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Ruling

Subject: GST and Entertainment expenses

Question

Are you entitled to claim input tax credits for entertainment expenses?

Answer

Yes, you are entitled to claim input tax credits for entertainment expenses.

Relevant facts and circumstances

You are a government entity which is registered for GST.

You are basically self-funded.

You sell sponsorship packages to a range of entities for a sponsorship fee. GST is charged on the full value of the package.

The sponsorship package includes, among other things, food and drink.

The benefits received by each sponsor are outlined in the sponsorship agreement.

To date, you considered that you were not entitled to claim input tax credits for the GST applicable to the food and drink provided to sponsors as it was non-deductible entertainment expenses.

However, you now consider that you may be entitled to claim input tax credits for the food and drink provided to sponsors and have requested a GST private ruling to confirm your eligibility.

As a government entity you are exempt from income tax.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 11-5

A New Tax System (Goods and Services Tax) Act 1999 Section 11-20

A New Tax System (Goods and Services Tax) Act 1999 Division 69

A New Tax System (Goods and Services Tax) Act 1999 Subsection 69-5(1)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 69-5(3)(f)

A New Tax System (Goods and Services Tax) Act 1999 Division 149

A New Tax System (Goods and Services Tax) Act 1999 Section 184-1

Income Tax Assessment Act 1997 Division 8

Income Tax Assessment Act 1997 Division 32

Income Tax Assessment Act 1997 Subdivision 32-B

Income Tax Assessment Act 1997 Section 32-5

Income Tax Assessment Act 1997 Subsection 32-10(1)

Income Tax Assessment Act 1997 Subsection 32-10(2)

Income Tax Assessment Act 1997 Section 32-40

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

Summary

You are entitled to claim input tax credits for entertainment expenses incurred in the course of providing food and drink to sponsors as you carry on a business in the entertainment industry and the expenses are incurred in the ordinary course of your business.

As a result, the exclusion in section 32-40 of the Income Tax Assessment Act 1997 (ITAA 1997) applies and therefore, the expenses incurred in providing the food and drink to sponsors are not 'non-deductible' entertainment expenses. As such, the exclusion in Division 69 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) does not apply to deny an entitlement to an input tax credit.

Detailed reasoning

Section 11-20 of the GST Act provides that you are entitled to claim input tax credits for any creditable acquisition that you make.

The word 'you' used in the GST legislation applies to entities (individuals, companies, partnerships, etc) generally.

However, in some cases, a government entity will not meet the definition of 'entity' in section 184-1 of the GST Act but the special rules in Division 149 of the GST Act apply to enable government entities, that are technically not entities, to register for GST.

Once registered for GST, a government entity, like other GST registered entities, will be liable for GST on the taxable supplies that it makes and entitled to input tax credits for its creditable acquisitions.

In relation to creditable acquisitions, section 11-5 of the GST Act provides that you make a creditable acquisition if:

· you acquire anything solely or partly for a creditable purpose

· the supply of the thing to you is a taxable supply

· you provide, or are liable to provide, consideration for the supply, and

· you are registered or required to be registered for GST.

However, Division 69 of the GST Act provides that some acquisitions that are not deductible for income tax purposes under the ITAA 1997 are not creditable acquisitions.

In particular, subsection 69-5(1) of the GST Act provides that an acquisition is not a creditable acquisition to the extent that it is a 'non-deductible expense'. Of relevance to this case is paragraph 69-5(3)(f) of the GST Act which provides that entertainment expenses that are not deductible under Division 8 of the ITAA 1997 because of Division 32 of the ITAA 1997 (which deals with entertainment expenses), are non-deductible expenses.

It should be noted that Division 69 of the GST Act applies to an entity irrespective of the income tax status of that entity. This is because the words 'under Division 8 of the ITAA 1997' refers to the general deductibility provisions of the ITAA 1997 rather than the particular circumstances of an entity's case. In other words, an acquisition may still be a non-deductible expense notwithstanding that the entity making the acquisition may be exempt from Australian income tax.

In relation to entertainment expenses, section 32-5 of the ITAA 1997 specifically denies an income tax deduction to the extent that an entity incurs expenditure on entertainment unless that expenditure is related to any of the exceptions outlined in Subdivision 32-B of the ITAA 1997.

The term 'entertainment' is defined in subsection 32-10(1) of the ITAA 1997 to mean, among other things, entertainment by way of food, drink or recreation.

As well, subsection 32-10(2) of the ITAA 1997 provides that you are taken to provide entertainment even if business discussions or transactions occur at the same time.

Common examples of entertainment are business lunches and social functions.

In determining whether food or drink expenses are entertainment it is necessary to consider all of the facts and circumstances surrounding the provision of the food or drink.

In respect to food and drink, paragraphs 23(a) to (d) of Taxation Ruling TR 97/17 sets out the factors to consider when determining if food and drink expenses are entertainment. Although TR 97/17 relates to employees, the principles it contains can be used to establish whether the provision of food and drink comprises entertainment.

The factors set out in TR 97/17 relate to 'why', 'what', 'when' and 'where' the food or drink is being provided. As stated in paragraph 24 of TR 97/17 the most important factors are 'why' the food or drink is being provided and 'what' food or drink is being provided. That is, food or drink provided in a social situation where the purpose of the function is for employees/clients to enjoy themselves, has the character of entertainment and the more elaborate the food or drink being provided the more it will take on the characteristics of entertainment.

From the information provided, you provide to sponsors, as part of the sponsorship package, food and drink.

Therefore, the food and drink provided constitutes entertainment as defined in the ITAA 1997.

Therefore, the expenses are entertainment expenses which Division 32 of the ITAA 1997 specifically prohibits from being deductible under Division 8 of the ITAA 1997.

However, Subdivision 32-B of the ITAA 1997 provides exceptions to the rule in section 32-5 of the ITAA 1997 that entertainment expenses are not deductible. The main exception relates to the provision of fringe benefits.

The other exceptions are outlined in the tables in Subdivision 32-B of the ITAA 1997. Of relevance to the food and drink being provided to sponsors is section 32-40 of the ITAA 1997 which relates to entertainment industry expenses.

In particular, item 3.1 of the table in section 32-40 of the ITAA 1997 states:

Section 32-5 does not stop you deducting a loss or outgoing for …

providing *entertainment for payment in the ordinary course of a *business that you carry on.

(An asterisk denotes a defined term in subsection 995-1(1) of the ITAA 1997)

The term 'business' is broadly defined in subsection 995-1(1) of the ITAA 1997 as including:

any profession, trade, employment, vocation or calling but does not include occupation as an employee.

The question of whether a business is being carried on is a question of fact and degree having regard to all of the circumstances of the case. In addition, guidance on the business indicators which the courts have held are relevant in determining if a business is being carried on, are set out in Taxation Ruling TR 97/11 at paragraph 13.

However, some government entities are not carrying on a business but rather simply carrying out the functions of a Government for which it receives government appropriations. This is why the special rules in Division 149 of the GST Act were enacted so that government entities that are technically not entities or not carrying on a business can still register for GST.

In this case, you are a government entity. In addition, we have been advised that you are basically self-funded.

Therefore, you are carrying on a business but to satisfy the requirements of section 32-40 of the ITAA 1997 the relevant loss or outgoing (entertainment expenses incurred) must be for providing 'entertainment for payment' and that this 'entertainment for payment' must be 'in the ordinary course of a business' being carried on.

Therefore, you are providing 'entertainment for payment'.

In relation to the requirement that the 'entertainment for payment' must be provided 'in the ordinary course of a business' being carried on, we have already determined that you are carrying on a business. However, as indicated in the heading to the provision, the exception in section 32-40 of the ITAA 1997 is directed to those entities that are carrying on a business in the entertainment industry.

You are carrying on a business in the entertainment industry.

Accordingly, the exclusion in section 32-40 of the ITAA 1997 applies and as a result, your expenditure is not 'non-deductible' entertainment expenses under section 32-5 of the ITAA 1997. Thus, the exclusion in Division 69 of the GST Act does not apply.

Consequently, you are entitled to claim input tax credits for entertainment expenses.