Edited version of your written advice

Authorisation Number: 1013037912309

Date of advice: 23 June 2016

Ruling

Subject: Fringe benefits tax - individual fringe benefits amount - excluded fringe benefits

Question 1

Are the benefits provided to employees as part of the annual reward holiday excluded fringe benefits under subsection 5E(3) of the Fringe Benefits Tax Assessment Act 1986 and therefore not included in an employee's individual fringe benefits amount?

Answer

Yes

This ruling applies for the following periods:

For a number of Fringe Benefits Tax years commencing in the year ended March 20xx

The scheme commences on:

In the year ended March 20xx

Relevant facts and circumstances

You are the Australian subsidiary of an overseas company (Parent Company).

On an annual basis, high-performing employees from Parent Company's various offices are chosen to attend a reward holiday.

Each year, a number of your high-performing employees and their spouses (where applicable) are selected to attend the reward holiday based on their performance for you.

The purpose of the reward holiday is to recognise the performance of the high performing employees. The event is not a conference and there are no business-related seminars or sessions included as part of the event.

The holiday will typically include:

• transportation (that is, flights and transfers to and from the airport)

• accommodation at a hotel

• food and drink

• recreational entertainment options

• hiring of entertainment facilities

Parent Company engages a third-party travel management company to facilitate the event.

The travel management company arranges the entire event, including but not limited to:

• arranging flights, on-ground transportation and accommodation

• preparation of the itinerary for the retreat, including organising events and recreational activities

• preparation of a program guide to be provided to the recipient employees

Parent Company is charged an all-inclusive fee by the travel management company to arrange the event which includes the actual costs associated with running the event as well as a co-ordination component.

The all-inclusive fee charged does not provide a detailed breakdown of relevant costs by category, activity or individual attendee. That is, there are no details provided for the costs of the flights, accommodation, leisure entertainment options or food and drink. Further, while the leisure entertainment options are offered to all attendees, there is no way to track and confirm who has attended the activities. The travel management company is engaged to provide an all-inclusive package.

Parent Company is liable for and pays for all of the costs of the reward holiday. No costs are recharged to you.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986, section 5E

Fringe Benefits Tax Assessment Act 1986, subsection 136(1)

Reasons for decision

Summary

The taxable value of the benefits provided to the employees in attending the reward holiday are partly attributable to entertainment facility leasing expenses and therefore are excluded fringe benefits in accordance with paragraph 5E(3)(c) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) and not included in the employees' individual fringe benefits amounts.

Detailed reasoning

Where a benefit provided to an employee does not fall within one of the specific categories of benefits set out in Divisions 2 to 11 of Part III of the FBTAA the benefit is taken to be a residual benefit in accordance with section 45 of the FBTAA.

A residual benefit will be fringe benefit where it satisfies the definition of 'fringe benefit' contained in subsection 136(1) of the FBTAA. Relevantly, according to the definition, a fringe benefit can be provided to an employee or an associate of an employee and can be provided by the employer, an associate of the employer or by a third party under an arrangement.

The employees and their spouses (where applicable) are provided with an all-inclusive holiday package consisting of transport (flights and transfers), accommodation at a hotel resort, recreational activities and food and drinks. The benefit that is being provided is the all-inclusive trip to attend the reward holiday. As the provision of the all-inclusive trip is a 'benefit' for the purposes of the FBTAA that does not fall within one of the specific categories of benefits set out in Divisions 2 to 11 of Part III of the FBTAA it must be categorised as a section 45 residual benefit. The benefit is a 'fringe benefit' in accordance with the definition provided by subsection 136(1) of the FBTAA and is therefore a residual fringe benefit.

In order to calculate your fringe benefits taxable amount you must calculate your employees' 'individual fringe benefits amount'. Subsection 5E(2) defines an employee's 'individual fringe benefits amount' as follows:

The individual fringe benefits amount is the sum of the employee's share of the taxable value of each fringe benefit that relates to the year of tax and is provided in respect of the employment other than an excluded fringe benefit.

Subsection 5E(3) then defines 'excluded fringe benefit' to relevantly include a fringe benefit whose taxable value is wholly or partly attributable to entertainment facility leasing expenses. Note that prior to 1 April 2016 any benefit with a taxable value wholly or partly attributable to entertainment facility leasing expenses is an excluded fringe benefit however for the 1 April 2016 to 31 March 2017 and later years of tax such a benefit will only be excluded where it is not provided under a salary packaging arrangement.

The benefits provided to employees attending the reward holiday are not provided under a salary packaging arrangement. Therefore for both the years before and after 1 April 2016, the benefits will be excluded fringe benefits under subsection 5E(3) of the FBTAA and not included in the employees' individual fringe benefits amounts if the taxable value of the benefits are wholly or partly attributable to entertainment facility leasing expenses. That is, if any part of the taxable value of the all-inclusive trip is attributable to entertainment facility leasing expenses, the whole benefit will be an excluded fringe benefit.

The method of calculating the taxable value of residual fringe benefits is set out in Subdivision B of Division 12 of the FBTAA which specifies that the taxable value will be calculated differently depending on whether the benefit is an in-house, external, period or non-period benefit. In your circumstances, the taxable value will be the cost paid by Parent Company for the all-inclusive trip.

Therefore if any part of the taxable value of the all-inclusive trip is attributable to entertainment facility leasing expenses the whole benefit is an excluded benefit in accordance with paragraph 5E(3) of the FBTAA.

The meaning of entertainment facility leasing expenses is provided by subsection 136(1) of the FBTAA which states:

Entertainment facility leasing expenses, for a person, means expenses incurred by the person in hiring or leasing:

(a) a corporate box; or

(b) boats, or planes, for the purpose of the provision of entertainment; or

(c) other premises, or facilities, for the purposes of the provision of entertainment;

but does not include so much of any such expenses that:

(d) is attributable to the provision of food or drink; or

(e) is attributable to advertising and is an allowable deduction for the person under the Income Tax Assessment Act 1936 or the Income tax Assessment Act 1997.

ATO Interpretative Decision ATOID 2009/45 Fringe Benefits Tax Entertainment Facility Leasing Expenses: private function room and hotel room expenses (ATOID 2009/45) provides further guidance as to the meaning of entertainment facility leasing expenses and particularly whether hotel room expenses fall within the definition. ATOID 2009/45 states:

There are a number of requirements that must be satisfied in considering whether expenses incurred satisfy the definition of 'entertainment facility leasing expenses'.

…

Other premises or facilities

Under the definition of 'entertainment facility leasing expenses', the hire or lease must be of a corporate box, boat, plane or other premises or facilities…

As the words 'premises or facilities' are not defined in the FBTAA they have their natural meaning, taken in the context that they appear in the legislation.

The words 'premises' and 'facility are defined in the Macquarie Dictionary to mean:

premise

noun

2. (plural)

the property forming the subject of a conveyance.

a tract of land.

a house or building with the grounds, etc., belonging to it.

facility

noun (plural facilities)'

9. a building or complex of buildings, designed for a specific purpose, as for the holding of sporting contests.

In this case the employee has hired a single room in a hotel or club but has not hired the hotel or club in its entirety. Accordingly, there is a difficulty in determining whether the employee has hired premises or a facility by reference to the dictionary meaning only which refers to a property, house and grounds or a specific purpose building. In addition the legislative reference to boats or planes would not ordinarily be considered as a (type of) premises or facility.

Taxation Laws Amendment (FBT Cost of Compliance) Bill 1995 introduced the subsection 136(1) of the FBTAA definition of 'entertainment facility leasing expenses' and introduced section 152B of the FBTAA. The Explanatory Memorandum to that Bill describes the new arrangement as being:

…applied to leasing or hiring costs of corporate boxes and other similar hospitality arrangements…

It is considered that the use of the words 'other premises or facility' derives meaning ejusdem generis as having similar characteristics to a corporate box. Hiring or leasing of a corporate box would generally only involve the hiring or leasing of part of a premises or a facility. For example, the corporate box is only part of a sporting stadium complex. However, a corporate box is a separate or distinct area or room which is able to be hired as a separate room or distinct area. The hiring or leasing of a separate room or distinct area for other hospitality purposes such as an end of year corporate event at a city hotel would be considered similar to a corporate box arrangement. It is considered that there would be premises or facilities for the purposes of the definition of 'entertainment facility leasing expenses'.

When a private function room in a club or a separate hotel room at a hotel have been leased or hired, they will be premises or facilities for the purposes of the definition of 'entertainment facility leasing expenses'.

Separate rooms at the relevant hotel have been hired and provided to the employees. According to the reasoning discussed in ATO ID 2009/45 it is considered that the accommodation is premises or facilities for the purposes of paragraph (c) of the 'entertainment facility leasing expenses' definition.

To be considered an entertainment facility leasing expense, the expense incurred in hiring or leasing the hotel accommodation must be incurred for the purposes of the provision of entertainment. ATOID 2009/45 provides the following guidance:

Subsection 136(1) of the FBTAA defines 'entertainment':

entertainment has the meaning given by section 32-10 of the Income Tax Assessment Act 1997 .

Subsection 32-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that '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.

Subsection 995-1 of the ITAA 1997 provides the meaning of 'recreation':

     recreation includes amusement, sport or similar leisure-time pursuits.

…

In relation to the use of the hotel room whilst the employee is travelling on a holiday and is not on work related duties, paragraph 32-10(1)(a) of the ITAA 1997 must also be considered. The use of the hotel room whilst on holidays is a leisure-time pursuit which is 'recreation' as defined in the ITAA 1997. This use of holiday accommodation is something affording diversion or amusement and will be entertainment within the natural meaning. The use of the hotel room is entertainment by way of recreation under paragraph 32-10(1)(a) of the ITAA 1997.

…

As required in the definition of 'entertainment facility leasing expenses' those expenses are not attributable to food or drink, or advertising.

The expenses incurred by the employee on hiring or leasing the private function room and the hotel room are 'entertainment facility leasing expenses' as defined in subsection 136(1) of the FBTAA.

The reward holiday is not a conference and there are no business-related seminars or sessions included as part of the retreat. The use of the accommodation while attending the hotel is analogous to the use of the hotel room whilst on holidays as described in ATOID 2009/45 and is considered to be something affording diversion and amusement and therefore 'entertainment' within its natural meaning. While the all-inclusive trip includes the provision of food and drink, the expenses related to the component being considered at this point, the accommodation, are not attributable to food or drink (or advertising). Therefore the expenses incurred in hiring or leasing the accommodation are an entertainment facility leasing expense.

As previously discussed, the benefit provided to your employees is the all-inclusive trip which is a residual benefit, the taxable value of which is the total cost paid for the all-inclusive trip. As concluded above, the cost of the accommodation provided as one part of the benefit is an entertainment facility leasing expense. The expense incurred in providing that entertainment facility leasing expense, forms part of the overall cost of the all-inclusive trip. Therefore, the taxable value of the benefit, the all-inclusive trip, is partly attributable to entertainment facility leasing expenses. This position is confirmed by the Fringe benefits tax - a guide for employers (NAT 1054) which states at paragraph 14.12:

When you give an employee a plane ticket for travel to a holiday destination, while this will be entertainment it is not an entertainment facility leasing expense. The purchase of an air fare is not the hiring or leasing of a plane.

However, if the plane ticket is part of an all-inclusive package that includes holiday accommodation, the taxable value of the benefit may be partly attributable to an entertainment facility leasing expense being the cost of hiring the holiday accommodation.

For example, providing an all-inclusive holiday package to an employee organised through a travel agent that includes both flights and the hire or lease of holiday accommodation will be a single benefit whose taxable value is partly attributable to entertainment facility leasing expenses.

As the taxable value of the fringe benefits are partly attributable to entertainment facility leasing expenses, the benefits provided to your employees are excluded fringe benefits in accordance with paragraph 5E(3)(c) of the FBTAA and not included in your employees' individual fringe benefits amounts.

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