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Ruling

Subject: Fringe Benefits Tax - entertainment facility leasing expenses

Question 1

Will the expenses incurred by an employee and their family in obtaining a hotel or motel room, rented holiday house, on-site caravan or similar accommodation whilst undertaking non-work related travel fall within the definition of entertainment facility leasing expenses in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)?

Answer

Yes.

Question 2

Where you reimburse these expenses incurred by your employee is the amount that would be the taxable value of the fringe benefit had section 57A of the FBTAA 1986 not applied, excluded from the calculation of the employer's aggregate non-exempt amount under subsection 5B(1E) of the FBTAA 1986?

Answer

Yes.

Question 3

Will the expenses incurred by an employee and their family in hiring a hotel or motel function room, temporary marquee or similar function room facility fall within the definition of entertainment facility leasing expenses in subsection 136(1) of the FBTAA 1986?

Answer

Yes

Question 4

Where you reimburse these expenses incurred by your employee is the amount that would be the taxable value of the fringe benefit had section 57A of the FBTAA 1986 not applied, excluded from the calculation of the employer's aggregate non-exempt amount under subsection 5B(1E) of the FBTAA 1986?

Answer

Yes

This ruling applies for the following periods

Year ended 31 March 2011

Year ended 31 March 2012

Year ended 31 March 2013

Year ended 31 March 2014

The scheme commenced on

1 April 2010

Relevant facts and circumstances

You are a public benevolent institution with deductible gift recipient endorsement.

You operate in the non profit community sector.

You are seeking to maximise all incentives available in order to increase your ability to attract and retain employees with the highest level of skills.

You are considering offering employees the opportunity to enter into a valid salary sacrifice agreement for certain costs related to a holiday or other recreational pursuits undertaken by your employees and their families.

The employees will incur the cost of hiring the accommodation facility or function room.

The accommodation is to be for recreation and leisure pursuits in the nature of employee holidays.

The function room is to be for personal recreation and entertainment of a private party nature.

The hire or leasing of the accommodation or function room will be limited to those hire costs only and will not include food, drink, advertising or travel costs.

A condition of the salary sacrifice arrangement is that the salary sacrificed amounts can only be applied where the relevant accommodation or function room hire will be used for non-work related purposes and the employee will use the accommodation whilst undertaking a holiday or other recreational pursuits.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 5B

Fringe Benefits Tax Assessment Act 1986 Section 57A

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 Section 152B

Income Tax Assessment Act Section 32-10

Income Tax Assessment Act Subsection 995-1(1)

Reasons for decision

All references made in these reasons for decision are to the FBTAA 1986 unless otherwise stated.

Questions 1 & 3

Summary

The expenses incurred by an employee and their family

· in obtaining a hotel or motel room, rented holiday house, on-site caravan or similar accommodation whilst undertaking non-work related travel, and

· in hiring a hotel or motel function room, temporary marquee or similar function room facility

· are entertainment facility leasing expenses as defined in subsection 136(1).

Detailed Reasoning

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

Subsection 136(1) defines 'entertainment facility leasing expenses':

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

· a corporate box; or

· boats, or planes, for the purpose of the provision of entertainment; or

· other premises, or facilities, for the purpose of the provision of entertainment;

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

· is attributable to the provision of food or drink; or

· 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.

Hiring or leasing

Under the definition of 'entertainment facility leasing expenses', an expense must be incurred by the person in hiring or leasing …

As the word 'hiring' is not defined in the FBTAA 1986 it takes on its natural meaning, taken in the context in which it appears in the legislation.

The Macquarie Dictionary (Multimedia version 5.0.0) defines 'hire' as:

· to engage the services of for payment: to hire a clerk.

· to engage the temporary use of for payment: to hire a car.

Also, hire out.

· to grant the temporary use of, or the services of, for a payment.

Under subsection 136(1) 'leased':

… means let on hire (including a letting on hire that is described in the relevant agreement as a lease) under an agreement other than a hire-purchase agreement.

Your employees will incur expenses in:

· obtaining the use of a room in a motel or hotel, rented holiday house, on-site caravan or similar accommodation

· hiring private function rooms at a motel or hotel, temporary marquee or similar function room facilities

· which accords with the dictionary definition of 'hire' and with the FBTAA definition of 'leased'.

These expenses which your employees will incur fall within 'hiring or leasing' in 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 Macquarie Dictionary defines 'premises', as is relevant, to mean:

… the property forming the subject of a conveyance.

· a tract of land.

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

'Facilities' is defined in the Macquarie Dictionary, as is relevant, to mean:

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

From these definitions is clear that a holiday house is a premises.

In the case where the employee

· hires a private function room at a motel, hotel or club, or

· hires a single room in a hotel (or similar accommodation)

he or she has not hired the hotel (or similar) 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, which only 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. 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 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 in fact 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 these would be premises or facilities for the purposes of the definition of 'entertainment facility leasing expenses'.

When

· a private function room at a motel or hotel, or

· a separate hotel room at a hotel (or similar accommodation)

· has been leased or hired, they will be premises or facilities for the purposes of the definition of 'entertainment facility leasing expenses'.

A marquee is also considered to be a 'facility' as that term is used in the definition of entertainment facility leasing expenses.

Provision of entertainment

Under the definition of 'entertainment facility leasing expenses' the expenses incurred on hiring or leasing the premises or facilities must be 'for the purpose of the provision of entertainment'.

Subsection 136(1) 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 provides that 'entertainment' means:

· entertainment by way of food, drink or *recreation; or

· accommodation or travel to do with providing entertainment by way of food, drink or *recreation.

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

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

A room or a marquee that is being used for a family celebration is clearly being used for the purpose of providing entertainment.

In relation to the use of a hotel room (and other holiday) accommodation, whilst the employee is travelling on a holiday and is not on work-related duties, a relevant question to consider under paragraph 32-10(1)(a) of the ITAA 1997 is whether the use of the room is for the purposes of providing entertainment by way of recreation. While 'recreation' is defined, the words 'entertainment by way of recreation' is not defined. As these words are not defined, they have their natural meaning, taken in the context in which they appear in the legislation.

The word 'entertainment', which is fundamental to the operation of the relevant words, is defined in the Macquarie Dictionary to mean:

· the act of entertaining; agreeable occupation for the mind; diversion, or amusement.

· something affording diversion or amusement, especially an exhibition or performance of some kind.

· hospitable provision for the wants of guests.

The use of the hotel room (and other holiday) accommodation whilst on holidays is a leisure-time pursuit which is 'recreation' as defined in the ITAA 1997. The use of holiday accommodation is something affording diversion or amusement and will be entertainment within the natural meaning. The use of the hotel room (or similar accommodation) is entertainment by way of recreation under paragraph 32-10(1)(a) of the ITAA 1997.

Alternatively, a hotel room (or similar accommodation) occupied whilst on holidays is accommodation. Such accommodation can fall within 'entertainment' under paragraph 32-10(1)(b) of the ITAA 1997, being accommodation to do with providing entertainment by way of recreation.

Further, Taxation Determination TD 94/55 states that in determining whether providing an item of property constitutes entertainment, regard should be given to all the circumstances of the case. In particular, regard should be given to the character of the entertainment to be derived from the item of property provided. Specifically, in Example 2 in TD 94/55, costs incurred in providing holiday accommodation are incurred in providing property that would constitute the provision of entertainment.

When the employee incurs expenses in hiring or leasing a hotel room (or similar accommodation), those expenses are for the purposes of the provision of entertainment, as entertainment is defined in subsection 136(1) and section 32-10 of the ITAA 1997.

As required in the definition of 'entertainment facility leasing expenses', your employees' expenses will not be attributable to food or drink, or advertising.

The expenses incurred by your employees on:

· obtaining the use of a room in a motel or hotel, rented holiday house, on-site caravan or similar accommodation, and

· hiring private function rooms at a motel or hotel, temporary marquee or similar function room facilities

· are 'entertainment facility leasing expenses' as defined in subsection 136(1).

Questions 2 & 4

Summary

The expenses that your employees will be incurring are entertainment facility leasing expenses. Where you reimburse these expenses you will be providing expense payment benefits. The amount that would be the taxable value of those benefits had section 57A of the FBTAA 1986 not applied, is excluded from the calculation of the employer's aggregate non-exempt amount under subsection 5B(1E) of the FBTAA 1986.

Detailed Reasoning

Section 57A provides that certain employers are generally exempt from fringe benefits tax on benefits provided to their employees. Specifically subsection 57A(1) states:

Where the employer of an employee is a public benevolent institution endorsed under subsection 123C(1) or (5), a benefit provided in respect of the employment of the employee is an exempt benefit.

Therefore, as you are an endorsed public benevolent institution (PBI) benefits provided to your employees will be exempt benefits.

However, subsection 5B(1D) provides that for PBIs, the employer's fringe benefits taxable amount will include the employer's aggregate non-exempt amount.

The method for calculating the employer's aggregate non-exempt amount is contained in subsection 5B(1E). It provides that a PBI will only be liable to pay fringe benefits tax on the amount by which the total grossed-up value of certain benefits provided to an individual employee exceeds $30,000.

Broadly, subsections 5B(1K) and 5B(1L) provide that the calculation of the value of the benefits provided to each employee will include the value of all but three of the benefits that would have been fringe benefits if the employer had not been a PBI.

According to Step 1 of subsection 5B(1L), the three types of benefits not included in the calculation are the benefits:

· that constitute the provision of meal entertainment as defined in section 37AD

· that are car parking fringe benefits, or

· whose taxable values are wholly or partly attributable to entertainment facility leasing expenses.

Step 1 of the method statement in subsection 5B(1L) specifically disregards these benefits for the purposes of calculating the employee's subsection (1L) amount. The effect is that these benefits remain exempt from fringe benefits tax and do not form part of the fringe benefits tax capping threshold in respect of an employee of an employer that is a public or non-profit hospital.

The expense payment benefits arising from the reimbursement of an employee's expenses would have a taxable value (but for section 57A) which is wholly or partly attributable to entertainment facility leasing expenses. As a result, the expense payment benefits are disregarded for the purposes from 'Step 1' of subsection 5B(1L) under paragraph '(c)' of that step.

Consequently, those benefits will be excluded from your aggregate non-exempt amount under subsection 5B(1E). The effect of this is that they remain exempt from fringe benefits tax and do not form part of the fringe benefits tax capping threshold in respect of your employees.