Edited version of private ruling

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Ruling

Subject: Entertainment

Question 1

Does food, drink and recreation provided to an employee whilst carrying out his duties constitute entertainment for the purposes of section 32-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

If the answer to question 1 is yes, does section 32-40 of the ITAA 1997 apply to preserve the deductibility of costs under section 8-1 of the ITAA 1997?

Answer

Not applicable.

Question 3

If the provision of food, drink and recreation constitutes the provision of a fringe benefit for the purposes of the Fringe Benefits Tax Assessment Act 1986 (FBTAA), will the otherwise deductible rule reduce the taxable value of any benefit to nil?

Answer

Yes.

This ruling applies for the following periods:

Year ended 31 March 2011

Year ending 31 March 2012

The scheme commences on:

1 April 2010

Relevant facts and circumstances

A key responsibility of the employee is to facilitate entertainment, including, in particular, looking after patrons' well-being at events.

The employee may be required to partake in the event, however, this is purely to facilitate the provision of entertainment to the guests.

The job position descriptions have been provided.

The costs are incurred by the employer.

The costs are incurred in the course of the employee's work.

Reasons for decision

Question 1

Section 32-10 of the ITAA 1997 provides:

SECTION 32 Meaning of entertainment

32-10(1) Entertainment means:

(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.

32-10(2) You are taken to provide entertainment even if business discussions or transactions occur.

Note: These are some examples of what is entertainment:

· business lunches

· social functions

These are some examples of what is not entertainment:

· meals on business travel

· theatre attendance by a critic

· a restaurant meal of a food writer

The term 'recreation' is defined in subsection 995-1 of the ITAA 1997 to include amusement, sport or similar leisure time pursuits.

Taxation Ruling TR97/17 Income Tax and fringe benefits tax: entertainment by way of food or drink provides the ATO view with regard to 'What is entertainment?' (Although written in terms of food and drink, the ruling is equally applicable to recreation in terms of 'What is entertainment?')

Paragraphs 22 to 24 of TR 97/17 states that in determining whether entertainment is provided an objective consideration of the circumstances in which the entertainment is provided are required. Paragraph 23 of TR 97/17 suggests that the following tests be applied:

(a) Why is the food, drink and recreation being provided? - Food, drink and recreation provided in a social situation where the purpose of the function is for the employees to enjoy themselves, has the character of entertainment.

(b) What in the way of food, drink and recreation is being provided? - The more elaborate the food, drink and recreation the greater the likelihood that entertainment will arise.

(c) When is the food, drink and recreation being provided?

(d) Where is the food, drink and recreation being provided?

Paragraph 24 of TR 97/17 provides that whilst none of the above factors are determinative (a) and (b) are the more important.

Why is the food, drink and recreation being provided ?

The facts provided state that the situations in which the recreation, food and drink are provided are all for the purpose of entertaining clients of the employer. The employees are in attendance as part of their work, i.e. to facilitate entertainment and in particular to look after patrons' well being at the events.

The employee participates because their role is facilitating and hosting the event. The employee may be required to partake in the event, however, this is purely to facilitate the provision of entertainment to these key customers so as to generate revenue and improve customer loyalty.

The Applicant has argued that as the food, drink and recreation is provided to the employee in the course of their work that the purpose for providing the food, drink and recreation can be likened to that of two of the examples of what is not entertainment contained in the note to subsection 32-10(2) of the ITAA 1997 being:

· theatre attendance by a critic; and

· a restaurant meal of a food writer.

After considering the facts and representations from the Applicant, it is considered that the purpose the food, drink and recreation are provided is to provide entertainment to customers. The providing of elements of the food, drink and recreation to the employee is considered to be incidental to the above purpose.

What food, drink and recreation is being provided ?

The type of food, drink and recreation provided to the clients is elaborate. However, the extent to which the employee partakes of the food, drink and recreation varies.

It is considered that to the extent the employee partakes of the food, drink and recreation that this food, drink and recreation would be considered to be of a type that is in the nature of entertainment.

When is the food, drink and recreation being provided?

TR 97/17 provides at paragraph 23 that:

…Food or drink provided during work time …is less likely to have the character of entertainment.

In the circumstances of this case, the food, drink and recreation are provided at various times during the course of the employee's work period.

Where are the food, drink and recreation being provided?

TR 97/17 provides at paragraph 23 that:

…food or drink provided in a function room, hotel, restaurant, café, coffee shop or consumed with other forms of entertainment is more likely to have the character of entertainment …

The recreation, food and drink are provided at locations designed for the provision of recreational entertainment.

Has entertainment been provided?

Applying the above tests we have found that:

· The purpose of providing the food drink and recreation is to entertain the customers (not the employees)

· However, what has been provided to the employees is in the nature of entertainment.

· The food drink and recreation is provided during work time and so is less likely to have the character of entertainment.

· However the food drink and recreation is provided at entertainment venues.

The Applicant has likened the circumstances of this Ruling to that of a theatre critic or a food writer stating that all are required to participate in what otherwise may be seen as entertainment as an essential ingredient of their employment rather than as a reward or pleasurable diversion.

The Applicant has also referred to the following as further backing for his argument:

· FBT NTLG Subcommittee Minutes of 23 March 1995, agenda item 11, pertaining to where a tour leader accompanied a group of employees of another employer who are partaking of the trip as part of the award system. Where the ATO was of the opinion that the tour leader was clearly undertaking work responsibilities and there would be no entertainment fringe benefit.

· Taxation Ruling TR 98/14 Income Tax: employee journalist - allowances, reimbursements and work-related deductions provides the following at paragraphs 161 to 164:

161. A deduction is not allowable under section 8-1 of the ITAA 1997 for expenditure incurred in attending staff dinners or similar functions. Such expenditure qualifies as an entertainment expense under section 51AE of the ITAA 1936. The costs of attending functions such as staff dinners and farewell dinners are not incurred in the course of producing income and they are essentially a private expense.

162. In Frankcom v. F C of T (1982) 65 FLR 25; 82 ATC 4599; (1982) 13 ATR 636, a magistrate was denied a deduction for the costs of attending a cocktail party hosted by the Bar Association and Law Society and dinners given by the Queensland Stipendiary Magistrates' Association. The taxpayer's duties as a magistrate did not necessitate his attendance at social functions. Hence, the expenditure was not incidental and relevant to the taxpayer gaining his salary and also were of a private nature.

163. A deduction is generally not allowable for the cost of providing entertainment by way of food, drink or recreation (whether to the taxpayer or another person). However, if an employee journalist is required as part of their work to report on a particular social function, the costs associated with attending are deductible.

164. Example: Edwina, a reporter for a major magazine, is responsible for the paper's social and society pages. In order to gather the necessary information for her articles, Edwina is required to attend several functions a year regarded as important to the city's socialites. The cost of attending these functions is an allowable deduction to Edwina due to the specialised nature of her work as a journalist.

It is considered that TR 98/14, supported by the FBT NTLG Subcommittee Minutes of 23 March 1995, provide guidance as to determining whether entertainment has been provided in the circumstances provided in this Ruling where the tests we have applied in accordance with TR 97/17 are finely balanced.

It is considered that, like the employee journalist, the attendance of the employee of the employer at events is an integral part of their job. As such, on balance, having applied the tests prescribed in TR 97/17, the food, drink and recreation provided to the employee whilst facilitating and hosting events in the course of their employment duties is not entertainment for the purposes of section 32-10 of the ITAA 1997.

Question 2

Not applicable as the answer to question 1 is no.

Question 3

A 'fringe benefit' is defined in subsection 136(1) of the FBTAA and generally applies to a benefit that is provided to an employee in respect of their employment. The benefit may be provided by the employer, an associate of the employer or under an arrangement with a third party.

The term benefit is defined in subsection 136(1) of the FBTAA as:

benefit includes any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility and, without limiting the generality of the foregoing, includes a right, benefit, privilege, service or facility that is, or is to be, provided under:

(a) an arrangement for or in relation to:

(i) the performance of work (including work of a professional nature), whether with or without the provision of property;

(ii) the provision of, or of the use of facilities for, entertainment, recreation or instruction; or

(iii) the conferring of rights, benefits or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar exaction;

(b) a contract of insurance; or

(c) an arrangement for or in relation to the lending of money.

The provision of food, drink and recreation in the circumstances of this case fit the definition of benefits and, as they are provided to the employee by the employer in respect of employment, are fringe benefits.

The types of benefit that arise are property benefits under section 40 of the FBTAA, being the provision of food and drink, and residual benefits under section 45 of the FBTAA being the right to attend and participate in events.

The taxable value of the fringe benefits would normally be the costs incurred in providing the benefits to the employees. However, the taxable value can be reduced by using the "otherwise deductible rule" under section 44 of the FBTAA in relation to property fringe benefits and section 52 of the FBTAA in relation to residual fringe benefits.

Broadly, this means that the taxable value may be reduced by the amount that the employee would have been entitled to claim as an income tax deduction, if the employee had incurred the expenses to perform their employment related duties rather than being provided with benefits by the employer.

Whilst section 32-5 of the ITAA 1997 denies an entity a deduction under section 8-1 of the ITAA 1997 for any loss or outgoing in respect of providing entertainment, we have determined that in the circumstances of this case that entertainment is not provided to the employee.

TR 98/14 addresses a similar circumstance for employee journalists at paragraphs 163 and 164:

163. A deduction is generally not allowable for the cost of providing entertainment by way of food, drink or recreation (whether to the taxpayer or another person). However, if an employee journalist is required as part of their work to report on a particular social function, the costs associated with attending are deductible.

164. Example: Edwina, a reporter for a major magazine, is responsible for the paper's social and society pages. In order to gather the necessary information for her articles, Edwina is required to attend several functions a year regarded as important to the city's socialites. The cost of attending these functions is an allowable deduction to Edwina due to the specialised nature of her work as a journalist.

Based on the above, as the employee is undertaking work responsibilities, if they had incurred the expenditure themselves, it would be deductible pursuant to section 8-1 of the ITAA 1997.

As the expenditure would have been deductible had the employee incurred the expenses the taxable value of fringe benefits that arise from the costs attending events can be reduced to nil by applying the "otherwise deductible rule"