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Ruling

Subject: Fringe benefits tax - entertainment facility leasing expenses

Question 1

Are the expenses incurred by an employee under an effective salary sacrifice arrangement for the cost of a cruise on a cruise ship attributable to entertainment facility leasing expenses and therefore disregarded for the purposes of subsection 5B(1L) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes.

This ruling applies for the following periods:

01 April 2011 - 31 March 2012.

The scheme commences on:

01 April 2011.

Relevant facts and circumstances

The Taxpayer is an endorsed Public Benevolent Institution (PBI).

The Taxpayer will reimburse an employee of the Taxpayer for the expenses incurred in paying for a holiday.

The Taxpayer has stated that the employee will enter into a effective salary sacrifice arrangement for the hiring of a cabin for the purposes of a holiday.

Under the terms of the salary sacrifice arrangement the Taxpayer will reimburse the employee for the amount paid by the employee for a cruise undertaken by the employee and the employee's immediate family.

The amount paid for the holiday was an all inclusive price that included:

· the exclusive use of a cabin by the employee and family members

· the use of swimming pools and spas;

· entertainment;

· food and drink at buffets and restaurants; and

· use of the library and general recreation areas.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 38

Fringe Benefits Tax Assessment Act 1986 Section 57A,

Fringe Benefits Tax Assessment Act 1986 Subsection 57A(1)

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1),

Fringe Benefits Tax Assessment Act 1986 Subsection 136(2)

Fringe Benefits Tax Assessment Act 1986 Subsection 5B(1E),

Fringe Benefits Tax Assessment Act 1986 Subsection 5B(1K),

Fringe Benefits Tax Assessment Act 1986 Subsection 5B(1L),

Fringe Benefits Tax Assessment Act 1986 Subsection 5B(1D),

Income Tax Assessment Act 1997 Section 32-20, and

Income Tax Assessment Act 1997 Section 32-30.

Reasons for decision

Question 1

Are the expenses incurred by an employee under a effective salary sacrifice arrangement for the cost of a cruise on a cruise ship attributable to entertainment facility leasing expenses and therefore disregarded for the purposes of subsection 5B(1L) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Summary

Section 57A of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) provides that certain employers are generally exempt from fringe benefits tax (FBT). Subsection 5B(1D) of the FBTAA provides that for public benevolent institutions (PBIs), the employers fringe benefits taxable amount will include the employers aggregate non-exempt amount.

The method for determining the value of the benefits is detailed in subsections 5B(1K) and 5B(1L) of the FBTAA. Subsections 5B(1K) and 5B(1L) of the FBTAA provide that the calculation of the value of the benefits provided to each individual employee will include the value of all but three of the benefits that would have been fringe benefits if the employer had not been a PBI.

Under subsection 5B(1L) of the FBTAA the value of excluded benefits is included in the value of the benefits provided to employees except for:

· benefits that constitute the provision of meal entertainment

· car parking fringe benefits, and

· benefits whose taxable values are wholly or partly attributable to entertainment facility leasing expenses.

For at least part of the reimbursement to come within this definition, it is necessary for at least part of the reimbursement to be of:

· expenses incurred in hiring or leasing

· a premise or facility that comes within paragraphs (a) to (c) of the 'entertainment facility leasing expenses' definition; but

· does not come within paragraphs (d) and (e) of the 'entertainment facility leasing expenses' definition.

In considering these three conditions, it is accepted that the part of the reimbursement that is attributable to the cabin is an expense:

· incurred in hiring or leasing;

· a premise or facility that comes within paragraph (c) of the 'entertainment facility leasing expenses' definition; and

· does not come within paragraphs (d) or (e) of the 'entertainment facility leasing expenses' definition.

Therefore, as all three conditions are met, the part of the expenditure that is attributable to the cabin will be 'entertainment facility leasing expenses'.

As part of the reimbursement is attributable to 'entertainment facility leasing expenses' the Taxpayer will not be liable to pay fringe benefits tax on the reimbursement of the cost of the all-inclusive cruise.

Detailed reasoning

Under the arrangement, the Taxpayer will reimburse an employee for the amount paid by the employee for an all-inclusive cruise.

As the Taxpayer is exempt from income tax and the cruise will constitute the provision of entertainment for which the Taxpayer would not be able to claim an income tax deduction for expenditure (if the taxpayer had been liable to pay income tax and section 32-20 of the Income Tax Assessment Act 1997 (ITAA 1997) had not been enacted), the reimbursement will be a tax-exempt body entertainment benefit.

Generally an employer that provides a tax-exempt body entertainment benefit to an employee will be liable to pay fringe benefits tax on the provision of the benefit. However, section 57A of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) provides that certain employers may not be liable to pay fringe benefits tax on the provision of a tax-exempt body entertainment benefit to an employee.

As the Taxpayer is a public benevolent institution, the relevant subsection of section 57A is subsection 57A(1) which states:

Where the employer of the employee is a public benevolent institution endorsed under subsection 123C(1) or (5), a benefit provided in respect of the employment of the employee is an exempt benefit.

In applying this definition, the tax-exempt body entertainment benefit will be an exempt benefit under subsection 57A(1) of the FBTAA as:

· the Taxpayer is a public benevolent institution that has been endorsed

· the benefit is considered to be provided in respect of the employment of the employee as it is provided under the terms of a salary sacrifice agreement.

Generally, an employer will not be liable to pay fringe benefits tax on the provision an exempt benefit. However, subsection 5B(1D) of the FBTAA provides that for PBIs, 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 subsection 5B(1E) of the FBTAA. It provides that PBIs will only be liable to pay fringe benefits tax on the amount by which the grossed-up value of the benefits provided to an individual employee exceeds $30,000.

The method for determining the value of the benefits is detailed in subsections 5B(1K) and 5B(1L) of the FBTAA. Subsections 5B(1K) and 5B(1L) of the FBTAA provide that the calculation of the value of the benefits provided to each individual employee will include the value of all but three of the benefits that would have been fringe benefits if the employer had not been a PBI.

Under subsection 5B(1L) of the FBTAA the value of excluded benefits is included in the value of the benefits provided to employees except for:

· benefits that constitute the provision of meal entertainment

· car parking fringe benefits, and

· benefits whose taxable values are wholly or partly attributable to entertainment facility leasing expenses.

Under subsection 5B(1L) of the FBTAA, the calculation will not include tax-exempt body entertainment benefits:

· that constitute the provision of meal entertainment; or

· whose taxable values are wholly or partly attributable to entertainment facility leasing expenses.

Therefore, as the Taxpayer is a public benevolent institution they will not be liable to pay fringe benefits tax on the reimbursement of the cost of the cruise if the reimbursement comes within either of these two categories. For the purpose of this ruling the relevant exclusion to consider is the exclusion that applies where the taxable value of the tax-exempt body entertainment benefit is wholly or partly attributable to entertainment facility leasing expenses.

For this exclusion to apply in relation to the reimbursement it is necessary for at least part of the reimbursement to be attributable to entertainment facility leasing expenses.

What is an entertainment facility leasing expense?

Subsection 136(1) of the FBTAA defines 'entertainment facility leasing expenses' to mean:

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 at least part of the reimbursement to come within this definition, it is necessary for at least part of the reimbursement to be of:

· expenses incurred in hiring or leasing;

· a premise or facility that comes within paragraphs (a) to (c); but

· it will not include an expense that comes within paragraphs (d) and (e).

Did the reimbursement include a hire or lease?

The word 'hiring' is not defined in the FBTAA. Therefore, it has its natural meaning, taken in the context in which it appears in the legislation.

The Macquarie Dictionary (Multimedia version 5.0.0) defines 'hire' as:

verb (t) (hired, hiring)

1.   to engage the services of for payment: to hire a clerk.

2.   to engage the temporary use of for payment: to hire a car.

3. Also, hire out.

to grant the temporary use of, or the services of, for a payment.

Subsection 136(1) of the FBTAA defines 'leased' to mean:

… let on hire (including a letting on hire that is described in the relevant agreement as a lease) under an agreement other than a hire-purchase agreement.

The expenditure that is being reimbursed includes a payment to obtain the exclusive use of a cabin for the period of the cruise. This is in accordance with the dictionary definition of 'hire' and with the FBTAA definition of 'leased'.

In these circumstances, it is accepted that the portion of the expenditure incurred by the employee in relation to the cabin satisfies the 'hiring or leasing' condition in the definition of 'entertainment facility leasing expenses'.

Does the cabin come within paragraphs (a) to (c) of the 'entertainment facility leasing expenses' definition?

Paragraph (a) applies to the hire or lease of a corporate box. As the cabin is not a corporate box, this paragraph will not apply.

Neither will paragraph (b) which requires the hire or lease of a boat or plane in its entirety for the purpose of the provision of entertainment.

Therefore, it is necessary to consider the application of paragraph (c) which applies to the hire or lease of other premises, or facilities for the purpose of the provision of entertainment.

The word 'premises' is not defined in the FBTAA. However, subsection 136(2) provides that for the purposes of the 'business premises' definition in subsection 136(1), 'premises includes a ship, vessel, floating structure, aircraft or train.'

The word 'premise' is defined in the Macquarie Dictionary to mean:

   premise

    noun

   2. (plural)

   the property forming the subject of a conveyance.

   a tract of land.

   a house or building with the grounds, etc., belonging to it.

   facility

    noun (plural facilities)

   9. a building or complex of buildings, designed for a specific purpose, as for the holding of sporting contests.

Similarly, the word 'facility' is not defined in the FBTAA, but it is used in conjunction with other definitions in the FBTAA such as:

· 'child care facility' which is defined in subsection 136(1) of the FBTAA to mean 'a facility....for the purpose of minding, caring for or educating....'; and

· 'in-house health care facility' which is defined in subsection 136(1) of the FBTAA to mean '....a clinic, surgery, first-aid station or similar facility...on premises of the employer....'

The word 'facility' is also used in the ITAA 1997 including instances where a facility is used for recreation purposes. For example:

· A 'facility' used for recreation on the employer's property and operated for employees is described in section 32-30 Item 1.5 of the ITAA 1997. A facility used for recreation in section 32-30 would include a drink vending machine or a pool table in a staff dining room. By exclusion, section 32-30 also is indicative that a facility can be for accommodation.

· A 'leisure facility' as defined in subsection 26-50(2) of the ITAA 1997 is 'land, a building, or part of a building or other structure, that is used (or held for use) for holidays or recreation. Examples of buildings or other structures which fall within the definition of 'leisure facility' would be ski-lodges, fishing shacks, holiday cottages, swimming pools and amenity buildings used in connection with tennis, bowling, golfing or swimming.

The word 'facility' is defined in the Macquarie Dictionary (Multimedia version 5.0.0) to mean:

 facility

 noun (plural facilities)

 1. something that makes possible the easier performance of any action; advantage: transport facilities; to afford someone every facility for doing something .

 9. a building or complex of buildings, designed for a specific purpose, as for the holding of sporting contests.

The word 'facility' is also defined in the Butterworths Encyclopaedic Australian Legal Dictionary , (Online Edition), LexisNexis Australia:

 Facility

 A building or appliance, designed for a specific purpose, which has the effect of making possible the easier performance of an action

The word facility, as described in each dictionary definition above, and as used in the income tax and fringe benefits tax definitions above is of wide meaning. It is accepted that the term 'facility' as it is used in the definition of 'entertainment facility leasing expenses' also has a wide meaning that includes buildings, part of buildings or other structures that is used for the purpose of the provision of entertainment. In the same way that a corporate box is a part of larger premises or a facility (being the sporting stadium), items that satisfy this category of entertainment facility leasing expense must be either:

· an entire premises or facility; or

· a distinct area or separate room of larger premises or a facility.

In the situation being considered the employee has hired a cabin on a cruise ship. Although the cabin is not the entire boat, it can be accepted as being a premise or facility that comes within paragraph (c) of the 'entertainment facility leasing expenses' definition as it is a separate room of a facility.

Therefore, it is accepted that the cabin comes within paragraph (c) of the 'entertainment facility leasing expenses' definition.

Does the reimbursement come within paragraphs (d) or (e) of the 'entertainment facility leasing expenses' definition?

As set out above, expenditure that is attributable to either the provision of food or drink, or to advertising which is an allowable deduction will not be 'entertainment facility leasing expenses'.

Although part of the expenditure can be said to be attributable to the food and drink provided on board the cruise the part of the expenditure that is attributable to the hire or lease of the cabin is not attributable to food, drink or advertising.

Therefore, the part of the expenditure that is attributable to the cabin will come within the 'entertainment facility leasing expenses' definition.

Conclusion

As part of the reimbursement is attributable to 'entertainment facility leasing expenses' the Taxpayer will not be liable to pay fringe benefits tax on the reimbursement of the cost of the all-inclusive cruise.

Further issues for you to consider

N/A.

ATO view documents

Fringe benefits tax - a guide for employers.

Other references (non ATO view, such as court cases)

The Macquarie Dictionary, Multimedia version 5.0.0.

Does Part IVA, or any other anti-avoidance provision, apply to this ruling?

N/A.

Other relevant comments

N/A.