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Authorisation Number: 1012020661712

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Ruling

Subject: Fringe benefits tax; tax-exempt body entertainment benefits

Question 1

Does the provision of food and drink by the employer to its employees at the annual dinner held in an in-house dining facility give rise to tax exempt body entertainment benefits referred to in section 38 of the Fringe Benefits Tax Assessment Act 1986?

Answer

No

Question 2

If the answer to Question 1 is yes, can the taxable value of the tax exempt body entertainment benefits determined under section 39 of the Fringe Benefits Tax Assessment Act 1986 be reduced by personal payments received from employees who attend the annual dinner?

Answer

Not necessary to answer

This ruling applies for the following fringe benefits tax years:

Year ending 31 March 2011

Year ending 31 March 2012

Year ending 31 March 2013

Year ending 31 March 2014

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.

The employer holds an annual dinner to discuss business for the year. It is the event used to report on the years activities and formally appoint new staff and to honour those who are moving on.

The event is attended by invited and uninvited staff and non-staff.

The venue for the dinner is the in-house dining facility of the employer.

The in-house dining facility is restricted to employees, is wholly owned by the employer, is located on the employers land and is primarily used for providing food and drink to staff members.

Both classes of uninvited guests are asked to make a contribution towards the cost of the dinner. Staff and non-staff are charged the same flat fee to attend the event which is based on the approximate costs of the meal and alcohol provided.

The employer is exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997.

The employer has not made an election for Division 9A of the Fringe Benefits Tax Assessment Act 1986 to apply to meal entertainment.

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 6-15,

Income Tax Assessment Act 1997 section 32-5,

Income Tax Assessment Act 1997 section 32-10,

Income Tax Assessment Act 1997 section 32-30,

Income Tax Assessment Act 1997 section 32-55,

Income Tax Assessment Act 1997 section 50-1 and

Income Tax Assessment Act 1997 section 50-5.

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.

Subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) defines 'tax exempt body entertainment benefit' to mean a benefit referred to in section 38 of the FBTAA.

Section 38 of the FBTAA refers to 'non-deductible exempt entertainment expenditure' that is incurred in respect of the provision of entertainment to employees, or their associates, in respect of the employment of the employees.

A tax-exempt body entertainment benefit is a benefit that meets the following conditions:

· it is provided in respect of employment

· it involves the provision of entertainment, and

· the employer incurs non-deductible exempt entertainment expenditure.

In respect of employment

Under subsection 136(1) of the FBTAA 'in respect of' in relation to an employee's employment includes "by reason of, by virtue of, or for or in relation directly or indirectly to, that employment".

The annual dinner is a work related event, as it is used to formally report on the years activities, and the employees who attend the dinner are provided with benefits (i.e. the food and drink) because of their employment relationship.

The benefits are provided in respect of the employment of the employees.

Provision of entertainment

Subsection 136(1) of the FBTAA defines 'entertainment' as having the same meaning given by section 32-10 of the Income Tax Assessment Act 1997 (ITAA 1997).

Subsection 32-10(1) of the ITAA 1997 defines entertainment as:

· entertainment by way of food, drink or recreation, or

· accommodation or travel to do with providing entertainment by way of food, drink or recreation.

Subsection 32-10(2) of the ITAA 1997 states that entertainment is provided even if business discussions occur.

In the note to section 32-10 of the ITAA 1997, business lunches and social functions are given as examples of entertainment.

Taxation Ruling TR 97/17 considers entertainment as it relates to the provision of food and drink for fringe benefits tax (FBT) and income tax purposes.

Paragraphs 18 to 20 of TR 97/17 explain that in most cases the mere provision of food and drink satisfies the 'entertainment' test. It is only in a narrow category of cases where the mere provision of food or drink does not amount to entertainment.

For example, the provision of morning and afternoon tea to employees on a working day and the provision of light meals such as finger food as a working lunch are not considered to be entertainment.

The provision of light meals can be contrasted with business lunches and drinks, dinners, cocktail parties and staff social functions. In these examples the provision of the food or drink confers entertainment on the recipient.

The annual dinner is more elaborate than a light meal. It is a function where a three course dinner and alcohol is provided. In those circumstances entertainment by way of food and drink is provided.

Non-deductible exempt entertainment expenditure

For entertainment expenditure to satisfy the definition of 'non-deductible exempt entertainment expenditure' in subsection 136(1) of the FBTAA, it must be expenditure that is:

· not incurred in respect of producing assessable income, and

· non-deductible entertainment expenditure

The ordinary and statutory income of entities covered by the tables in subdivision 50-A of the ITAA 1997 is exempt income under section 50-1 of the ITAA 1997.

The employer is covered by an item in one of the tables in subdivision 50-A of the ITAA 1997 which means that any income it derives is exempt income.

Under section 6-15 of the ITAA 1997 exempt income is not assessable income and, therefore, any expenditure incurred by the employer is not incurred in producing assessable income.

To satisfy the definition of 'non-deductible entertainment expenditure' in subsection 136(1) of the FBTAA the entertainment must be non-deductible for income tax purposes. For the purpose of determining whether the expenditure is deductible for income tax purposes, the tax-exempt body is treated as though it is a taxable entity.

Section 32-5 of the ITAA 1997 prevents entertainment expenditure from being allowed as an income tax deduction unless one of the exceptions in subdivision 32-B of the ITAA 1997 applies.

The exception in item 1.1 in the table in section 32-30 of the ITAA 1997 applies where an employer provides food or drink to its employees in an in-house dining facility. The exception does not apply if the food or drink is provided at a party, reception or other social function.

Section 32-55 of the ITAA 1997 defines 'in-house dining facility' as a canteen, dining room or similar facility that is:

o on the employers premises

o operated mainly for providing food and drink to employees, and

o not open to the public.

The annual dinner is held in a dining facility which restricts its patrons to employees of the employer, is wholly owned by the employer, is located on the employers land and is primarily used for providing food and drink to staff members.

Therefore the facility satisfies the definition of 'in-house dining facility' under section 32-55 of the ITAA 1997.

The purpose of the annual dinner is for the executive to report on the activities of the employer for the year, to appoint new staff and to honour those who will be moving on.

Although the food and drink provided at the dinner confers entertainment on the employees, the dinner is primarily held for business reasons. The dinner does not include music, dancing or other entertainment and the food and drink is not provided merely for the purpose of providing entertainment as would be the case at a Christmas party, birthday party, celebration or other social gathering.

As the dinner is not a party, reception or social function the expenditure incurred by the employer in providing the entertainment to its employees by way of food and drink would be deductible for income tax purposes because it is provided in an in-house dining facility.

Accordingly, the expenditure is not 'non-deductible exempt entertainment expenditure'.

Conclusion

The expenditure incurred by the employer in providing its employees with entertainment by way of food and drink at the annual dinner would be deductible for income tax purposes if the employer was a taxable entity.

Therefore, the entertainment does not give rise to tax exempt body entertainment benefits referred to in section 38 of the FBTAA.

Further issues for you to consider

The benefits that arise from the provision of food and drink that are not tax exempt body entertainment benefits are property benefits under section 40 of the FBTAA.

Consideration can be given to whether those benefits are:

· exempt property benefits under section 41 of the FBTAA, or

· exempt minor benefits under section 58P of the FBTAA.

Where property benefits are not exempt benefits, the recipient's contribution can be used to reduce the taxable value of the benefits.