Edited version of private advice

Authorisation Number: 1052283316903

Date of advice:13 December 2024

Ruling

Subject: FBT - exempt residual benefit

Question

Does the provision of free membership for certain benefits provided to all employees of the organisation, constitute an exempt residual benefit pursuant to subsection 47(2) of the Fringe Benefits Tax Assessment Act 1986?

Answer

Yes.

This ruling applies for the following periods:

Fringe Benefits Tax (FBT) Year ending 31 March 20XX

FBT Year ending 31 March 20XX

FBT Year ending 31 March 20XX

FBT Year ending 31 March 20XX

The scheme commenced on:

1 April 20XX

Relevant facts and circumstances

The organisation is an income tax exempt body.

The organisation currently provides free access and membership to the employees from the recreational facilities.

The organisation is considering of extending this benefit to all of the organisation's employees.

The membership provides full access to the:

•         gymnasium;

•         pools; and

•         spa and steam room.

It does not cover creche or café services.

Employees may choose to pay for creche or café goods/services at their expense. The café is located on the organisation's business premises, is subject to a lease agreement and is operated by an unrelated third party.

The free membership is only available to the organisation's employees and does not extend to any family members.

Employees must adhere to the same terms and conditions as the general public.

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 section 47

Fringe Benefits Tax Assessment Act 1986 section 136

Income Tax Assessment Act 1997 section 32-5

Income Tax Assessment Act 1997section 32-10

Income Tax Assessment Act 1997section 32-40

Reasons for decision

If an employer provides an employee with benefits in respect of the employment of the employee, the employer is liable to pay fringe benefits tax on the benefits unless the benefits are excluded from the definition of fringe benefit in subsection 136(1) of the (FBTAA).

Exempt benefits are specifically excluded from the definition of fringe benefit in subsection 136(1) of the FBTAA.

Subsection 136(1) of the FBTAA defines benefit to include any right, privilege, service or facility.

The free use of the gymnasium, pools, spa and steam room that will be provided to the employees of the organisation will be benefits that are provided in respect of their employment. Therefore, the benefits will be fringe benefits unless they are exempt benefits.

Under subsection 47(2) of the FBTAA, where a residual benefit provided to a current employee in respect of their employment consists of the provision, or use, of a recreational facility and the facility is located on business premises of the employer, the benefit is an exempt benefit.

Is the benefit a residual benefit?

The benefit provided must be a residual benefit which according to section 45 of the FBTAA '...is a benefit that ... is not a benefit by virtue of a provision of Subdivision A of Divisions 2 to 11 (inclusive)...'. Essentially, residual benefits are benefits that remain or are left over because they are not one of the more specific categories of benefit.

The benefits that the organisation will be providing are the use of the gymnasium, pools, spa and steam room facilities. The employees will not be incurring any expenses in relation to recreational facilities entry so there is no possibility of an expense payment benefit under section 20 of the FBTAA.

Employees will be using the gymnasium, pools, spa and steam room for recreation. Under subsection 136(1) of the FBTAA recreation includes:

(a)  amusement;

(b)  sport or similar leisure-time pursuits; and...

Recreation is included within the definition of entertainment for the purposes of the FBTAA which takes its definition from section 32-10 of the Income Tax Assessment Act 1997 (ITAA 1997).

Because the organisation is an income tax exempt body and the use of the gymnasium, pools, spas and steam room can be considered entertainment, it is necessary to consider whether the benefits are tax-exempt body entertainment benefits under section 38 of the FBTAA.

Section 38 of the FBTAA states:

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.

In order to determine if the organisation will be providing benefits under this section it is necessary to determine if the organisation will be incurring non-deductible exempt entertainment expenditure in providing the employees with use of the recreational facilities. Non-deductible exempt entertainment expenditure means 'non-deductible entertainment expenditure to the extent to which it is not incurred in producing assessable income'.

Under subsection 136(1) of the FBTAA '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 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;

The costs that the organisation will incur in providing the benefits will be the same costs incurred in providing the gymnasium, pools, spa and steam room to any person using them. The question is whether those expenses are 'non-deductible entertainment expenditure'.

If, hypothetically, the organisation incurred these expenses in producing assessable income, section 32-5 of the ITAA 1997 would not apply to them. That section states:

To the extent that you incur a loss or outgoing in respect of entertainment, you cannot deduct it under section 8-1. However, there are exceptions, which are set out in Subdivision 32-B.

The expenses that the organisation incurs in providing the gymnasium, pools, spa and steam room facilities would fall within an exception set out in subdivision 32-B of the ITAA 1997, that is item 3.1 of section 32-40. Under that item section 32-5 would not stop the organisation from deducting a loss or outgoing for 'providing entertainment for payment in the ordinary course of a business that you carry on'.

The organisation owns and operates the recreational facilities and carries on a business of providing the use of gymnasium, pools, spa and steam room to members of the public for payment. The business is one of providing recreation which is entertainment and the activity is part of the ordinary course of a business of the organisation.

As the organisation will not be incurring 'non-deductible entertainment expenditure' in providing the benefits to its employees paragraph 136(1)(a) of the FBTAA is not satisfied. Therefore, the benefits will not be tax-exempt body entertainment benefits under section 38.

Since the benefits will not be benefits by virtue of another provision of Subdivision A of Divisions 2 to 11 (inclusive) of the FBTAA, the benefits will be residual benefits under section 45.

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

As discussed above the employees will be provided with the use of the gymnasium, pools, spa and steam room which are recreational facilities.

Is the recreational facility located at the business premises of the employer?

According to subsection 136(1) of the FBTAA, 'business premises':

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

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

(b)  a corporate box; or

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

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

Paragraph 12 of Taxation Ruling TR 2000/4 provides guidance concerning the two requirements that must be satisfied for premises to be classified as business premises of the employer. These requirements are:

(a)  the control the employer has over the premises, and

(b)  the consistency of an employer's actions and activities on the premises with those of normal business practices.

Paragraph 7 of TR 2000/4 addresses the first requirement that the premises or part of the premises are under a person's control. A person's control is satisfied if that person owns the premises or has exclusive occupancy rights as lessee of the premises.

The second requirement is that the premises or part of premises must be used by the person, in whole or part, for the purposes of their business operations. Under subsection 136(1) of the FBTAA 'business operations' in relation to a government body or non-profit company, includes any operations or activities carried out by that body or company.

As noted in the explanation above the operation of the gymnasium, pools, spa and steam room is considered to be a business that the organisation carries on. Consequently:

•         the gymnasium, pools, spa and steam room are not excluded by paragraph (d) of the definition of business premises in subsection 136(1) of the FBTAA as the premises are used in the organisation's business of providing entertainment, and

•         the organisation's actions and activities on the premises are consistent with its normal business practice of providing recreation to the community.

The gymnasium, pools, spa and steam room are therefore located on the organisation's business premises and all of the conditions in subsection 47(2) of the FBTAA are satisfied. Since those conditions are satisfied the benefits that will be provided to the organisation's employees will be exempt benefits and excluded from the definition of a fringe benefit.

Conclusion

It is considered that the benefits that the organisation provide to their employees will be exempt benefits and excluded from the definition of a fringe benefit.

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