Edited version of private ruling

Authorisation Number: 1011481842532

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Ruling

Subject: Fringe Benefits Tax - Exempt Benefits - Excluded benefits

This ruling applies to

The applicant being a Public Benevolent Institution (PBI) Employer

Issue

The treatment for Fringe Benefits tax purposes, covering the cost of a cruise holiday for and on behalf of an employee of the employer, whose status is a tax exempt Public Benevolent Institution.

Question

Is the cost of a cruise holiday comprising food and drink and use of a cabin on a boat, paid for and on behalf of an employee and or their associate, an excluded benefit and therefore not included to calculate the employee's individual fringe benefit amount for the purposes of working out the employer's fringe benefits taxable amount?

Answer

Yes

This ruling applies for the following period

01/04/2010 - 31/03/2011

The scheme commenced on

01/04/2010

Relevant facts

The PBI employer is an Australian public company and endorsed by the Commissioner of Taxation as Public Benevolent Institution (PBI) and eligible to claim various GST concessions and all relevant income tax and fringe benefits tax exemptions.

The applicant in its capacity as a PBI employer provides fringe benefits to its employees.

The employer has provided fringe benefits to an employee and their associate by way of payment for and on behalf of the employee and their partner, the cost of a cruise holiday undertaken by them.

The employer requests confirmation whether the provision of benefits in the form of a cruise holiday comprising, food and drink, exclusive use of a cabin on a boat and connected available facilities on the boat, will qualify as an excluded benefit and therefore not included when calculating the employee's individual fringe benefit amount for the purposes of working out the employer's fringe benefits taxable amount.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Subsection 5B (1D)

Fringe Benefits Tax Assessment Act 1986 Subsection 5B (1A)

Fringe Benefits Tax Assessment Act 1986 Subsections 5B (1E) (1F) (1G) (1H) (1J) (1K) (1L)

Fringe Benefits Tax Assessment Act 1986 Subsection 5C (3)

Fringe Benefits Tax Assessment Act 1986 Subsection 5C (4)

Fringe Benefits Tax Assessment Act 1986 Subsections 5E (1) (2) (3)

Fringe Benefits Tax Assessment Act 1986 Section 23

Fringe Benefits Tax Assessment Act 1986 Section 37AD

Fringe Benefits Tax Assessment Act 1986 Section 37AC

Fringe Benefits Tax Assessment Act 1986 Section 37AA

Fringe Benefits Tax Assessment Act 1986 Section 37BA

Fringe Benefits Tax Assessment Act 1986 Section 57A

Fringe Benefits Tax Assessment Act 1986 Subsection 57A (1)

Fringe Benefits Tax Assessment Act 1986 Subsections 123(1) (5)

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 Section 152B

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Paragraph 31-10 (1) (a)

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 Subsection 995-1(1)

Reasons for decision

Issue 1

Question 1

Detailed reasoning

As an endorsed PBI employer, the applicant has no FBT obligation pursuant to the application of subsection 57A (1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA).

Section 57A of FBTAA provides that certain employers are generally exempt from fringe benefits tax (FBT).

Sub-section 57A (1) of the FBTAA 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.

However the employer is subject to the capping provisions limiting the level of its exempt benefits per employee to the combined crossed up value of $30,000.

The benefits which are exempt solely because an employee works for a PBI employer are known as Quasi Fringe Benefits.

The applicant as a PBI employer and subject to the application of section 57A of the FBTAA, for the FBT year of tax 2000-2001 and each later year, must increase its "fringe benefits taxable amount" by the relevant "aggregate non-exempt amount " under the application of Sub-section 5B(1D) in Division 1 of the FBTAA.

For the purpose of working out the employer's "fringe benefits taxable amount", under 5B(1A) in Division 1 of the FBTAA, regard is given to the application of sub-sections 5C(3) and 5C(4) in Division 2 of the FBTAA, by interaction with the application of subsections 5E(2) and (3) in Division 3 of the FBTAA.

For the purpose of working out the employer's "aggregate non-exempt amount", regard is given to the application of sub-sections 5B(1E),(1F), (1G) (1H), (1J) (1K), and (1L) of the FBTAA, and by interaction of the application of subsections 5E(2) and (3) in Division 3 of the FBTAA.

The interaction of the application of subsections 5E(1), (2) and (3) in Division 3 of the FBTAA, relates to the need to work out each Employee's Individual Fringe Benefits Amount, for the purpose of working out the employer's fringe benefits taxable amount under subsection 5B(1A) of the FBTAA.

The Employee's Individual Fringe Benefits Amount under subsection 5E(2) of the FBTAA, is the sum of the employee's share of the taxable value of each fringe benefit that relates to the FBT year of tax and is provided in respect of the employment, other than an excluded fringe benefit.

Step 3(b) of subsection 5B(1E) of the FBTAA provides that a PBI employer will only be liable to pay fringe benefits tax on the amount by which the grossed-up value of the benefits provided to an individual employee exceeds $30,000.

Broadly, subsections 5B(1K) and 5B(1L) of the FBTAA provide that the calculation of the value of the benefits provided to each individual 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, or a public or non-profit hospital.

The three types of benefits not included in the calculation according to Step 1 of subsection 5B(1L) of the FBTAA are benefits that:

(a) constitute the provision of meal entertainment as defined in section 37AD of the FBTAA

(b) are car parking fringe benefits, or

(c) whose taxable values are wholly or partly attributable to entertainment facility leasing expenses.

For employers that are public benevolent institutions and subject to the provisions of section 57A of the FBTAA, benefits provided to employees whose taxable values are wholly or partly attributable to meal entertainment, car-parking or entertainment facility leasing expenses, are not subject to fringe benefits tax because of the interaction between section 57A and subsection 5B(1L) of the FBTAA.

Step 1 of the method statement in subsection 5B(1L) of the FBTAA specifically disregards these benefits for the purposes of calculating the employee's step 3 subsection (1L) amount.

This is reflected in the phrase 'work out for each employee his or her share (if any) of the amounts that, if section 57A did not apply, would be the taxable values of the excluded fringe benefits for the year of tax in respect of the employee's employment if those benefits were not excluded fringe benefits, but disregarding benefits:

(a) that constitute the provision of a meal entertainment as defined in section 37AD of the FBTAA (whether or not the employer made an election under section 37AA of the FBTAA);

(b) that are car parking fringe benefits; or

(c) whose taxable values are wholly or partly attributable to entertainment facility leasing expenses.

The effect is that these benefits remain exempt from fringe benefits tax and do not form part of the fringe benefits tax capping threshold ($30,000) in respect of an employee of an employer that is endorsed as a PBI.

For the purposes of subsections 5B(1L) and 5E(3) of the FBTAA, the provision of "meal entertainment" and "entertainment leasing facility expenses" can be incurred by a person.

This can include expenses incurred by the employer or by the employee.

However, under sections 37BA and 152B of the FBTAA, for the purposes of valuing the expenses that are taken into account are limited to those expenses incurred by the employer.

The benefits provided to the employee are expense payment benefits being the payment for and on behalf of the employee and their partner, to cover the cost of a cruise holiday undertaken by them.

However as the benefit is provided by a PBI employer (the provider) who has incurred "non-deductible exempt entertainment expenditure" that is wholly or partly in respect of entertainment to the recipient, being an employee or an associate of the employee, the incurring of the expenditure constitutes "tax-exempt body entertainment fringe benefit" for the purposes of sections 38 and 39 of the FBTAA.

Subsection 136(1) of the FBTAA defines non-deductible exempt entertainment expenditure to mean non-deductible entertainment expenditure, to the extent to which is not incurred in producing assessable income.

The applicant in this case is a tax-exempt body and the expenditure incurred subject to this ruling request, was incurred to the extent of not producing assessable income.

Furthermore Subsection 136(1) of the FBTAA defines "non-deductible entertainment expenditure" to mean a loss or outgoing to the extent to which:

· 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

· 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 ITAA 1997 denies a deduction for entertainment expenses under section 8-1 of the ITAA 1997.

Section 32-20 of the ITAA 1997 allows taxable employers a deduction for a loss or outgoing to the extent that is incurred in respect of providing entertainment by way of providing a fringe benefit.

If section 57A of the FBTAA did not apply, the benefit would also be a fringe benefit. The taxable value of the expense payment benefit, under section 23 of the FBTAA, would have been the amount of the payment to cover the cost of a cruise holiday undertaken by the employee and their partner. Therefore the taxable value would have been wholly or partly attributable to the employee's expenses.

If the employee's expenses are meal entertainment and or entertainment facility leasing expenses, the taxable value of the expense payment benefits will be disregarded in determining the employee's subsection (1L) of the FBTAA amount, in accordance with the method statement in subsection 5B(1L) of the FBTAA.

Relevant Definitions

Subsection 136(1) of the FBTAA defines "meal entertainment benefit" and "meal entertainment fringe benefit" to mean a benefit that is a meal entertainment benefit because of section 37AC of the FBTAA.

Section 37AC of the FBTAA states:

where at a particular time an employer (the provider) to whom this division applies provides meal entertainment to another person (the recipient) the provision of the meal entertainment is taken to constitute a meal entertainment fringe benefit provided by the provider to the recipient at that time'

Subsection 136(1) of the FBTAA defines 'entertainment facility leasing expenses' as:

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 purpose of the provision of entertainment;

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

(d) 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.

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

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 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:

verb (t) (hired, hiring)

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

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

3. Also, hire out.

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

Subsection 136(1) of the FBTAA defines '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.

The employee or the employer will incur expenses to obtain the exclusive hire and use of a cabin on a cruiser boat. The applicant stated in its submission that the cost of a cruise holiday, in addition to the exclusive use of a cabin as accommodation, will include the provision of food and drink, and use of available connected facilities on the boat.

Such hire and use of a cabin for the purpose of obtaining entertainment and recreation by way of food, drink, and accommodation, accords with the dictionary definition of 'hire' and with the FBTAA definition of 'leased'.

Other Premises or facilities for the provision of entertainment

Under the definition of 'entertainment facility leasing expenses', the hire or lease must be of:

(a) a corporate box; or

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

(c) other premises or facilities for the purpose of the provision of entertainment.

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)

(plural) premises

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)

1. Something that makes possible the easier performance of any action; advantage:

Transport facilities; to afford someone every "facility" for doing something.

9. a building or complex of buildings, designed for a specific purpose, as for he

holding of sporting contests.

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, or a cabin on a ship or vessel for that matter, for any hospitality purpose as a recreational facility, it is reasonable to consider, that these would be premises or facilities for the purposes of 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) of the FBTAA and 995-1(1) of the ITAA 1997 define 'entertainment':

entertainment has the meaning given by section 32-10 of the ITAA 1997.

(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*.

* denotes a term defined in section 995-1 of the ITAA 1997.

Subsection 136(1) of the FBTAA and 995-1(1) of the ITAA 1997, define 'recreation' to include

(a) amusement;

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

(c) recreation or amusement provided on, or by means of a vehicle, ship, vessel, or aircraft.

Subsection 136(1) of the FBTAA defines 'recreational facility' to mean:

a facility for recreation, but does not include a facility for accommodation or a facility for drinking or dining.

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, for the purposes of allowing an employer to apply the 50/50 split method for entertainment facility leasing costs and to include in the employer's aggregate fringe benefits amount, (for the purposes of section 5C of the FBTAA), 50% of the entertainment facility leasing costs

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…

The applicant's submission states part of the employer's or employee's costs relate to the hire or lease for the exclusive use of a cabin on a cruise boat. It is therefore noted that the employee has not hired the boat (or similar accommodation) in its entirety.

As such, the expenses incurred by the employer on behalf of the employee and their partner, relate to the cost of the cruise holiday which included the provision of a cabin on a ship or vessel.

The use of the cabin on the ship or vessel whilst on holidays is a leisure-time pursuit which is 'recreation' as defined in the FBTAA and the ITAA 1997. The use of a cabin as holiday accommodation is something affording diversion or amusement and will be entertainment within the natural meaning. The use of the cabin and other available facilities that are open for use as part of the package on the ship or vessel, is entertainment by way of recreation under paragraph 32-10(1) (a) of the ITAA 1997 and as defined under subsection 136(1) of the FBTAA.

Accordingly, by reference to the definitions of "hiring / leasing", "premises or facilities", "entertainment", "recreation", "recreational facility" there is a strong argument that a reasonable person would conclude, the person has hired or leased for the duration of certain period, a recreational facility which was offering and providing amusement, leisure-time pursuits, and recreation, on, or by means of ship or vessel.

The inclusion of the words "on or by means of a ship, vessel or aircraft" leads a reasonable person to conclude that entertainment on such recreational facility, need not be or involve, the hiring or leasing of the ship, vessel or aircraft in its entirety.

As required in the definition of 'entertainment facility leasing expenses', the expenses attributable to the cabin on the ship or vessel, will not be attributable to food or drink, or advertising.

Overall conclusion

The expenses if incurred or will be incurred by the person (employer or employee) connected to the use of a cabin on the ship or vessel, are 'entertainment facility leasing expenses' as defined in subsection 136(1) of the FBTAA.

In addition, expenses if incurred or will be incurred by the person (employer or employee) connected to the provision of food and drink on the ship or vessel, is the provision of 'meal entertainment" as defined in subsection 136(1) of the FBTAA, by reference to Sections 37AC and 37AD of the FBTAA.

If the employer will pay or reimburse, or has paid or reimbursed the employee's expenses, the expense payment benefits would have a taxable value (but for section 57A of the FBTAA) which is wholly or partly attributable to meal entertainment and entertainment facility leasing expenses.

As a result, such expense payment benefits are considered to qualify as excluded fringe benefits under subsection 5E(3) of the FBTAA and to be disregarded for the purposes of working out the Employer's Fringe Benefits Taxable Amount under subsection 5B(1A), when determining the Employer's aggregate non-exempt amount under 'Step 1' of subsection 5B(1L) of the FBTAA under paragraphs (a) and (c) of that step.

Does Part IVA, or any other anti-avoidance provision, apply to this ruling?

No