an income tax exempt body, the benefit will be a tax-exempt body entertainment benefit if the expenditure is for the provision of entertainment for which an organisation that was subject to income tax could not claim an income tax deduction.

Section 38 of the FBTAA defines a tax-exempt body entertainment benefit as follows:

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.

'Entertainment' as defined in subsection 136(1) of the FBTAA and by extension section 32-10 of the Income Tax Assessment Act 1997 (ITAA 1997) includes in its meaning, entertainment by way of recreation. The term 'recreation' is further defined in subsection 995-1(1) of the ITAA 1997 to include amusement, sport or similar leisure-time pursuits.

The employee's use of the FRAC is entertainment by way of recreation under section 32-10 of the ITAA 1997.

Therefore, if the cost of the membership is '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.

Subsection 136(1) of the FBTAA provides:

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 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;

(on the assumption that section 32-20 of the Income Tax Assessment Act 1997 had not been enacted).

Section 32-5 of the Income Tax Assessment Act 1997 (ITAA 1997) prevents a deduction being claimed for expenditure incurred in providing entertainment unless the expenditure comes within one of the exceptions set out in subdivision 32-B of the ITAA 1997.

In the situation being considered, the expenditure is payment for the right to use a recreational facility. As this does not come within the exceptions set out in subdivision 32-B of the ITAA 1997 the payment of the membership fee will be a tax-exempt body entertainment fringe benefit on which you will pay fringe benefits tax.

In providing this advice it is noted that the way this arrangement is structured results in a different conclusion to that reached in ATO Interpretative Decision ATO ID 2008/60 Fringe Benefits Tax Residual fringe benefit: tax-exempt body - recreation centre (ATO ID 2008/60).

In ATO ID 2008/60, a tax-exempt body, a local government council, owned and operated a recreation centre which provided members of the public with a range of sporting facilities. In that situation, the use of the facility by an employee was an exempt residual benefit under subsection 47(2) of the FBTAA.

The reason for the different outcome was the benefit being provided in that situation was the use of the facility, rather than the payment of the membership fee. In addition, the council operated the recreational facility. As a result, the council would have been able to claim an income tax deduction for the expenses incurred in operating the recreational facility if it had been subject to income tax under section 32-40 of the ITAA 1997. Therefore, the benefit was not a tax-exempt body entertainment benefit.

Further, it was not an expense payment benefit as the benefit was the use of the facility, rather than the payment of an expense incurred by the employee.

Therefore, the relevant type of benefit was a residual benefit which would have been an exempt benefit under subsection 47(2) of the FBTAA as the benefit consists of the use of a recreational facility located on the business premises of the employer.

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