Edited version of private ruling

Authorisation Number: 1011717758207

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Ruling

Subject: Meal entertainment

Issue 1: Food or drink consumed off the business premises.

Question 1

Are the 'refreshments' consumed off the business premises of the employer and client considered to be the provision of meal entertainment for the purposes of section 37AD of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer:

Yes.

Question 2

Does the reimbursement of the cost of the food or drink to employees give rise to a fringe benefit as defined in subsection 136(1) of the FBTAA?

Answer:

Yes

Issue 2: Deductibility of meal entertainment expenses incurred by the employer.

Question 1

Are the expenses incurred by the employer in reimbursing employees for the cost of the food or drink income tax deductible to the employer to the extent allowed under section 51AEA of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

This ruling applies for the following period:

1 April 2009 to 31 March 2012

The scheme commences on:

1 April 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Refreshments are purchased and consumed off the business premises of the employer and/or client, by an employee and a client.

The employee and client go to a coffee shop/cafe or restaurant to facilitate business discussions.

These refreshments are not consumed on the business premises of the employer or the client.

The employee purchases the refreshments and is reimbursed for the cost of the refreshments by the employer.

There are reasons why the business discussions are held off the business premises. These are:

· rooms are occupied

· no kitchenette in the employer's office

· meeting room not booked

· it is preferred to step out of the office, and

· no suitable space to conduct the business meeting on the business premises.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 20

Fringe Benefits Tax Assessment Act 1986 Section 37AA

Fringe Benefits Tax Assessment Act 1986 Section 37AC

Fringe Benefits Tax Assessment Act 1986 Section 37AD

Fringe Benefits Tax Assessment Act 1986 Section 37AF

Fringe Benefits Tax Assessment Act 1986 Section 37B

Fringe Benefits Tax Assessment Act 1986 Section 37BA

Fringe Benefits Tax Assessment Act 1986 Section 132

Fringe Benefits Tax Assessment Act 1986 Section 136

Income Tax Assessment Act 1936 Section 51AEA

Income Tax Assessment Act 1936 Section 262A

Income Tax Assessment Act 1997 Section 8-1

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 Section 32-30

Issue 1

Question 1

Detailed reasoning

Section 37AD of the FBTAA, provides the meaning of provision of 'meal entertainment', which is similar to the definition in section 32-10(1)(a) the Income Tax Assessment Act 1997 (ITAA 1997) except recreation is not included in FBTAA:

37AD MEANING OF PROVISION OF MEAL ENTERTAINMENT

A reference to the provision of meal entertainment is a reference to the provision of:

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

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

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

whether or not:

(d) business discussions or business transactions occur; or

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

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

(g) at or in connection with a seminar.

The consumption of tea/coffee and/or sweets at a coffee shop or restaurant may be entertainment as defined in subsection 32-10 of the ITAA 97.

An employer can make an objective analysis of all the circumstances surrounding the provision of food or drink, using the Commissioner's view in Taxation Ruling TR 97/17: Income Tax and FBT: entertainment by way of food or drink and its addendum (TR 97/17).

In making a determination of whether the food or drink provided to the employee results in the entertainment of that person, an employer should consider paragraph 7 of TR 97/17. It lists four factors that need to be considered when determining whether the provision of food and drink constitutes entertainment. These factors are:

(1) why the food or drink is being provided

(2) what type of food or drink is being provided

(3) when is that food or drink being provided, and

(4) where the food or drink is being provided.

Paragraph 18 states:

…in most cases the mere provision of food or drink satisfies the 'entertainment' test. It is only a narrow category of cases where the mere provision of food or drink does not amount to 'entertainment' for purposes of Division 32 of the ITAA 1997.

Paragraph 24 refers to the tests in determining entertainment:

No one of the above factors will be determinative; however, paragraphs (a) and (b) are considered more important. The application of the above factors results in the determination of whether the food or drink amounts to meal entertainment.

In determining, whether the employer has provided entertainment by way of food or drink, the four factors listed in TR 97/17 are considered:

Why is the food and/or drink being provided?

The food is provided as refreshment or for the convenience of the client. The meeting between employees and their clients is to facilitate business discussions in a social or convivial atmosphere.

What type of food and/or drink is provided?

Items consumed are usually coffee, tea, or hot chocolate or soft drink with a muffin or biscuits or cakes. These items are not substantial. Full meals and alcohol are not consumed.

When is food or drink being provided?

Normally, the business meetings occur during the business hours. However, certain meetings can go past the standard working hours.

Where is the food or drink provided?

The employees meet their clients outside the employee's or client's business premises. Refreshments are consumed at a coffee shop/café/restaurant outside the business premises. Refreshments consumed in a coffee shop or restaurant is more likely to have the character of entertainment.

The food or drink does not provide entertainment in itself, but it is the setting in which they are consumed that turns the food or drink into the provision of entertainment. That is, entertainment is provided by way of food or drink, in a social situation at a coffee shop/café/restaurant, despite business discussions taking place.

Taxation Ruling IT 2675 income tax and fringe benefits tax: morning and afternoon teas, light meals and in-house dining facilities states that these refreshments provided at the employer's business premises will not be entertainment by way of food or drink.

The difference in this case is that these refreshments are consumed off the business premises, which characterises it into entertainment by way of food or drink.

Moreover, as per the table and addendum provided in TR 97/17, refreshments consumed during business hours on the employer's business premises will not be entertainment by way of food or drink.

As the refreshments provided to employees are consumed off the business premises are entertainment by way of food or drink, within the meaning of entertainment in paragraph 32-10(1)(a) of the ITAA 1997, they also meet the definition of meal entertainment contained in subsection 37AD(a) of the FBTAA.

Issue 1

Question 2

In order for the fringe benefits tax (FBT) provisions to apply, we have to consider whether the provision of the food or drink gives rise to a fringe benefit.

A fringe benefit is defined in subsection 136(1) of the FBTAA and is in general provided at any time during the FBT year of tax, to an employee, by the employer in respect of employment of the employee. This is the basic premise of a fringe benefit.

The provision of the food or drink to a client does not give rise to a fringe benefit as the required employment relationship does not exist.

An employee who has been reimbursed by the employer for the cost of the food or drink is considered to be receiving an expense payment fringe benefit as defined in subsection 136(1) of the FBTAA.

There is no separate category for entertainment as a fringe benefit. Depending on the type of entertainment and the circumstances in which the benefit is provided, it can be expense payment, property, tax-exempt body entertainment or residual fringe benefits.

If the employer account for entertainment provided as 'meal entertainment' by making an election under Division 9A of the FBTAA to use the 50/50 split method as outlined in section 37BA of the FBTAA, then other categories that the entertainment can fall into will be disregarded. That is, the employer will not need to declare the expense payment fringe benefit in relation to the meal entertainment.

The total taxable value of meal entertainment fringe benefits provided by the employer during an FBT year will be 50 per-cent of the total expenses incurred in providing meal entertainment to all people whether employees, clients or otherwise.

The employer's total meal entertainment expenditure includes expenditure that might otherwise be exempt from FBT or not normally subject to FBT

Issue 2

Question 1

Detailed reasoning

Under section 8-1 of the ITAA 1997, a deduction can be allowed under one of the three positive limbs but not if it is not deductible by another section of the ITAA 1936 or the ITAA 1997.

With some exceptions, section 32-5 of the ITAA 1997 generally denies an income tax deduction in respect of expenditure incurred in relation to the provision of entertainment. This is the case even if the entertainment expenses have a connection with business such as a business lunch.

One of the exceptions is provided under section 32-20 of the ITAA 1997. Section 32-20 of the ITAA 1997 provides that a taxpayer (employer) is not prevented by section 32-5 of the ITAA 1997 from deducting a loss or outgoing to the extent that it is incurred in respect of providing a fringe benefit.

The provision of a fringe benefit can only be provided under an employee and employer relationship. Despite having business discussions whilst consuming refreshments outside the business premises, an income tax deduction cannot be claimed for expenditure incurred in providing the client with food or drink, whether consumed on or of the business premises.

However, if the employer elects to characterise the provision of entertainment as meal entertainment and a further election is made to use the 50/50 split method as outlined in subdivision B of Division 9A of the FBTAA, then other FBT categories that entertainment falls into will not be relevant.

As such, the employer may claim a deduction in respect meal entertainment expenses to the extent provided for in section 51AEA of the ITAA 1936. That is, 50 per-cent of the employer's total meal entertainment expenditure in a given FBT year is income tax deductible.