Edited version of private advice

Authorisation Number: 1051965692438

Date of advice: 6 July 2022

Ruling

Subject: Income tax deductions - NDIS business

Issue 1 - Your Employees' Costs

Question 1

Are the entry costs to the skill building activities paid by you for the employees subject to Fringe Benefits Tax under the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)?

Answer

Yes, however the fringe benefit taxable value may be reduced to zero using the otherwise deductible rule.

Question 2

Are your employee's entry costs to the skill building activities, paid by you, in relation to their employment, deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 3

Is the food and drinks provided to your employees at skill building activities subject to Fringe Benefits Tax under the FBTAA 1986?

Answer

Yes.

Question 4

Are the costs incurred by you for the purchase of food and drinks consumed by your employees at skill building activities deductible under section 8-1 of the ITAA 1997?

Answer

No.

Question 5

Are the costs incurred by you for the purchase of food and drinks consumed by your employees at skill building activities deductible under section 8-1 of the ITAA 1997 because of the operation of section 32-20 of the ITAA 1997?

Answer

No.

Question 6

Are the costs incurred by you for accommodation expenses for respite care subject to Fringe Benefits Tax under the FBTAA 1986?

Answer

Yes.

Question 7

Are the costs incurred by you for food and drink on respite constitute a Fringe Benefit under the FBTAA 1986?

Answer

Yes.

Question 8

Are the costs incurred by you for accommodation expenses for respite care for your employee's deductible under section 8-1 of the ITAA 1997?

Answer

Yes.

Question 9

Are the costs incurred by you for the purchase of food and drinks consumed by your employees at respite care deductible under section 8-1 of the ITAA 1997?

Answer

No.

Question 10

Are the costs incurred by you for the purchase of food and drinks consumed by your employees at respite care deductible under section 8-1 of the ITAA 1997 because of the operation of section 32-20 of the ITAA 1997?

Answer

No.

Issue 2 - Your Clients' Costs

Question 1

Are there any FBT implications in relation to paying expenses for NDIS participants to attend activities under the FBTAA 1986?

Answer

No.

Question 2

Are your client's entry costs to the skill building activities paid by you, deductible under section 8-1 of the ITAA 1997?

Answer

Yes.

Question 3

Are the costs incurred by you for the purchase of your client's food and drinks consumed at skill building activities deductible under section 8-1 of the ITAA 1997?

Answer

No.

Question 4

Are the costs incurred by you for the purchase of ingredients for group cooking sessions conducted in the centre with your client's deductible under section 8-1 of the ITAA 1997?

Answer

Yes.

Question 5

Are the costs incurred by you for accommodation expenses for respite care deductible under section 8-1 of the ITAA 1997?

Answer

Yes.

Question 6

Are the costs incurred by you for the purchase of your client's food and drinks consumed at respite care deductible under section 8-1 of the ITAA 1997?

Answer

No.

Issue 3 - Your Costs

Question 1

Are the entry costs to the skill building activities paid by you, in your capacity as a supervisor of your clients, deductible under section 8-1 of the ITAA 1997?

Answer

Yes.

Question 2

Are the costs incurred by you for the purchase of food and drinks consumed at skill building activities deductible under section 8-1 of the ITAA 1997?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You operate a care business as a sole trader.

You have employees.

You and your employees actively provide the care services to clients who have an approved self-managed NDIS plan.

You provided us with details on your client base.

The responsibilities of providing care to the clients involve following the participants' NDIS plan which entails social skill building and accessing their community through means such as attending various group and individual activities ('skill building activities'). You provided us with a list of these activities.

You incurred costs on behalf of the clients and employees for the admission to skill building activities and respite care.

As clients engage in skill building activities, they must always be supervised by either you or your employees to ensure that the goals of their NDIS plans are being met. The supervision is a requirement of the caregiver's employment and role.

When going to the activities with the client, you purchased the food and drinks for yourself, your clients, and your employees.

Your incurred costs for the ingredients used for group cooking classes with your clients. The group cooking classes involve building the clients social skills.

You incurred costs for yourself and on behalf of the clients and employees for travel and accommodation and food and drinks for respite care.

NDIS sets an hourly rate that you can charge your clients. NDIS does not allow you to charge your clients for the cost of the admission to the activities and food consumed.

Relevant legislative provisions

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 section 32-20

Income Tax Assessment Act 1997 section 32-40

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

Fringe Benefits Tax Assessment Act 1986 section 38

Fringe Benefits Tax Assessment Act 1986 section 40

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)

Reasons for decision

Employee's Food and Drink for FBT purposes

The minor fringe benefit exemption will not apply as it is frequently and regularly provided in the line of work of the employee.

The food expenses will be an external property fringe benefit. An external property fringe benefit may arise under section 40 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986) where the employer incurs expenditure to a provider under an arm's length transaction. The taxable value of an external property fringe benefit is the expenditure at arm's length value, or otherwise the notional value, reduced by any employee contribution.

Employee's Activities for FBT purposes

Subsection 136(1) of the FBTAA 1986 defines entertainment as having the meaning given by section 32-10 of the Income Tax Assessment Act 1997 (ITAA 1997). Section 32-10 of the ITAA 1997 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.

As the admission costs to do not constitute food and drink, it is necessary to determine if they constitute recreation.

Recreation is defined in subsection 136(1) of the FBTAA 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.

The purpose of purchasing admission tickets to venues is so that the employees can escort their clients and care for them at these events.

During the event, the employees are on duty and also assist their clients with other needs as required.

The expected outcome of providing the recreation is not of a social nature as their employment role is to accompany the service recipient to the event.

Therefore, the purchase of the admission costs is not for the purpose of conferring entertainment on the employee. The purchase of the admission costs to various activities for the employees while on duty does not constitute entertainment for the purposes of section 38 of the FBTAA 1986.

The provision of entertainment may give rise to a number of different types of fringe benefit, depending on the circumstances under which you provide the entertainment.

Where the employer incurs expenses for a benefit provided to the employee that is not covered under any other provision of the FBTAA 1986, the benefit will be a residual fringe benefit under section 45 of the FBTAA 1986. The taxable value of a residual fringe benefit is the amount paid or payable by the employer for the benefit reduced by any employee contribution.

The taxable value of a residual fringe benefit can be reduced under section 52 of the FBTAA 1986 by the amount the employee would have been entitled to claim as an income tax deduction. Under this section, the residual benefit will have its taxable value reduced to nil if the employee would have been entitled to claim an income tax deduction for the full amount of the expense had the employee incurred the expense, and the employee is able to provide a declaration in an approved form.

Employee's Accommodation for respite care for FBT purposes

Where the employer incurs expenses for a benefit provided to the employee that is not covered under any other provision of the FBTAA 1986, the benefit will be a residual fringe benefit under section 45 of the FBTAA 1986. The taxable value of a residual fringe benefit is the amount paid or payable by the employer for the benefit, or otherwise the notional value, reduced by any employee contribution.

The taxable value of a residual fringe benefit can be reduced under subsection 52 of the FBTAA 1986 by the amount the employee would have been entitled to claim as an income tax deduction if they had incurred the unreimbursed expense themself. Under this section, an employee expense payment benefit could have its taxable value reduced to nil if the employee would have been entitled to claim an income tax deduction for the full amount of the expense had the employee not been reimbursed by their employer, and the employee is able to provide a declaration in an approved form.

Employee's Food and Drink for Respite Care for FBT purposes

Where the employer provides property to their employee, an external property fringe benefit may arise under section 40 of the FBTAA 1986. The taxable value of an external property fringe benefit is the expenditure at arm's length value, or otherwise the notional value, reduced by any employee contribution.

As with the food provided on excursions, the minor fringe benefit exemption will not apply to food provided on respite as it is frequently and regularly provided in the line of work of the employees.

Food, Drinks and Activities for Income Tax purposes

Section 8-1 of the ITAA 1997 allows for a deduction for all losses and outgoing to the extent to which they are incurred in gaining or producing your assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income, or a provision of the ITAA 1997 prevents it.

Section 32-5 of the ITAA 1997 denies an income tax deduction to the extent that an entity incurs expenditure on entertainment unless that expenditure is related to any of the exceptions outlined in Subdivision 32-B of the ITAA 1997.

Entertainment is defined in section 32-10 of the ITAA 1997 and includes entertainment by way of food, drink or recreation.

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

Under section 32-20 of the ITAA 1997, section 32-5 does not prevent a deduction for a loss or outgoing to the extent that it is incurred in respect of providing entertainment by way of providing a fringe benefit. However, the exemption does not apply to the amount where the fringe benefit is reduced for example: employee contributions.

Section 32-40 of the ITAA 1997 allows a deduction for entertainment expenses where the business is in the entertainment industry. For example, restaurants and theatres.

Expenditure on food and drink is usually considered to be private in nature and will not ordinarily provide the necessary connection to a taxpayer's income earning activities (Federal Commissioner of Taxation v Cooper (1991) 21 ATR 1616).

Accommodation for respite care for Income Tax purposes

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

It is a question of fact whether an expense for accommodation is incurred in gaining or producing assessable income or is of a private or domestic nature.

Accommodation expenses are only deductible when travel is an essential characteristic of the job itself, and the necessity to stay away from the employee's usual residence overnight is encountered while performing their income producing activities.

Client's Entrance Fees and Food for FBT purposes

No fringe benefit arises in the provision of expense payments to clients as there is no employer-employee relationship.

A fringe benefit is a benefit provided in respect of employment. This means a benefit is provided to somebody because they are an employee. The employee may be a former or future employee.

An employee is a person who is, was, or will be entitled, to receive salary or wages, or benefits in lieu of salary and wages. As the clients are not employees, no fringe benefit is provided.

Application to your situation

Issue 1 - Your Employees' Costs

Question 1

The payment of entry costs by you (the employer) is a residual fringe benefit which may be reduced to zero using the otherwise deductible rule.

Question 2

It is considered that skill building activities does not constitute entertainment under Division 32 of the ITAA 1997. As the skill building activities are incurred in gaining or producing your assessable income and not entertainment expenses the costs are deductible under section 8-1 of the ITAA 1997.

Question 3

The payment of food and drink by you (the employer) is an external property fringe benefit with the taxable amount being the expenditure incurred by the employer at arm's length value reduced by any employee contribution.

Question 4

Food and drinks during the normal course of your employee's day are considered to be private expenses for which you cannot claim a deduction. Therefore, in your case the cost of the food and drinks consumed at activities by your employee's is considered to be a private expense and not deductible under section 8-1 of the ITAA 1997.

Question 5

As mentioned in question 4 food and drink is not an allowable deduction under section 8-1 of the ITAA 1997. However, as the cost of the food and drink is a fringe benefit it will be an allowable deduction (less any employee contributions) under section 8-1 of the ITAA 1997 because of the operation of section 32-20 of the ITAA 1997.

However, in your case whilst it is a fringe benefit you are not registered for FBT therefore the operation of section 32-20 of the ITAA 1997 does not apply.

You can find out more information on FBT by searching 'QC 43874' and 'QC 43873' on ato.gov.au.

Question 6

The payment of accommodation by you (the employer) is a residual fringe benefit which may be reduced by any employee contribution. The taxable amount could be reduced under the otherwise deductible rule to the extent that it would have been deductible for the employee had the employee paid the unreimbursed expenses.

Question 7

The payment of food and drink by you (the employer) is an external property fringe benefit with the taxable amount being the expenditure incurred by the employer at arm's length value reduced by any employee contribution.

Question 8

As the accommodation for respite care is incurred in gaining or producing your assessable income and you pay for this expense for your employees the costs are deductible under section 8-1 of the ITAA 1997.

Question 9

Food and drink expenses are a prerequisite to gaining or producing an employee's assessable income and are not incurred in performing an employee's income producing activity. These expenses are also private or domestic in nature. This means that even if these expenses were incurred in gaining or producing assessable income, they still would not be deductible. Therefore, in your case the cost of the food and drinks consumed at respite care by your employee's is considered to be a private expense and not deductible under section 8-1 of the ITAA 1997.

Question 10

As mentioned in question 9 food and drink is not an allowable deduction under section 8-1 of the ITAA 1997. However, as the cost of the food and drink is a fringe benefit it will be an allowable deduction (less any employee contributions) under section 8-1 of the ITAA 1997 because of the operation of section 32-20 of the ITAA 1997.

However, in your case whilst it is a fringe benefit you are not registered for FBT therefore the operation of section 32-20 of the ITAA 1997 does not apply.

You can find out more information on FBT by searching 'QC 43874' and 'QC 43873' on ato.gov.au.

Issue 2 - Your Clients' Costs

Question 1

No fringe benefit arises in the provision of expense payments to clients as there is no employer-employee relationship.

Question 2

It is considered that skill building activities does not constitute entertainment under Division 32 of the ITAA 1997. As the skill building activities deductions are incurred in gaining or producing your assessable income and not entertainment expenses the costs are deductible under section 8-1 of the ITAA 1997.

Question 3

Food and drinks during the normal course of your client's day are considered to be private expenses for which you cannot claim a deduction. Therefore, in your case the cost of the food and drinks consumed at activities by your clients is considered to be a private expense and not deductible under section 8-1 of the ITAA 1997.

Question 4

The ingredients used for group cooking classes with your clients does not constitute entertainment under Division 32 of the ITAA 1997. As the deductions in relation to your group cooking classes with your clients are incurred in gaining of producing your assessable income and not entertainment expenses the costs are deductible under section 8-1 of the ITAA 1997.

Question 5

As the accommodation for respite care is incurred in gaining or producing your assessable income and you pay for this expense for your clients the costs are deductible under section 8-1 of the ITAA 1997.

Question 6

Food and drinks during the normal course of your client's day are considered to be private expenses for which you cannot claim a deduction. Therefore, in your case the cost of the food and drinks consumed at respite care by your clients is considered to be a private expense and not deductible under section 8-1 of the ITAA 1997.

Issue 3 - Your Costs

Question 1

It is considered that skill building activities does not constitute entertainment under Division 32 of the ITAA 1997. As the skill building activities are incurred in gaining or producing your assessable income and not entertainment expenses the costs are deductible under section 8-1 of the ITAA 1997.

Question 2

Food and drinks during the normal course of your day are considered to be private expenses for which you cannot claim a deduction. Therefore, in your case the cost of the food and drinks consumed at activities with your clients is considered to be a private expense and not deductible under section 8-1 of the ITAA 1997.

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