Edited version of private ruling

Authorisation Number: 1011716597124

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Ruling

Subject: Fringe Benefits Tax - meal entertainment/entertainment facility leasing expenses

Question 1

Will the use of the Meal Leisure Card to purchase meal entertainment be included in the calculation of the employer's aggregate non-exempt amount under subsection 5B(1E) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

No

Question 2

Will the use of the Meal Leisure Card to pay for the cost of hiring or leasing premises or facilities for the purpose of the provision of entertainment be included in the calculation of the employer's aggregate non-exempt amount under subsection 5B(1E) of the FBTAA?

Answer

No

Question 3

Will the use of the Meal Leisure Card to pay for recreation, or to purchase property or services that do not constitute the provision of entertainment be included in the calculation of the employer's aggregate non-exempt amount under subsection 5B(1E) of the FBTAA?

Answer

Yes

This ruling applies for the following periods:

1 April 2011 - 31 March 2012

1 April 2012 - 31 March 2013

1 April 2013 - 31 March 2014

1 April 2014 - 31 March 2015

The scheme commences on:

1 April 2011

Relevant facts and circumstances

You are a health care provider which comes within paragraph 57A(3)(a) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA).

Under the terms of your salary packaging arrangements you currently allow your employees access to two types of cards.

The first card is a meal card that can only be used to purchase food and drink that constitutes the provision of entertainment.

The second card does not have any restrictions on the items that can be purchased.

You are considering allowing your employees to obtain a third type of card as part of a salary sacrifice arrangement. The card will be called a 'Meal Leisure Card'.

In general terms, the 'Meal Leisure Card' will be enable the employee (or associate) to pay for expenses incurred:

· for the provision of meal entertainment by way of food or drink; and/or

· in the hire or lease of an entertainment facility.

Apart from the expenses that can be paid using the card, the terms and conditions that apply to the 'Meal Leisure Card' will be the same as those that apply to the existing cards.

In summary, the cards operate as follows:

· The employees enter into an effective salary sacrifice arrangement (in accordance with Taxation Ruling TR 2001/10).

· Under the terms of the salary sacrifice agreement the amount of salary that the employee would otherwise receive is reduced in return for the employee being provided with a nominated card that can be used to make purchases to an agreed value.

· Each pay period the amount agreed to in the salary sacrifice arrangement is transferred by the employer to the card account.

· The employee uses the card at a merchant to pay for items. Each purchase by the employee or their associate reduces the value available on the card.

· The bank makes a payment to the merchant from the relevant card account.

· The cards have a limit of zero dollars. An employee cannot spend more than the value that is on the card.

· Cash withdrawals, cash advances and internet transfers between accounts are not permitted.

· The cards must not be used in Taxis or VHA cars.

· Direct debits are not allowed to be established on these accounts.

· If an employee makes a purchase and there are insufficient funds in the card account, the Visa card terminal will reject the employee's use of the card. The employee will have to pay in cash and may then submit a manual claim form to the employer along with the receipt and tax invoice. The employer will then transfer money from the employee's card account to the employee's personal bank account or alternatively, may reduce the next transfer to the employee's card account and deposit this reduction to the employee's personal bank account.

· A card account may be overdrawn if a merchant terminal is not operating or the process with merchant's banking facility is down. As a result of this transaction the employee's card may fall into debit. The employer will notify the employee that an additional amount will be deducted pre tax from the employee's salary and paid to the card account.

Meal cards may be used to purchase meals from merchants that are deemed to be valid.

An annual reconciliation will take place after the conclusion of the relevant fringe benefits tax (FBT) year. Any reimbursement amount not claimed by the last pay period of the FBT year will be converted and paid as salary with appropriate PAYG amounts being withheld. Such payments will be made as soon as practicable after the end of the FBT year.

Where an employee terminates employment or ceases salary packaging, the employer will return any unused balance amount that the employee has in their account via the payroll system as salary. Amounts for PAYG will be withheld.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 5B.

Fringe Benefits Tax Assessment Act 1986 Subsection 5B(1D).
Fringe Benefits Tax Assessment Act 1986 Subsection 5B(1E).
Fringe Benefits Tax Assessment Act 1986 Subsection 5B(1L).
Fringe Benefits Tax Assessment Act 1986 Subsection 5E(2).
Fringe Benefits Tax Assessment Act 1986 Subsection 5E(3).
Fringe Benefits Tax Assessment Act 1986 Paragraph 5E(3)(a).
Fringe Benefits Tax Assessment Act 1986 Paragraph 5E(3)(c).
Fringe Benefits Tax Assessment Act 1986 Section 37AC.
Fringe Benefits Tax Assessment Act 1986 Section 37AD.
Fringe Benefits Tax Assessment Act 1986 Section 57A.
Fringe Benefits Tax Assessment Act 1986 Subsection 136(1).
Income Tax Assessment Act 1997 Section 32-10
Income Tax Assessment Act 1997 Paragraph 32-10(1)(a)
Income Tax Assessment Act 1997 Subsection 995-1

Reasons for decision

Will the use of the Meal Leisure Card to purchase meal entertainment be included in the calculation of the employer's aggregate non-exempt amount under subsection 5B(1E) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Section 57A of the FBTAA provides that certain employers are generally exempt from fringe benefits tax on benefits provided to their employees. Specifically subsection 57A(3) of the FBTAA states:

A benefit provided in respect of the employment of an employee is an exempt benefit if:

(a) the employer of the employee is a health care provider ; or

(b) the employer provides public ambulance services or services that support those services and the employee is predominantly involved in connection with the provision of those services.

Therefore, as you are a health care provider, the benefits provided to your employees will be exempt benefits.

However, subsection 5B(1D) of the FBTAA provides that where section 57A applies, the employers 'fringe benefits taxable amount' will include the employers 'aggregate non-exempt amount'.

The method for calculating the employers aggregate non-exempt amount is contained in subsections 5B(1E) to 5B(1L). These subsections provide that an employer, that satisfies paragraph 57A(3) of the FBTAA, 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 exceed $17,000.

However, not all benefits are included in the calculation. Under subsection 5B(1L) of the FBTAA the calculation will not include benefits:

(a) that constitute the provision of meal entertainment

(b) that are car parking fringe benefits, or

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

Meal entertainment

The provision of meal entertainment is defined in section 37AD of the FBTAA to be the provision of:

(a) (a)entertainment by way of food or drink; or

(b) (b)accommodation or travel in connection with, or for the purpose of facilitating entertainment to which paragraph (a) applies; or

(c) (c)the payment or reimbursement incurred in providing something covered by paragraph (a) or (b);

(d) whether or not

(e) (d)business discussions or business transactions occur; or

(f) (e)in connection with the working of overtime or otherwise in connection with the performance of the duties of any office or employment; or

(g) (f)for the purposes of promotion or advertising; or

(h) (g)at or in connection with a seminar.

In applying this definition for the expense that is paid using the card to come within paragraph 5B(1L) of the FBTAA the expense has to involve the provision of food or drink, or be for accommodation or travel that is in connection with or for the purpose of facilitating entertainment that is provided by way of food or drink.

However, not all food and drink will come within the definition of 'meal entertainment'. Guidelines that can be used for determining whether the food or drink constitutes the provision of entertainment are provided in Taxation Ruling TR 97/17 Income tax and fringe benefits tax: entertainment by way of food or drink provides guidance in relation to meal entertainment.

Paragraph 23 sets out four (4) factors to determine whether the provision of food or drink constitutes entertainment as follows:

(a) Why is the food or drink being provided. This test is a 'purpose test'. For example, food or drink provided for the purposes of refreshment does not generally have the character of entertainment, whereas food or drink provided in a social situation where the purpose of the function is for employees to enjoy themselves has the character of entertainment.

(b) What food or drink is being provided. As noted above, morning and afternoon teas and light meals are generally not considered to constitute entertainment. However, as light meals become more elaborate, they take on more of the characteristics of entertainment. The reason for this is that the more elaborate a meal, the greater the likelihood that entertainment arises from the consumption of the meal.

(a) For example, when an employer provides morning or afternoon teas or light meals, that food or drink does not usually confer entertainment on the employee. By contrast, a three course meal provided to an employee during a working lunch has the characteristics of entertainment. The nature of the food itself confers entertainment on the employee.

(b) When is the food or drink being provided. Food or drink provided during work time, during overtime or while an employee is travelling is less likely to have the character of entertainment. This is because in the majority of these cases food provided is for a work-related purpose rather than an entertainment purpose. This, however, depends upon whether the entertainment of the recipient is the expected outcome of the provision of the food or drink. For example, a staff social function held during work time still has the character of entertainment.

(c) Where is the food or drink being provided. Food or drink provided on the employer's business premises or at the usual place of work of the employee is less likely to have the character of entertainment; refer to the reasons in (b) and (c) above. However, food or drink provided in a function room, hotel, restaurant, cafe, coffee shop or consumed with other forms of entertainment is more likely to have the character of entertainment. This is because the provision of the food or drink is less likely to have a work-related purpose.

Paragraph 24 of TR 97/17 provides that no one of these factors is determinative. However, the factors in paragraphs (a) and (b) are considered the more important.

TR 97/17 also contains a table that provides examples of the application of these factors.

Further guidance that can be used to determine whether food or drink constitutes the provision of entertainment is provided by Taxation Determination TD 94/55 Income tax: when does providing an item of property constitute the provision of entertainment within the meaning of subsection 51AE(3) of the Income Tax Assessment Act 1936?

2. In determining whether providing an item of property constitutes the provision of entertainment, regard should be had 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. This character is distinct from the property itself and relates to the immediate and active use of the property.

3. In practice, the provision of entertainment can be determined by reference to the following characteristics:

* Timeliness

· entertainment occurs soon after provision of the item of property;

· the usefulness of the item of property expires after consumption; or

· the item of property is returned at the completion of use.

* Direct Connection

There should be a direct connection between the item of property and the entertainment:

· the entertainment should arise from the use of the item of property;

· the entertainment is the expected outcome of the provision of the property.

TD 94/55 then provides the following examples to illustrate the application of these characteristics:

Example 1

Costs incurred in the giving of items of property, such as bottled spirits, groceries, games, TV sets, VCRs, computers, crockery, swimming pools, gardening equipment, etc; have an enduring character, and only an indirect nexus to any immediate entertainment. Consumption is usually delayed. The items of property usually require further steps before they can be consumed, and consumption can occur over a long period.

Hence, these items of property do not generally constitute provision of entertainment.

Example 2

Costs incurred in providing glasses of champagne, hot meals, theatre tickets, holiday accommodation, hired entertainers, and hired sporting equipment, have a dynamic and immediate character. Consumption can usually occur immediately. These items of property do not last beyond initial consumption (or are to be returned at the end of the hire period).

Hence, these items of property would generally constitute provision of entertainment.

A Meal Leisure Card can be used to purchase food and drink which comes within the 'meal entertainment' definition. When this occurs, the payment will be an exempt benefit that will not be included in the calculation of the employer's 'aggregate non-exempt amount'.

Will the use of the Meal Leisure Card to pay for the cost of hiring or leasing premises or facilities for the purpose of the provision of entertainment be included in the calculation of the employer's aggregate non-exempt amount under subsection 5B(1E) of the FBTAA?

Unlike the Meal Card, the Meal Leisure Card is not restricted to the purchase of food or drink. However, the use is restricted by Merchant category codes which are used to restrict purchases to purchases from merchants that have a primary purpose of providing a dining experience or accommodation.

As set out above, paragraph 5B(1L)(c) provides that the calculation of the employer's 'aggregate non-exempt amount' will not include any benefits whose taxable values are wholly or partly attributable to 'entertainment facility leasing expenses'.

Entertainment facility leasing expenses

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

… 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

(e) 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.

For a payment made using a Meal Leisure Card to come within this definition the following conditions must be satisfied:

1. the expense must be incurred in hiring or leasing one of the premises or facilities listed in paragraphs (a) to (c) of the 'entertainment facility leasing expenses' definition;

2. if the premise or facility that is hired or leased comes within paragraphs (b) or (c) the hire or lease must be for the purpose of the provision of entertainment; and

3. the expense must not be attributable to the provision of food, drink or deductible advertising.

The application of these conditions has been considered in:

· ATO Interpretative Decision ATO ID 2009/45 in relation to lease or hire of a private function room and hotel room; and

· ATO Interpretative Decision ATO ID 2009/141 in relation to the hire of a marquee for use at the employee's home for the purpose of providing entertainment.

As the situations in which the Meal Leisure Card can be used are similar to the private function room and hotel room it is accepted that a Meal Leisure Card can be used to pay for an 'entertainment facility leasing expense'. When this occurs, the payment will be an exempt benefit that will not be included in the calculation of the employer's 'aggregate non-exempt amount'.

Will the use of the Meal Leisure Card to pay for recreation, or to purchase property or services that do not constitute the provision of entertainment be included in the calculation of the employer's aggregate non-exempt amount under subsection 5B(1E) of the FBTAA?

As set out above, the Meal Leisure card will only be able to be used at merchants where the primary purpose of the business is identified as providing a dining experience or providing accommodation.

As the purpose is not restricted to merchants who only provide meal entertainment, or only provide accommodation it is possible for the Meal Leisure Card to be used to pay for an expense that is neither meal entertainment, nor an entertainment facility leasing expense. For example, it is possible for a resort that contains a restaurant and provides accommodation to also provide recreational activities, services or property. In such a situation, it is possible for an employee to use the Meal Leisure Card to pay for an expense that is neither meal entertainment, nor an entertainment facility leasing expense.

If the Meal Leisure Card is used to pay for an expense that is neither meal entertainment, nor an entertainment facility leasing expense subsection 5B(1L) will not prevent the amount of the expenditure from being included in the calculation of the employer's 'aggregate non-exempt amount'.