Edited version of private ruling

Authorisation Number: 1011663261044

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Ruling

Subject: Tax-exempt Body Entertainment

Question 1

Did a tax-exempt body entertainment benefit arise from the expenditure incurred in providing entertainment to your employees at the annual staff Christmas Party?

Answer

Yes.

Question 2

Did a tax-exempt body entertainment benefit arise from the expenditure incurred in providing entertainment to your employees at the End of Year Bar-B-Que?

Answer

Yes.

Question 3

Did a tax-exempt body entertainment benefit arise from the expenditure incurred in providing restaurant meals to your employees?

Answer

Yes.

Question 4

Did a tax-exempt body entertainment benefit arise from the expenditure incurred in providing entertainment to your employees and their associates at the function?

Answer

A tax-exempt body entertainment arose from the expenditure that related to the benefits that were only provided to non paying employees and associates.

This ruling applies for the following period

1 April 2009 - 31 March 2010

The scheme commenced on

1 April 2009

Relevant facts and circumstances

You are exempt from income tax.

You provide entertainment to your employees in the form of:

§ A Christmas party

§ An End of Year Bar-B-Que

§ Restaurant meals

§ An annual industry function

§ A Hall of Fame function.

The Christmas Party and the End of Year Bar-B-Que were only attended by employees.

The restaurant meals were provided to employees who met with non employees to discuss business related matters.

The restaurant meals were provided at a range of restaurants for breakfast, lunch or dinner.

You do not operate any of the restaurants at which the meals were provided.

The function is held to recognise participants in the industry and to promote the interests of the industry.

The majority of attendees were invited guests who attended free of charge.

Some of the employees who attended performed official roles at the function.

During the evening a three course meal including alcohol and a band were provided.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 38

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Income Tax Assessment Act 1997 section 32-5

Income Tax Assessment Act 1997 section 32-30

Income Tax Assessment Act 1997 section 32-40

Income Tax Assessment Act 1997 section 32-45

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Will a tax-exempt body entertainment benefit arise from the expenditure incurred in providing entertainment to your employees and their associates at the listed functions?

Tax-exempt body entertainment benefits are defined in section 38 of the Fringe Benefits Act Assessment Act 1986 (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.

Therefore, a tax-exempt body entertainment benefit will arise from the expenditure that you incurred in providing entertainment to your employees and their associates at the functions if the expenditure is 'non-deductible exempt entertainment expenditure'.

Is the expenditure 'non-deductible exempt entertainment expenditure'?

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

'Non-deductible entertainment expenditure' is also defined in subsection 136(1) of the FBTAA as:

… 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 apply

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;

(on the assumption that section 32-20 of the Income Tax Assessment Act 1997 had not been enacted).

Therefore, the expenditure will be non-deductible entertainment expenditure if:

§ it is not incurred in producing assessable income, but

§ section 32-5 of the Income Tax Assessment Act 1997 (ITAA 1997) would have prevented an income tax deduction being claimed for the expenditure under section 8-1 of the ITAA 1997 if it had been incurred in producing assessable income.

Was the expenditure incurred in producing assessable income?

As you are exempt from income tax the expenditure was not incurred in providing assessable income.

Would section 32-5 have prevented an income tax deduction being claimed for the expenditure under section 8-1 of the ITAA 1997 if it had been incurred in producing assessable income?

In general terms, section 32-5 of the ITAA 1997 prevents an income tax deduction being claimed for expenditure incurred in providing entertainment unless the expenditure comes within one of the exceptions listed in subdivision 32-B of the ITAA 1997.

Does the expenditure come within one of the exceptions listed in subdivision 32-B of the ITAA 1997?

For the purpose of this ruling the relevant exceptions are those listed at:

§ item 1.4 of the table in section 32-30 of the ITAA 1997;

§ item 3.1 of the table in section 32-40; and

§ item 4.3 of the table in section 32-45.

Item 1.4 of the table in section 32-30

Item 1.4 enables a deduction to be claimed for expenses incurred in providing food or drink to an employee under an industrial instrument relating to overtime.

Item 3.1 of the table in section 32-40

Item 3.1 enables a deduction to be claimed for expenses incurred in providing entertainment for payment in the ordinary course of carrying on a business.

Item 4.3 of the table in section 32-45

Item 4.3 enables a deduction to be claimed for expenses incurred to promote or advertise to the public a business or its goods or services. However, this exception will not apply if 'some people have a greater opportunity to get the benefits of the entertainment than ordinary members of the public have'.

Did any of the exceptions apply to the Christmas Party?

The expenditure incurred in holding the Christmas Party will not come within any of the three exceptions as it was not incurred:

§ in providing food or drink under an industrial instrument relating to overtime; or

§ in providing entertainment for payment in the ordinary course of carrying on a business; or

§ in promoting or advertising a business or its goods or services to the public.

Did any of the exceptions apply to the End of Year Bar-B-Que?

Similarly, the expenditure incurred in holding the End of Year Bar-B-Que will not come within any of the three exceptions as it was not incurred:

§ in providing food or drink under an industrial instrument relating to overtime; or

§ in providing entertainment for payment in the ordinary course of carrying on a business; or

§ in promoting or advertising a business or its goods or services to the public.

Did any of the exceptions apply to the restaurant meals?

The restaurant meals were provided to employees who met with non employees to discuss business related matters. The expenditure incurred in relation to these meals will not come within any of the three exceptions as it was not incurred:

§ in providing food or drink under an industrial instrument relating to overtime; or

§ in providing entertainment for payment in the ordinary course of carrying on a business; or

§ in promoting or advertising a business or its goods or services to the public.

Did any of the exceptions apply to the function?

Item 1.4

Item 1.4 will not apply to the expenditure as it does not involve the provision of food or drink to an employee under an industrial instrument relating to overtime.

Item 3.1

In considering item 3.1, the expenditure incurred in providing entertainment at the function can be divided into the following three categories:

§ expenditure that related to the provision of entertainment to all attendees; for example venue hire and band costs;

§ expenditure that solely related to the provision of entertainment to employees and their associates; for example the food and drink provided to employees and their associates; and

§ expenditure that solely related to the provision of entertainment to attendees who were not an employee or an associate of an employee; for example the food and drink provided to these attendees.

As a fringe benefit can only arise in relation to the first two categories, it is only necessary to consider the application of item 3.1 to these two categories.

For the expenditure incurred in providing these benefits to come within item 3.1, the entertainment must be provided both for:

§ payment; and

§ in the ordinary course of a business that you carry on.

The first of these requirements will be satisfied in relation to the expenditure that related to the entertainment that was provided to all attendees. It will also be satisfied in relation to the expenditure that related to the entertainment provided to employees and associates who paid for their tickets. However, it will not be satisfied in relation to the expenditure that related to the entertainment that was only provided to employees and associates who did not pay for their tickets.

In considering the second requirement it is necessary to consider whether you are carrying on a business. In so doing, it is relevant to note that the definition of 'business operations' in subsection 136(1) of the FBTAA states:

in relation to a government body or a non-profit company, includes any operations or activities carried out by that body or company.

Further guidance for determining whether you are carrying on a business is provided by Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?

Paragraph 13 of TR 97/11 lists the following indicators that are relevant in determining whether the activities constitute the carrying on of a business:

§ whether the activity has a significant commercial purpose or character; this indicator comprises may aspects of the other indicators;

§ whether the taxpayer has more than just an intention to engage in business;

§ whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;

§ whether there is repetition and regularity of the activity;

§ whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;

§ whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit;

§ the size, scale and permanency of the activity; and

§ whether the activity is better described as a hobby, a form of recreation or a sporting activity.

The facts provided indicate:

§ your activities have a significant commercial purpose or character;

§ there is a prospect that your revenues will exceed your expenses;

§ there is repetition and regularity in the activities;

§ the activities are the kind of activities that would be expected to be carried out by an entity conducting a business;

§ your activities are planned, organised and carried on in a businesslike manner; and

§ your activities are a significant size.

Therefore, it is accepted that you are carrying on a business for the purposes of the FBTAA. Further, it is accepted that the function is an ordinary part of that business.

Therefore, the exception in item 3.1 of the table in section 32-40 of the ITAA 1997 will apply to the expenses that related to the provision of entertainment to:

§ both paying and non paying attendees; or

§ solely to paying attendees.

It will not apply to the expenses that related to the entertainment provided solely to employees (or associates) that did not pay for their attendance.

Item 4.3

In considering whether item 4.3 will apply to the expenses that related to the provision of entertainment to employees (or associates) that did not pay for their attendance it is necessary to consider whether:

§ the entertainment is provided to promote or advertise to the public a business or its goods or services; and

§ whether some people have a greater opportunity than an ordinary member of the public to get the benefit of the entertainment.

Prior to the insertion of Division 32 into the ITAA 1997, this exception was contained in paragraph 51AE(5)(d) of the Income Tax Assessment Act 1936 (ITAA 1936).

The explanatory memorandum to the Taxation Laws Amendment Bill (no. 4) 1985, which introduced section 51AE of the ITAA 1936, stated at clause 9 in relation to entertainment that promotes or advertises to the public:

The cost of providing products of a business free of charge for promotional purposes will, where that would otherwise constitute entertainment, continue to be deductible where they are provided for the purpose of promoting the business to the public. An example would be the cost of providing free drinks in a restaurant or hotel. In addition, general promotional entertainment will continue to qualify for deduction provided it is undertaken for public promotional purposes and that its enjoyment is open to the public generally(e.g., a show put on in a shopping mall).

For the purpose of determining whether some people have a greater opportunity than an ordinary member of the public to get the benefit of the entertainment subparagraph 51AE(5)(d)(ii) of the ITAA 1936 listed categories of people who may have a greater opportunity to obtain the benefits of the entertainment than an ordinary member of the public. The listed categories were:

§ clients, customers or suppliers of the taxpayer or the other person;

§ employees of the taxpayer or the other person;

§ any other associates of the taxpayer or the other person;

§ journalists;

§ dignitaries; and

§ any other special class of persons.

The majority of attendees were invited guests who had a greater opportunity to obtain the benefits of the entertainment than ordinary members of the public.

Therefore, as some people had a greater opportunity to get the benefits of the entertainment than ordinary members of the public, the exception in item 4.3 will not apply to the expenditure incurred in relation to the function.