Edited version of your private ruling

Authorisation Number: 1012425448980

Ruling

Subject: Fringe benefits tax - Entertainment facility leasing expenses

Question 1

Will the reimbursement by the employer of the cost of credits paid by the employees in respect of holiday resort accommodation be disregarded as being wholly or partly attributable to entertainment facility leasing expenses for the purposes of Step 1 in the method statement in subsection 5B(1L) of the FBTAA?

Answer

a) Yes, for credits when used or otherwise exchanged for a stay at the holiday resort accommodation.

b) No, for unused credits.

Question 2

Will the reimbursement by the employer of the cost of cleaning fees paid by the employees in respect holiday resort accommodation be disregarded as being wholly or partly attributable to entertainment facility leasing expenses for the purposes of Step 1 in the method statement in subsection 5B(1L) of the FBTAA?

Answer

Yes.

This ruling applies for the following period:

1 April 2013 to 30 March 2014

The scheme commences on:

1 April 2012

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 is an endorsed public benevolent institution (PBI).

The employer offers certain of its employee's valid salary sacrifice arrangements under the terms of which the employer will reimburse those employees for expenses incurred by the employees in respect of any or all of the following:

a) credits

b) cleaning fees

Credits

Participants who join the holiday resort club (club) entity become resort members.

Resort members purchase credits from the club at the date of joining.

Credits are used or otherwise exchanged by the resort members, through the club, usually for the temporary right to stay at the club's premises held by the club or its affiliates.

A resort member must maintain a minimum number of credits to remain within the club.

When credits are purchased their quantity is credited to the resort member's 'personal account' with the club.

When the resort member makes a reservation for holiday accommodation the number of credits needed for the particular reservation is automatically withdrawn from the resort member's personal account balance.

Each year, on the anniversary date, the full amount of credits originally purchased by the resort member is again made available.

Resort members have the right to use, rent, lend or will their credits (subject to certain restrictions).

Resort members may also sell or transfer their credits by private agreement (subject to certain restrictions).

Cleaning fees

A cleaning service is provided at the end of each stay at the club's holiday accommodation. Additional cleaning services are available on request and under certain other circumstances at extra cost to the resort member.

Resort members are entitled to one free cleaning service.

There is an entitlement to one additional free cleaning service for additional credits owned.

Relevant legislative provisions

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

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

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)

Income Tax Assessment Act 1997 subsection 995-1

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

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

Question 1

Will the reimbursement by the employer of the cost of credits paid by the employees in respect of holiday resort accommodation be disregarded as being wholly or partly attributable to entertainment facility leasing expenses for the purposes of Step 1 in the method statement in subsection 5B(1L) of the FBTAA?

Summary

The credits when used or otherwise exchanged for a stay at holiday resort accommodation held by the club, its affiliates or for similar holiday accommodation held by other organisations would be regarded as being wholly or partly attributable to entertainment facility leasing expenses.

Unused credits still held in the resort member's personal account would not be regarded as being wholly or partly attributable to entertainment facility leasing expenses.

Detailed reasoning

Section 57A exemption

1. Section 57A of the FBTAA provides that benefits provided by certain employers are generally exempt from fringe benefits tax (FBT).

2. Subsection 57A(1) of the FBTAA states:

57A(1) [Employer is public benevolent institution]

Where the employer of an employee is a public benevolent institution endorsed...a benefit provided in respect of the employment of the employee is an exempt benefit.

3. The employer is an endorsed PBI. Therefore, any benefits provided by the employer to its employees will fall for exemption under section 57A of the FBTAA.

4. However, subsection 5B(1E) of the FBTAA limits the extent of the above exemption to $30,000 grossed-up taxable value per employee. The value of any benefits provided in excess of this threshold, are liable for fringe benefits tax (FBT).

5. Nevertheless, the operation of Step 1 of the method statement contained in subsection 5B(1L) of the FBTAA specifically disregards certain benefits when calculating an employer's fringe benefits taxable amount. Step 1 of subsection 5B(1L) of the FBTAA states:

5B(1L) Working out the subsection (1L) amounts.

An employee's subsection (1L) amounts for the year of tax are worked out as follows.

Method statement

Step 1.

Work out for each employee his or her share (if any) of the amounts that, if section 57A did not apply, would be the taxable values of the excluded fringe benefits for the year of tax in respect of the employee's employment by the employer if those benefits were not excluded fringe benefits, but disregarding benefits:

(a) that constitute the provision of meal entertainment as defined in section 37AD (whether or not the employer made an election under section 37AA); or

(b) that are car parking fringe benefits; or

(c) whose taxable values are wholly or partly attributable to entertainment facility leasing expenses.

6. Consequently, under paragraph (c) of Step 1 of subsection 5B(1L) of the FBTAA, an employer to which section 57A of the FBTAA applies will not be liable for FBT in respect of benefits whose taxable values are wholly or partly attributable to entertainment facility leasing expenses (EFLEs) irrespective of whether or not the threshold amount for the employee receiving such benefits has otherwise been exceeded.

Entertainment facility leasing expenses

7. Subsection 136(1) of the FBTAA defines the term 'entertainment leasing expenses' as:

entertainment facility leasing expenses, for a person, means 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.

8. Therefore, several conditions must be satisfied before expenses incurred will fall within the definition of 'entertainment facility leasing expenses' for the purposes of subsection 136(1) of the FBTAA.

9. The basic requirements, as relevant here, to be satisfied for an EFLE are:

a. there is either 'hiring' or 'leasing' expenses incurred.

b. those hiring or leasing expenses are in respect of one, or more, of the premises or facilities listed in the EFLE definition.

c. these hiring or leasing expenses are for the purpose of the provision of entertainment.

d. any part of such hiring or leasing expenses that is attributable to the provision of food or drink is not included.

(a) hiring or leasing

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

11. 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.

12. Subsection 136(1) of the FBTAA defines 'leased' as:

means 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.

(b) premises or facilities

13. As the words 'premises' or 'facilities' are not defined in the FBTAA they have their natural meaning, taken in the context that they appear in the legislation.

14. The words 'premises' and 'facility are 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.

15. Taxation Laws Amendment (FBT Cost of Compliance) Bill 1995 introduced the subsection 136(1) of the FBTAA definition of 'entertainment facility leasing expenses' and also introduced section 152B of the FBTAA. The Explanatory Memorandum to that Bill describes the new arrangement as being:

...applied to leasing or hiring costs of corporate boxes and other similar hospitality arrangements...

16. It is considered that the use of the words 'other premises or facility' derives meaning ejusdem generis as having similar characteristics to a corporate box. Hiring or leasing of a corporate box would generally only involve the hiring or leasing of part of premises or a facility.

17. Therefore, although premises or facilities has a wide meaning, in the same way that a corporate box is part of larger premises or a facility (being the sporting stadium), items that satisfy this category of EFLE must be either:

· an entire premises or facility; or

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

(c) provision of entertainment

18. Subsection 136(1) of the FBTAA defines 'entertainment':

entertainment has the meaning given by section 32-10 of the Income Tax Assessment Act 1997 .

19. Subsection 32-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that '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.

20. Subsection 995-1(1) of the ITAA 1997 provides the meaning of 'recreation':

recreation includes amusement, sport or similar leisure-time pursuits.

21. The word 'entertainment', which is key to the operation of the relevant words, is defined in the Macquarie Dictionary to mean:

1. the act of entertaining; agreeable occupation for the mind; diversion, or amusement.

2. something affording diversion or amusement, especially an exhibition or performance of some kind.

3. hospitable provision for the wants of guests.

(d) food or drink

22. As the words 'food' or 'drink' are not defined in the FBTAA they have their natural meaning to be taken in the context that they appear in the legislation.

Application of EFLE requirements to credits

23. The basic requirements, as relevant here, to be satisfied for an EFLE are:

(a) there is either 'hiring' or 'leasing' expenses incurred.

(b) those hiring or leasing expenses are in respect of one, or more, of the premises or facilities listed in the EFLE definition.

(c) these hiring or leasing expenses are for the purpose of the provision of entertainment.

(d) any part of such hiring or leasing expenses that is attributable to the provision of food or drink is not included.

(a) hiring or leasing

24. When cedits are purchased their quantity is credited to the resort member's personal account and the number of credits needed for a particular reservation is automatically withdrawn.

25. Credits are usually used or otherwise exchanged for the temporary right to stay at the club's holiday resort accommodation or its affiliates.

26. Resort members have the right to use, rent, lend or will their credits (subject to certain restrictions). Resort nembers may also sell or transfer their credits by private agreement (subject to certain restrictions).

27. Although the credits are first credited at the time of initial joining the club or are re-credited to full balance the following year, there is no absolute guarantee at the time of acquisition by the resort member that all such credits will, in fact, be used or otherwise exchanged for temporary stays at the club's holiday resort accommodation, its affiliates or for temporary stays at similar accommodation held by other organisations.

28. It is considered that the terms 'hiring' or 'leasing' require a definite activity to have been undertaken towards gaining the use of the thing or services that is being hired or leased.

29. It is also considered, therefore, that the unused credits held in the resort member's personal account merely represent the potential for 'hiring' or 'leasing' and do not fall within the meaning of those aforementioned terms unless, and until, the credits are used or otherwise exchanged for a stay at the club's holiday resort accommodation, its affiliates or for similar holiday accommodation held by other organisations.

30. It is further considered that the above view is not necessarily altered by the probable intention of the resort members at the time of acquiring the credits that all such credits will ultimately be used or otherwise exchanged for a stay at the club's holiday resort accommodation , its affiliates or for similar holiday accommodation held by other organisations.

31. This requirement is met only when the credits are actually used or otherwise exchanged for a stay at the club's holiday resort accommodation, its affiliates or for similar holiday accommodation held by other organisations.

32. This requirement is not met for unused credits held in the resort member's personal account.

33. In addition, it is considered that the part of the initial cost in respect of an establishment fee (paid at the same time as the initial credits) also does not fall within either the dictionary meaning of 'hire' or the FBTAA definition of 'leased'.

(b) hiring or leasing of listed premises or facilities

34. it is considered that the holiday resort accommodation held by the club, its affiliates or similar holiday accommodation held by other organisations are separate or distinct areas within larger premises or facilities and, consequently, fall within the expression 'other premises or facilities' for the purposes of paragraph (c) of the definition of 'entertainment leasing expenses' in subsection 136(1) of the FBTAA.

35. Therefore, when the credits are used or otherwise exchanged for a stay at the club's holiday resort accommodation, its affiliates or for similar holiday accommodation held by other organisations this requirement is met.

(c) purpose of provision of entertainment

36. All of the club's holiday resort accommodation is located at recognised holiday destination sites.

37. The use of a hotel room, or similar accommodation, whilst on holidays is a leisure-time pursuit which is 'recreation' as defined in the ITAA 1997. This use of accommodation is something affording diversion or amusement and will be entertainment within the natural meaning. The use of the hotel room, or similar accommodation, whilst on holiday is entertainment by way of recreation under paragraph 32-10(1)(a) of the ITAA 1997.

38. Alternatively, a hotel room, or similar accommodation, occupied whilst on holidays is accommodation. Such accommodation can fall within 'entertainment' under paragraph 32-10(1)(b) of the ITAA 1997, being accommodation to do with providing entertainment by way of recreation.

39. Taxation Determination TD 94/55 states that in determining whether providing an item of property constitutes entertainment, regard should be had to all the circumstances of the case. In particular, regard should be given to the character of the entertainment to be derived from the item of property provided. Specifically, in Example 2 in TD 94/55, costs incurred in providing holiday accommodation are incurred in providing property that would constitute the provision of entertainment.

40. It is considered, therefore, that when the credits are used or otherwise exchanged for a stay at the club's holiday resort accommodation, its affiliates or for similar holiday accommodation held by other organisations such premises are being hired or leased for the purposes of the provision of 'entertainment' as that term is defined in subsection 136(1) of the FBTAA and subsection 32-10(1) of the ITAA 1997.

41. This requirement is met.

(d) not attributable to provision of food or drink

42. The acquisition or use of credits is not in respect of either food or drink so this requirement is met.

Conclusion on application of EFLE requirements to Credits

43. Credits when used or otherwise exchanged for a stay at the club's holiday resort accommodation, its affiliates or for similar holiday accommodation held by other organisations fulfil all the necessary requirements for being entertainment facility leasing expenses.

44. Unused credits held in the resort member's personal account do not meet all the necessary requirements for being entertainment facility leasing expenses.

45. In addition, it may noted, that the part of the initial cost in respect of an establishment fee would also not be entertainment facility leasing expenses as it considered that such establishment fees do not fall within either the dictionary meaning of 'hire' or the FBTAA definition of 'leased' and, therefore, one of the necessary requirements for being considered an EFLE is not met.

Are unused Credits 'partly attributable' to an EFLE?

46. Paragraph (c) of Step 1 of the Method Statement in subsection 5B(1L) of the FBTAA states that 'benefits whose taxable values are wholly or partly attributable to entertainment facility leasing expenses are to be disregarded' for the purposes of Step1.

47. Therefore, even though it has been determined above that unused credits still held in the resort member's personal account are not EFLEs, and consequently cannot be said to be 'wholly attributable' to an EFLE, it still needs to be examined whether such unused credits can be said to be 'partly attributable' to an EFLE.

48. It was determined above that credits when used or otherwise exchanged for a stay at the club's holiday resort accommodation or similar holiday accommodation held by other organisations would constitute an EFLE.

49. However, unused credits only represent the potential to be used or otherwise exchanged for a stay at the club's holiday resort accommodation or similar holiday accommodation held by other organisations.

50. It is considered that the existence of the future possibility that unused credits may, perhaps, be used or otherwise exchanged for a stay at the club's holiday resort accommodation has insufficient connection to be said to be 'partly attributable' to an EFLE. In a real sense, used or exchanged credits constituting an EFLE are mutually exclusive from unused credits held in the resort member's personal account.

Question 2

Will the reimbursement by the employer of the cost of cleaning fees paid by the employees in respect of holiday resort accommodation be disregarded as being wholly or partly attributable to entertainment facility leasing expenses for the purposes of Step 1 in the method statement in subsection 5B(1L) of the FBTAA?

Summary

The cost of cleaning fees for a stay at the club's holiday resort Accommodation, its affiliates or for similar holiday accommodation held by other organisations would be regarded as being partly attributable to entertainment facility leasing expenses.

Detailed reasoning

Application of EFLE requirements to cleaning fees

51. The basic requirements, as relevant here, to be satisfied for an EFLE are:

(a) there is either 'hiring' or 'leasing' expenses incurred.

(b) those hiring or leasing expenses are in respect of one, or more, of the premises or facilities listed in the EFLE definition.

(c) these hiring or leasing expenses are for the purpose of the provision of entertainment.

(d) any part of such hiring or leasing expenses that is attributable to the provision of food or drink is not included.

(a) hiring or leasing

52. The payment of cleaning fees are usually incurred by the resort member for cleaning services provided in respect of the club's holiday resort accommodation.

53. It is considered that the cleaning expenses incurred under such circumstances neither accord with the dictionary definition of 'hire' nor the FBTAA definition of 'leased'.

54. Therefore, this requirement is not met.

(b) hiring or leasing of listed premises or facilities

55. The cleaning expenses incurred are in relation to club's holiday resort accommodation which may, themselves, fall within the description of 'premises' or 'facilities.'

56. Nonetheless, the relevant expenditure has been determined above as not being either the 'hiring' or 'leasing' of any such 'premises' or 'facilities' and, therefore, this requirement is not met.

(c) purpose of provision of entertainment

57. The cleaning expenses incurred are not for the provision of entertainment so, therefore, this requirement is not met.

(d) not attributable to provision of food or drink

58. The cleaning expenses incurred are not in respect of either food or drink so this requirement is met.

Conclusion on application of EFLE requirements to cleaning fees

59. Expenses incurred in respect of the cleaning fees are not entertainment facility leasing expenses as not all of the necessary requirements have been met.

Are cleaning fees 'partly attributable' to an EFLE?

60. The payment of cleaning fees are only incurred by a resort member for cleaning services provided in respect of the club's holiday resort accommodation.

61. No cleaning fees are incurred by the resort member unless credits have been first used or otherwise exchanged for a stay at the club's holiday resort accommodation, its affiliates or for similar holiday accommodation held by other organisations.

62. Cleaning fees incurred for cleaning services provided under such circumstances are sufficiently related to those credits constituting EFLEs to be considered 'partly attributable' to an EFLE.