Edited version of private ruling

Authorisation Number: 1011808208734

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Ruling

Subject: Recreational facilities and fringe benefits tax (FBT)

Question 1

Will the employer incur a fringe benefits tax liability if it were to allow its staff to salary sacrifice their salaries to gain access to facility X?

Answer

No

This ruling applies for the following periods:

Year ended 31 March 2012

Year ended 31 March 2013

Year ended 31 March 2014

Year ended 31 March 2015

The scheme commences on:

1 April 2011

Relevant facts and circumstances

Employees will given the option of entering into a salary sacrifice agreement (SSA) in which they will sacrifice salary and gain access to facility X.

Facility X is owned by the employer and is situated on land owned by the employer. The employer owns all the equipment at the facility.

The employer has engaged entity Y to manage the facility on their behalf.

A copy of the management agreement was provided..

The employer is income tax exempt.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 (FBTAA) section 38

FBTAA section 45

FBTAA subsection 47(2)

FBTAA subsection 136(1)

Income Tax Assessment Act 1997 (ITAA 1997) Division 32

ITAA 1997 section 32-10

ITAA 1997 section 32.40

ITAA 1997 section 995-1

Reasons for decision

Question 1

Will the employer incur a fringe benefits tax liability if it were to allow its staff to salary sacrifice their salaries to gain access to facility X?

Summary

A fringe benefit liability does not arise as the benefit is an exempt benefit under subsection 47(2) of the FBTAA.

Detailed reasoning

A SSA is an arrangement between an employer and an employee, whereby the employee agrees to forgo part of their future entitlement to salary or wages in return for the employer providing them with benefits of a similar value.

In this case employees forgo part of their salary entitlement to receive access to facility X.

A benefit is defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to include 'any right…privilege, service or facility…'

In order to be subject to fringe benefits tax the benefit must be a fringe benefit. A fringe benefit is defined in subsection 136(1) of the FBTAA as states in part:

…in relation to an employee, in relation to the employer of the employee, in relation to a year of tax, means a benefit:

(a) provided at any time during the year of tax; or

(b) provided in respect of the year of tax;

being a benefit provided to the employee or to an associate of the employee by:

(c) the employer; or

(d) an associate of the employer; or…

(e)…

…in respect of the employment of the employee, but does not include:

(f)…

(g) a benefit that is an exempt benefit in relation to the year of tax;…

As the employees will enter into a SSA agreement the benefit is provided in respect of employment and will therefore be a fringe benefit unless it is an exempt benefit

In order to determine if the benefit is an exempt benefit it is important to classify the benefit under the correct benefit type. This is because some exemptions only apply to specific benefit types.

In this case the benefit being provided is the right to use the facility, which is a right to use the equipment within the facility. These contents are owned by the employer.

In effect the benefit being provide to the employee under the SSA is the use of property owned by their employer, which as explained in Fringe Benefits Tax: A guide for employers (NAT 1054) a residual benefit.

A residual benefit as described in section 45 of the FBTAA and is essentially a catch all provision for those benefits which do not fall under any of the other specific categories of benefit.

However as the employer is an income tax-exempt body and the nature of the benefit being provided, before we can classify the benefit as a residual benefit we have to eliminate it from being a tax-exempt body entertainment benefit under section 38 of the FBTAA first.

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 if the benefit consists of the employer incurring non-deductible exempt entertainment expenditure then the benefit would be tax-exempt body entertainment and not a residual benefit.

Non-deductible exempt entertainment expenditure is defined in subsection 136(1) of the FBTAA to mean 'non-deductible entertainment expenditure to the extent to which it is not incurred in producing assessable income'.

Subsection 136(1) of the FBTAA also defines non-deductible entertainment expenditure and states:

means 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 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).

Division 32 of the Income Tax Assessment Act 1997 ITAA 1997) effectively denies a deduction in respect of entertainment expenditure except in the circumstances outlined in that Division.

The definition of entertainment in section 32-10 of the ITAA 1997 includes entertainment by the way of recreation. Recreation is defined in section 995-1 of the ITAA 1997 to include amusement, sport or similar leisure-time pursuit.

Given the nature of facility X the use of it could be seen as the provision of entertainment through recreation.

However item 3.1 of section 32-40 of the ITAA 1997 allows a deduction if you provide entertainment for payment in the ordinary course of business that an entity carries on. Based on the management agreement entered into and the facts of this case this provision would apply to allow a deduction.

Therefore had the not been income tax exempt the expenditure would have been deductible . As a result section 38 of the FBTAA does not apply and the benefit is a residual benefit as described in section 45 of the FBTAA.

As the benefit is a residual benefit and is in respect of the provision of recreation this suggests that the exemption contained in subsection 47(2) of the FBTAA might apply.

Subsection 47(2) of the FBTAA provides an exemption in respect of a residual benefit and the provision of recreation facilities where they are provided to current employees and the recreation facilities are on business premises of the employer (or on business premises of a related company if the employer is a company).

In this case the benefit is a residual benefit and the benefit is the provision of recreational facilities. In addition as the employees have to enter SSA arrangements to receive the benefit it can be concluded that under the SSA the benefit is being provided to a current employees.

What needs to be determined is whether facility X is business premises of the employer. Business premises is defined in subsection 136(1) of the FBTAA as:

in relation to a person, means premises or part of premises, of the person used, in whole or in part, for the purposes of business operations of the person, but does not include:

(a) premises, or part of premises, used as a place of residence of an employee of the person or an employee of an associate of the person; or

(b) a corporate box; or

(c) boats or planes used primarily for the purpose of providing entertainment unless the boat or plane is used in the person's business of providing entertainment; or

(d) other premises used primarily for the purpose of providing entertainment unless the premises are used in the person's business of providing entertainment.

Taxation Ruling TR 2000/4 Fringe benefits tax: meaning of 'business premises' explains the meaning of the definition of fringe benefits and in looking at whether premises are business premises of an employer an analysis needs to ne made and paragraph 12 states

In making this analysis, an employer should carefully weigh all relevant matters, including the following factors that are especially relevant to determining whether each of the two requirements has been met:

(a) the control the employer has over the premises; and

(b) the consistency of an employer's actions and activities on the premises with those of normal business practices.

Importantly, each factor should be considered in relation to each of the two requirements. Further, the factors must be considered in combination and as a whole, together with all other relevant matters.

Paragraph 7 of TR 2000/4 addresses the first requirement that the premises or part of the premises are under your control. A person's control is satisfied if that person owns the premises, or has exclusive occupancy rights as lessee of the premises.

The second requirement is that the premises or part of premises must be used by the person, in whole or part, for the purposes of their business operations. Under subsection 136(1) of the FBTAA 'business operations' in relation to a government body or non-profit company, includes any operations or activities carried out by that body or company.

As noted in the explanation above facility X is considered to be a business that the employer carries on. Consequently:

· the facility is not excluded by paragraph (d) of the definition of business premises as the premises are used in the business of providing entertainment, and

· the actions and activities on the premises are consistent with your normal business practice of providing this sort of facility.

The recreational facility is therefore located on the employer's business premises and all of the conditions in subsection 47(2) of the FBTAA are satisfied. Since those conditions are satisfied the benefit will be an exempt benefit and excluded from the definition of a fringe benefit.