Edited version of your private ruling

Authorisation Number: 1012434860056

Ruling

Subject: Fringe benefits - use of a leisure facility

Question 1

Will a fringe benefit arise from the discounted fee charged to an employee for the use of the leisure facilities?

Answer

No

Question 2

Will a fringe benefit arise if you pay the employee's on-going fees under a valid salary sacrifice arrangement?

Answer

Yes

This ruling applies for the following periods:

Year ended 31 March 2013

Year ended 31 March 2014

Year ended 31 March 2015

Year ended 31 March 2016

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.

You own a leisure facility which is managed on your behalf by the Contractor.

For the operation of leisure facilities you contribute an agreed sum.

For accessing the facilities the contractor charges a range of fees which vary according to the level of service provided.

Membership fees are currently paid from after-tax salary either:

· by way of a payroll deduction from the after tax salary paid to the employee which you forward to the leisure facility; or

· the employee will pay the membership fees directly to the leisure facility.

You are considering a proposal which will enable an employee to enter into a salary sacrifice arrangement for the payment of the membership fees.

Under the proposed arrangement you will reduce the employee's fortnightly salary payment by the amount that you will pay to the leisure centre for the employee's membership.

To participate in the arrangement:

(a) the employee will complete the Membership Application Form at the relevant leisure facility;

(b) on that form the employee:

· elects the type of membership; and

· authorises the direct debit of the applicable fees and charges from the salary sacrifice account;

(c) the leisure facility forwards the signed form to you for the salary deduction to commence;

Once you receive the form you will deduct the relevant amount from the employee's pre-tax salary and remit the amount monthly to the relevant leisure facility.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 38

Fringe Benefits Tax Assessment Act 1986 Section 45

Fringe Benefits Tax Assessment Act 1986 Subsection 47(2)

Fringe Benefits Tax Assessment Act 1986 Subsection 58P(1)

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Income Tax Assessment Act 1997 Section 32-10

Income Tax Assessment Act 1997 Section 32-40

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

Reasons for decision

Question 1

Will a fringe benefit arise from either:

(a) the discounted fee charged for the use of the leisure facilities; or

(b) the payment of the fees under a salary sacrifice arrangement?

Under the arrangement an employee will apply to become a member of one of the leisure centres that you own and may be required to pay a joining fee.

On becoming a member, the employee will be liable to pay on-going fees. The amount of these fees will be less than the amount that would be paid by a member of the public.

In previous years, the employee either paid the membership fees directly to the leisure centre, or arranged for you to deduct the fees from the employee's after tax salary and forward the amount to the leisure centre. Under the proposed arrangement, an employee will be able to enter into a salary sacrifice arrangement in relation to the payment of the on-going fees.

In general terms, the definition of 'fringe benefit' in subsection 136(1) of the Fringe benefits Tax Assessment Act 1986 (FBTAA) provides that a fringe benefit will arise from the arrangement if:

1. a benefit is provided to the employee;

2. by the employer, an associate of the employer or another person in circumstances that come within paragraph (e) or (ea) of the fringe benefit definition;

3. the benefit is provided in respect of the employee's employment; and

4. the benefit is not one of the benefits excluded from being a fringe benefit by virtue of paragraphs (f) to (s) of the fringe benefit definition.

Each of these conditions is considered below:

1. Will a benefit be provided to the employee?

The definition of 'benefit' in subsection 136(1) of the FBTAA provides that 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.

Under the arrangement there are three benefits that come within this definition; namely:

(i) the waiving of the joining fee;

(ii) the discounted on-going fees; and

(iii) the payment of the on-going fees under the terms of a salary sacrifice arrangement.

On the basis of the questions asked in your ruling application, this ruling will only consider whether a fringe benefit arises from the discounted on-going fees and the payment of the on-going fees. It will not consider whether the benefit that arises from the waiving of the joining fee is a fringe benefit. However, it is noted that depending upon the circumstances in which the joining fee is waived, it may be an exempt minor benefit under section 58P of the FBTAA.

2. Who provides the benefits?

The discounted on-going fees

Although limited information has been provided, the fees charged to the employees will either be determined by you, or under an agreement with the leisure centre operators. Therefore, the reduced fees will either be provided by the employer or the leisure centre operator under an arrangement with the employer that comes within paragraph (e) of the fringe benefit definition.

The payment of the on-going fees under a salary sacrifice arrangement

If you pay the ongoing fees under a salary sacrifice arrangement the benefit (the payment of the fees) will be provided by the employer.

3. Is the benefit provided in respect of the employee's employment?

The term 'in respect of' is defined in subsection 136(1) to include 'by reason of, by virtue of, or for or in relation directly or indirectly to, that employment'.

Both of the benefits being considered in this ruling come within this definition as the employee's employment is the reason for the discounted on-going fees and the payment of the fees under a salary sacrifice arrangement.

4. Is the benefit one of the benefits excluded from being a fringe benefit by virtue of paragraphs (f) to (s) of the fringe benefit definition?

For the purposes of this ruling, the relevant paragraph is paragraph (g) of the fringe benefit definition which provides that a benefit that is an exempt benefit will not be a fringe benefit.

Various benefits are listed in the FBTAA as being exempt benefits. For the purposes of this ruling the exempt benefits are:

· the exemption contained in subsection 47(2) of the FBTAA for a residual benefit that consists of the use of a recreational facility located on the business premises of the employer; and

· the exemption contained in section 58P of the FBTAA for minor benefits.

Is the benefit an exempt benefit under subsection 47(2) of the FBTAA?

The discounted on-going fees

Subsection 47(2) of the FBTAA states:

Where:

(a) a residual benefit provided to a current employee in respect of his or her employment consists of:

(i) the provision, or use, of a recreational facility; or

(ii) the care of children of the employee in a child care facility; and

(b) the recreational facility or child care facility, as the case may be, is located on business premises of:

(i) the employer; or

(ii) if the employer is a company, of the employer or of a company that is related to the employer;

the benefit is an exempt benefit.

Therefore, the benefit that arises from the discounted on-going fees will be an exempt benefit if the following conditions are met:

· the benefit is a residual benefit;

· the benefit consists of the use of a recreational facility;

· the recreational facility is located on the business premises of the employer (or a company that is related to the employer).

These requirements are considered below:

Is the benefit a residual benefit?

Section 45 of the FBTAA provides that a benefit will be a residual benefit if it does not come within one of the specific benefit categories contained within the FBTAA.

The benefit categories that are relevant for the purposes of this ruling are:

· expense payment benefits as defined in section 20 of the FBTAA; and

· tax-exempt body entertainment benefits as defined in section 38 of the FBTAA.

Section 20 of the FBTAA states:

Where a person (in this section referred to as the ``provider''):

(a) makes a payment in discharge, in whole or in part, of an obligation of another person (in this section referred to as the ``recipient'') to pay an amount to a third person in respect of expenditure incurred by the recipient; or

(b) reimburses another person (in this section also referred to as the ``recipient''), in whole or in part, in respect of an amount of expenditure incurred by the recipient;

the making of the payment referred to in paragraph (a), or the reimbursement referred to in paragraph (b), shall be taken to constitute the provision of a benefit by the provider to the recipient.

This section will not apply to the discounted fees as the discount does not involve a payment or reimbursement.

Section 38 of the FBTAA states:

Where, at a particular time, a person (in this section referred to as the "provider") incurs non-deductible exempt entertainment expenditure that is wholly or partly in respect of the provision, in respect of the employment of an employee, of entertainment to a person (in this section referred to as the "recipient") being the employee or an associate of the employee, the incurring of the expenditure shall be taken to constitute a benefit provided by the provider to the recipient at that time in respect of that employment.

As the discount does not involve the incurring of expenditure, this section will not apply.

Therefore, as neither section 20 or 38 applies, the benefit is a residual benefit under section 45 of the FBTAA.

Does the benefit consist of the use of a recreational facility?

The underlying benefit that arises from the discount is the use of the leisure centres for a fee that is less than the fee that would be charged to a member of the public for the use of the centre. Therefore, the benefit consists of the use of the centre.

'Recreational facility' is defined in subsection 136(1) of the FBTAA to mean:

a facility for recreation, but does not include a facility for accommodation or a facility for drinking or dining

'Recreation' is defined in subsection 136(1) of the FBTAA to include:

(a) amusement;

(b) sport or similar leisure-time pursuits; and

(c) recreation or amusement provided on, or by means of, a vehicle, ship, vessel or aircraft.

The purpose of the facility is to provide high quality social, recreational, sporting and health/fitness opportunities. By doing this the facility is used for recreation and is a recreational facility.

Therefore, the benefit consists of the use of a recreational facility.

Is the recreational facility located on the business premises of the employer (or a company that is related to the employer)?

'Business premises' is defined in subsection 136(1) of the FBTAA to mean:

… premises, or a part of premises, of the person used, in whole or in part, for the purposes of business operations of the person, but does not include:

(a) premises, or a part of premises, used as a place of residence of an employee of the person or an employee of an associate of the person; or

(b) a corporate box; or

(c) boats or planes used primarily for the purpose of providing entertainment unless the boat or plane is used in the person's business of providing entertainment; or

(d) other premises used primarily for the purpose of providing entertainment unless the premises are used in the person's business of providing entertainment.

Guidance as the application of this definition is provided in Taxation Ruling TR 2000/4 Fringe benefits tax: meaning of 'business premises'. Paragraph 4 of TR 2000/4 states:

… unless any of the specific exclusions apply, premises are only 'business premises' in relation to a person if two requirements are met. The first requirement is that the premises or part of premises are 'of' the person. Secondly, the premises or part of premises must be used by the person, in whole or in part, for the purposes of their business operations.

Paragraphs 6 to 8 of TR 2000/4 discuss the requirement for the premises to be premises of the person. They state:

6. The first requirement necessitates an interpretation of the words 'premises, or a part of premises, of the person' found in the definition.

7. If a person has ownership of premises, or has exclusive occupancy rights as lessee of premises, the premises would ordinarily be described as premises of the person.

8. In other circumstances, for example, where a person has non-exclusive possession of premises, the person satisfies this requirement if they have a right to possession of the premises, at least to the extent necessary to enable the conduct thereon of their business operations.

This requirement is met in relation to the facility as you own the facility. The occupancy rights that arise from this ownership are not diluted by the Management Contract with the operator of the facility.

The meaning of business operations is discussed in paragraph 9 of TR 2000/4 which states:

The term 'business operations' in the definition of 'business premises' includes a wide range of activities. The activities include those undertaken by a person in the ordinary course of carrying on a business. They also include those activities that, although not undertaken in the ordinary course of carrying on a business, are nevertheless undertaken in the course of carrying on a business. Profit making activities that fall short of being a business are also included in 'business operations' if they have a business or commercial character.

In the context of a government body or non profit company the definition of 'business operations' in subsection 136(1) of the FBTAA provides that 'business operations':

… includes any operations or activities carried out by that body or company

In applying this definition, it is accepted that the provision of recreational facilities is an activity that you undertake. However, for the facility to be considered to be your business premises it is necessary for both requirements to be jointly considered. In this regard, paragraphs 11 to 13 of TR 2000/4 state:

11. Given that each case turns on its own facts, there is no absolute or conclusive test of whether particular premises are 'business premises' of a person. However, in order to determine whether premises are 'business premises', i.e., they satisfy the respective requirements of 'premises of the person ( the employer )' and 'used ... for the purposes of business operations of the person ( the employer )', an objective analysis of all the circumstances is necessary.

12. In making this analysis, an employer should carefully weigh all relevant matters, including the following factors that are especially relevant to determining whether each of the two requirements has been met:

(a) the control the employer has over the premises; and

(b) the consistency of an employer's actions and activities on the premises with those of normal business practices.

Importantly, each factor should be considered in relation to each of the two requirements. Further, the factors must be considered in combination and as a whole, together with all other relevant matters.

13. Having regard to the above, where a person is carrying on 'business operations' on premises, the premises are their 'business premises' where in form and substance the person bears the rights and risks of possession of the premises associated with the conduct of the 'business operations'.

Although you have entered into a Management Contract for the management of the facility you have retained control of the facility as:

· the operator of the facility is required to provide the specified services;

· if the operator fails to provide the specified services you can require the operator to remedy the default;

· you are required to approve the fees and charges that apply in relation to the facility; and

· you plan and finance capital works at the facility.

As these requirements are consistent with the requirements that can be expected to apply where the owner of a leisure facility contracts with a contractor to operate the leisure facility on behalf of the owner, it is accepted that the leisure facility are your business premises.

Conclusion

As all of the requirements are met, the benefit that arises from the discounted fees paid for the use of the leisure facility by an employee will be an exempt benefit under subsection 47(2) of the FBTAA.

The payment of the on-going fees under a salary sacrifice arrangement

The second benefit that arises when you pay the on-going fees that have been incurred by the employee can be distinguished from the initial discount as in paying the fees you incur expenditure. Therefore, the benefit will be a tax-exempt body entertainment benefit if the expenditure is non-deductible exempt entertainment expenditure.

'Non-deductible exempt entertainment expenditure' is defined in subsection 136(1) of the FBTAA to mean:

… non-deductible entertainment expenditure to the extent to which it is not incurred in producing assessable income

'Non-deductible entertainment expenditure' is also defined in subsection 136(1) of the FBTAA to mean:

… a loss or outgoing to the extent to which:

(a) section 32-5 of the Income Tax Assessment Act 1997 applies to it, or would apply if it were incurred in producing assessable income; and

(b) apart from that section, it would be deductible under section 8-1 of that Act, or would be if it were incurred in producing assessable income;

(on the assumption that section 32-20 of the Income Tax Assessment Act 1997 had not been enacted).

Therefore, as you are not subject to income tax the expenditure incurred in paying the on-going fees for the employee will be a tax-exempt body entertainment fringe benefit if section 32-5 of the Income Tax Assessment Act 1997 (ITAA 1997) would have prevented you from claiming an income tax deduction if you had been liable for income tax.

In general terms, section 32-5 of the Income Tax Assessment Act 1997 (ITAA 1997) prevents an income tax deduction being claimed for the provision of entertainment under section 8-1 of the ITAA 1997 unless the expenditure is a type of expenditure listed in the tables in sections 32-30 to 32-50 of the ITAA 1997.

Entertainment as defined in subsection 136(1) of the FBTAA and by extension section 32-10 of the ITAA 1997 includes in its meaning, entertainment by way of recreation. The term recreation is further defined in subsection 995-1 of the ITAA 1997 to include amusement, sport or similar leisure-time pursuits.

The on-going fees paid for the entitlement to use the leisure facility come within the definition of entertainment. Therefore, unless the payment of the on-going fees comes within one of the items in sections 32-30 to 32-50 of the ITAA 1997, the payment of the on-going fees will be a tax-exempt body entertainment benefit.

In considering whether the payment comes within one of the items in sections 32-30 to 32-50 of the ITAA 1997 the relevant items to consider are:

· item 1.5 in section 32-30 which enables an income tax deduction to be claimed for providing a facility for recreation on property you occupy if the listed conditions are met; and

· item 3.1 of section 32-40 which enables an income tax deduction to be claimed for providing entertainment for payment in the ordinary course of a business that you carry on.

Does item 1.5 in section 32-30 of the ITAA 1997 apply to the payment of the on-going fees incurred by the employee?

For the exception in item 1.5 to apply the following conditions must be satisfied:

· the facility must be mainly operated for your employees to use; and

· the facility must not be for accommodation or dining or drinking (unless it is a food or drink vending machine)

The meaning of 'mainly' is not defined in the ITAA 1997 or the FBTAA. However, at page 52 in the ATO publication Income tax guide for non-profit organisations 'principally' is stated to mean 'mainly or chiefly' and that 'less than 50% is not principally'. Therefore, under such guidance, the facility will be mainly operated for employees to use if at least 50% of the people using the facility are employees.

Although you have not provided details of the proportion of members who are employees, the fact that the facility is provided for the use of all the residents of your council area and visitors indicates it is mainly used by non employees. Therefore, the exception in item 1.5 of section 32-30 of the ITAA 1997 does not apply to your circumstances.

Does item 3.1 in section 32-40 of the ITAA 1997 apply to the payment of the on-going fees incurred by the employee?

Although some of your expenditure relating to the leisure facility may come within this item, the payment of the employee's on-going fees will not as you do not pay membership fees as part of the business of operating a leisure facility. Rather, it is just something you will do for your employees who generally will not be involved in the operation of the leisure facility.

Therefore, as the payment of the membership fees does not occur in the ordinary course of operating the leisure facility item 3.1 of section 32-40 will not apply to the expenditure.

As the exceptions listed in the items in sections 32-30 to 32-50 do not apply to the expenditure, the payment of the on-going fees under a salary sacrifice arrangement will give rise to a tax-exempt body entertainment benefit.

Is the benefit an exempt benefit under section 58P of the FBTAA?

If the value of a benefit is less than $300 the benefit may be an exempt benefit under section 58P if the specified conditions are met. These conditions include:

· a requirement for the notional taxable value of the minor benefit in relation to the current year of tax to be less than $300;

· a restriction on the application of the minor benefit exemption to tax-exempt body entertainment benefits; and

· a requirement to consider whether it is unreasonable in the circumstances to treat the benefit as a fringe benefit.

Guidance in relation to these conditions is provided in Taxation Ruling TR 2007/12 Fringe benefits tax: minor benefits.

The notional taxable value will be the amount of the on-going fees. Depending upon how frequently a payment is made the notional taxable value may be less than $300.

Paragraph 58P(1)(d) of the FBTAA restricts the application of the minor benefit exemption where a tax-exempt body entertainment benefit is provided to two limited circumstances. Paragraph 58P(1)(d) of the FBTAA states:

in the case of a tax-exempt body entertainment benefit where the provider incurs non-deductible exempt entertainment expenditure that is wholly or partly in respect of the provision of entertainment to the employee or an associate of the employee:

(i) the provision of entertainment to the employee or the associate of the employee, as the case may be:

(A) is incidental to the provision of entertainment to outsiders; and

(B) neither consists of, nor is provided in connection with, the provision of a meal (other than a meal consisting of light refreshments) to the employee or the associate of the employee, as the case may be; or

(ii) the entertainment is provided to the employee or the associate of the employee, as the case may be:

(A) on eligible premises of the employer; and

(B) solely as a means of recognising the special achievements of the employee in a matter relating to the employment of the employee;

In considering these two exceptions:

· subparagraph 58P(1)(d)(i) will not apply as the payment of an employee's on-going fees is not incidental to the provision of entertainment to outsiders; and

· subparagraph 58P(1)(d)(ii) will not apply as the payment is not made solely as a means of recognising the special achievements of the employee.

Therefore, as neither of the two exceptions applies the payment of the on-going fees will not be an exempt benefit under section 58P.

Even if one of the subparagraphs in section 58P applied, the benefit will not be an exempt minor benefit as it is provided under a salary sacrifice arrangement. In this regard, paragraph 16 of TR 2007/12 states:

The minor benefits exemption in section 58P does not apply to benefits that are provided to an employee under a SSA.