Edited version of your private ruling

Authorisation Number: 1012523644722

Ruling

Subject: Fringe benefits classification and income tax deductibility

Question 1

Is the event a seminar for the purposes of section 32-65 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

a) Will you incur a fringe benefits tax liability for the return airfares and transfers provided to your employees?

b) Will you incur a fringe benefits tax liability for the return airfares and transfers provided to your clients?

c) Can you claim an income tax deduction in relation to the return airfares and transfers provided to your employees?

d) Can you claim an income tax deduction in relation to the return airfares and transfers provided to your clients?

Answer

a) No

b) No

c) Yes

d) Yes

Question 3

a) Will you incur a fringe benefits tax liability for the accommodation provided to your employees?

b) Will you incur a fringe benefits tax liability for the accommodation provided to your clients?

c) Can you claim an income tax deduction in relation to the accommodation provided to your employees?

d) Can you claim an income tax deduction in relation to the accommodation provided to your clients?

Answer

a) No

b) No

c) Yes

d) Yes

Question 4

a) Will you incur a fringe benefits tax liability for the breakfasts provided to your employees?

b) Will you incur a fringe benefits tax liability for the breakfasts provided to your clients?

c) Can you claim an income tax deduction in relation to the breakfasts provided to your employees?

d) Can you claim an income tax deduction in relation to the breakfasts provided to your clients?

Answer

a) No

b) No

c) Yes

d) Yes

Question 5

a) Will you incur a fringe benefits tax liability for the gifts provided to your employees?

b) Will you incur a fringe benefits tax liability for the gifts provided to your clients?

c) Can you claim an income tax deduction in relation to the gifts provided to your employees?

d) Can you claim an income tax deduction in relation to the gifts provided to your clients?

Answer

a) Yes

b) No

c) Yes

d) Yes

Question 6

a) Will you incur a fringe benefits tax liability for the arrival dinner provided to your employees on the arrival day?

b) Will you incur a fringe benefits tax liability for the arrival dinner provided to your clients on the arrival day?

c) Can you claim an income tax deduction in relation to the arrival dinner provided to your employees on the arrival day?

d) Can you claim an income tax deduction in relation to the arrival dinner provided to your clients on the arrival day?

Answer

a) No

b) No

c) Yes

d) Yes

Question 7

a) Will you incur a fringe benefits tax liability each of the gala dinners provided to your employees?

b) Will you incur a fringe benefits tax liability for each of the gala dinners provided to your clients?

c) Can you claim an income tax deduction in relation to each of the gala dinners provided to your employees?

d) Can you claim an income tax deduction in relation to each of the gala dinners provided to your clients?

Answer

a) Yes

b) No

c) Yes

d) Yes

Question 8

a) Will you incur a fringe benefits tax liability for the room hire and room set up for the training session in relation to your employees?

b) Will you incur a fringe benefits tax liability for the room hire and room set up for the training session in relation to your clients?

c) Can you claim an income tax deduction in relation to the room hire and room set up for the training session?

Answer

a) No

b) No

c) Yes

Question 9

a) Will you incur a fringe benefits tax liability for the morning tea and lunch provided to your employees at the training session?

b) Will you incur a fringe benefits tax liability for the morning tea and lunch provided to your clients at the training session?

c) Can you claim an income tax deduction in relation to the morning tea and lunch provided to your employees at the training session?

d) Can you claim an income tax deduction in relation to the morning tea and lunch provided to your clients at the training session?

Answer

a) No

b) No

c) Yes

d) Yes

Question 10

a) Will you incur a fringe benefits tax liability for recreational activities provided to your employees?

b) Can you claim an income tax deduction in relation to the recreational activities provided to your employees?

Answer

a) Yes

b) Yes

Question 11

a) Will you incur a fringe benefits tax liability for the lunches provided to your employees following the recreational activities?

b) Can you claim an income tax deduction in relation to the lunches provided to your employees following the recreational activities?

Answer

a) No

b) Yes

Question 12

a) Will you incur a fringe benefits tax liability for the lunch provided to your employees at the feedback seminar?

b) Will you incur a fringe benefits tax liability for the lunch provided to your clients at the feedback seminar?

c) Can you claim an income tax deduction in relation to the lunch provided to your employees at the feedback seminar?

d) Can you claim an income tax deduction in relation to the lunch provided to your clients at the feedback seminar?

Answer

a) No

b) No

c) Yes

d) Yes

Question 13

a) Will you incur a fringe benefits tax liability for the coach transfers and boat charter in relation to your employees?

b) Will you incur a fringe benefits tax liability for the coach transfers and boat charter in relation to your clients?

c) Can you claim an income tax deduction in relation to the coach transfers and boat charter for your employees?

d) Can you claim an income tax deduction in relation to the coach transfers and boat charter for your clients?

Answer

a) Yes

b) No

c) Yes

d) Yes

Question 14

a) Will you incur a fringe benefits tax liability for the hire of the seminar location for your employees?

b) Will you incur a fringe benefits tax liability for the hire of the seminar location for your clients?

c) Can you claim an income tax deduction in relation to the hire of the seminar location?

Answer

a) No

b) No

c) Yes

Question 15

a) Will you incur a fringe benefits tax liability for the entertainment act provided to your employees at the feedback seminar?

b) Will you incur a fringe benefits tax liability for the entertainment act provided to your clients at the feedback seminar?

c) Can you claim an income tax deduction in relation to the cost of the entertainment act to your employees at the feedback seminar?

d) Can you claim an income tax deduction in relation to the cost of the entertainment act provided to your clients at the feedback seminar?

Answer

a) Yes

b) No

c) Yes

d) Yes

Question 16

a) Will you incur a fringe benefits tax liability for the drinks provided to your employees on the boat trip?

b) Will you incur a fringe benefits tax liability for the drinks provided to your clients on the boat trip?

c) Can you claim an income tax deduction in relation to the drinks provided to your employees on the boat trip?

d) Can you claim an income tax deduction in relation to the drinks provided to your clients?

Answer

a) Yes

b) No

c) Yes

d) Yes

Question 17

a) Will you incur a fringe benefits tax liability for the lunches provided to your employees on the final day of the event?

b) Will you incur a fringe benefits tax liability for the lunches provided to your clients on the final day of the event?

c) Can you claim an income tax deduction in relation to the lunches provided to your employees on the final day of the event?

d) Can you claim an income tax deduction in relation to the lunches provided to your clients on the final day of the event?

Answer

a) No

b) No

c) Yes

d) Yes

This ruling applies for the following periods:

A number of fringe benefits tax years commencing in the relevant fringe benefits tax year.

The scheme commences on:

In the relevant fringe benefits tax year

Relevant facts and circumstances

You require your top performing staff to attend a training seminar at a location that is not their usual place of employment.

A small number of representatives from key clients also attended the event.

None of the clients are a related party to you.

Each of the client representatives are Australian employees.

The main purpose of the event was to provide training to staff directly relevant to their work, provide staff with the opportunity to meet with key representatives of key clients and build relationships with them.

The training was directly relevant to your business.

The employees who attended the training were required to share the knowledge obtained with their colleagues upon their return to work.

You incurred all of the costs relating to both your employees and your clients representatives attending the seminar.

The event was held over a number of days with the first and last day primarily comprising of travelling to and from the location.

You did not make an election under section 37AA of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to apply Division 9A of the FBTAA in determining the taxable value of any meal entertainment fringe benefits that may have been provided in the fringe benefits tax (FBT) year.

Over the course of the event you provided your employees and the client representatives with:

· travel to the location

· accommodation

· breakfast daily

· dinner on arrival

· gala dinners with entertainment

· a number of gifts

· a training session

· a boat charter including drinks

· a follow up training session

· a lunch with an entertainment act during the follow up training session

· a light lunch on the final day of the event

You also provided your employees with:

· recreational activities and lunch following the activities

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 37AD

Fringe Benefits Tax Assessment Act 1986 Division 9A

Fringe Benefits Tax Assessment Act 1986 section 40

Fringe Benefits Tax Assessment Act 1986 section 44

Fringe Benefits Tax Assessment Act 1986 section 45

Fringe Benefits Tax Assessment Act 1986 section 52

Fringe Benefits Tax Assessment Act 1986 section 58P

Fringe Benefits Tax Assessment Act 1986 paragraph 58P(1)(f)

Fringe Benefits Tax Assessment Act 1986 section 66

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 section 152B

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 32-5

Income Tax Assessment Act 1997 section 32-10

Income Tax Assessment Act 1997 section 32-20

Income Tax Assessment Act 1997 section 32-35

Income Tax Assessment Act 1997 section 32-65

Income Tax Assessment Act 1997 subsection 32-65(2)

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

Reasons for decision

Question 1

Summary

Detailed reasoning

Is the event a seminar for the purposes of section 32-65 of the Income Tax Assessment Act 1997 (ITAA 1997)?

The event was held over a number of days.

Section 32-5 of the ITAA 1997 generally disallows a deduction for entertainment expenses:

SECTION 32-5 No deduction for entertainment expenses

32-5 To the extent that you incur a loss or outgoing in respect of providing *entertainment, you cannot deduct it under section 8-1. However, there are exceptions, which are set out in Subdivision 32-B.

The main exception to the rule contained in section 32-5 is found in section 32-20 which states that section 32-5 does not prevent a deduction to the extent that the entertainment is provided by way of providing a fringe benefit.

Section 32-35 provides another exception to the general rule of section 32-5 by allowing a deduction for food, drink accommodation or travel that is reasonably incidental to an employee attending a seminar that goes for at least four hours. Section 32-35 states:

SECTION 32-35 Seminar expenses

Seminar expenses
Item	Section 32-5 does not stop you deducting a loss or outgoing for…	But the exception does not apply if…
2.1	Providing food, drink, accommodation or travel to an individual (including yourself) that is reasonably incidental to the individual attending a *seminar that *goes for at least 4 hours.	(a) the seminar is a *business meeting; or (b) the *seminar's main purpose is to promote or advertise a *business (or prospective *business) or its goods or services; or (c) the *seminar's main purpose is to provide *entertainment at, or in connection with, the seminar.

Section 32-65 of the ITAA 1997 a definition of the term 'seminar' for the purposes of section 32-35. Section 32-65 states:

SECTION 32-65 Seminars (seminar expenses table item 2.1)

32-65(1) Seminar includes a conference, convention, lecture, meeting (including a meeting for the presentation of awards), speech, "question and answer" session or educational course.

32-65(2) In working out whether a *seminar goes for at least 4 hours the following are taken not to affect the seminar's continuity, nor to form part of it:

(a) any part of the seminar that occurs during a meal

(b) any break during the seminar for the purpose of a meal, rest or *recreation.

In summarising, for a seminar to be considered to be a 'seminar' for the purposes of section 32-65 of the ITAA 1997 the following requirements must be met:

1. The seminar is a conference, convention, lecture, meeting, speech, question and answer session or educational course

2. the seminar, not including any part of the seminar that occurs during a meal or any break in the seminar for the purposes of a meal, rest or recreation, goes for at least four hours

1. Is the event a conference, convention, lecture, meeting, speech, question and answer session or educational course?

The terms conference, convention, lecture, meeting, speech, question and answer session and educational course are not defined in the ITAA1997 and so take on their ordinary meanings.

The term conference is defined in The Macquarie Dictionary [Multimedia], version 5.0.0, 01/10/01 (Macquarie Dictionary), as:

conference

Noun 1. a meeting for consultation or discussion.

2. the act of conferring or consulting together, consultation, especially on an important or serious matter.

'Meeting' is also defined in the Macquarie Dictionary as follows:

meeting

noun 1. a coming together.

2. an assembling as of persons for some purpose.

3. an assembly or gathering held.

4. an assembly of people with responsibilities towards an organisation, held to conduct the business of that organisation

The whole of the event meets the Macquarie Dictionary definition of a conference and individual parts of the training session on day two are more specifically a lecture and question and answer session.

2. Did the seminar, not including any part of the seminar that occurs during a meal or any break in the seminar for the purposes of a meal, rest or recreation, go for at least four hours?

On one of the days you held a specific training session. You have provided that this individual training session went for at least four hours for the purposes of the definition of seminar contained in section 32-65 of the ITAA 1997. That is, that training session went for at least four hours not including any part that occurred during a meal or any break for the purposes of a meal, rest or recreation. As that individual session individually met the requirements of subsection 32-65(2), the whole of the seminar event meets the requirements of subsection 32-65(2).

In conclusion, the event is considered to be a seminar for the purposes of section 32-65 of the ITAA 1997.

Question 2

a) Will you incur a fringe benefits tax liability for the return airfares and transfers provided to your employees?

Subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) provides the following definition of a 'fringe benefit':

fringe benefit, in relation to an employee, in relation to the employer of the employee, in relation to a year of tax, means a benefit:

(a) provided at any time during the year of tax; or

(b) provided in respect of the year of tax;

being a benefit provided to the employee or to an associate of the employee by:

(c) the employer; or

(d) …

in respect of the employment of the employee, but does not include:

(e) …

When you provided the return airfares and transfers to your employees to enable them to attend the conference you provided your employees with a fringe benefit.

In order to determine whether you will have a fringe benefits tax liability arising from the provision of the return airfares and transfers it is necessary to initially consider the type of fringe benefit that is provided. The FBTAA is divided into 13 types of benefits and each type has its own valuation rules.

Section 45 of the FBTAA defines residual benefits as:

45 Residual benefits

A benefit is a residual benefit for the purposes of this Act if the benefit is not a benefit by virtue of a provision of Subdivision A of Divisions 2 to 11 (inclusive).

The provision of the airfares and transfers are a benefit that does not fall within one of the specific categories of benefits in Subdivision A of Divisions 2 to 11 of the FBTAA and therefore, according to section 45 of the FBTAA, the provision of the return airfares and transfers constitutes a residual benefit.

The taxable value of a residual fringe benefit can be reduced in certain circumstances by the use of the otherwise deductible rule contained in section 52 of the FBTAA.

Section 52 of the FBTAA states:

52 Reduction of taxable value - otherwise deductible rule

(1) Where:

(a) the recipient of a residual fringe benefit in relation to an employer in relation to a year of tax is an employee of the employer; and

(b) if the recipient had, at the comparison time, incurred and paid unreimbursed expenditure (in this subsection called the gross expenditure), in respect of the provision of the recipients benefit, equal to the amount that, but for this subsection and Division 14 and the recipients contribution, would be the taxable value of the residual fringe benefit in relation to the year of tax - a once-only deduction (in this subsection called the gross deduction) would, or would if not for section 82A of the Income Tax Assessment Act 1936, and Divisions 28 and 900 of the Income Tax Assessment Act 1997, have been allowable to the recipient under either of those Acts in respect of the gross expenditure; and

(ba) the amount (in this subsection called the notional deduction calculated in accordance with the formula

GD - RD

…

exceeds nil; and

…

The recipient gives to the employer, before the declaration date, a declaration, in a form approved by the Commissioner, in respect of the recipients benefit; and

…

the taxable value, but for Division 14, of the residual fringe benefit in relation to the year of tax is the amount calculated in accordance with the formula:

TV - ND

Taxation Ruling TR 2001/2 Fringe benefits tax: the operation of the new fringe benefits tax gross-up formula to apply from 1 April 2000 (TR 2001/2) summaries the operation of the otherwise deductible rule. TR 2001/2 states:

The taxable value of certain fringe benefits may be reduced to the extent that the employee would have been able to claim an income tax deduction had the employee themselves incurred the expense. The otherwise deductible rule applies to reduce the taxable value of either an airline transport fringe benefit, a board fringe benefit, an expense payment fringe benefit, a loan fringe benefit, a property fringe benefit or a residual fringe benefit. The taxable value is reduced by the hypothetical income tax deduction to which the employee would have been entitled had the employee incurred the expense…

Therefore, in order to determine whether you will have a fringe benefits tax liability in relation to the return airfares and transfers it must be determined whether your employees would have been entitled to claim an income tax deduction for the costs of the return airfares and transfers had the employee incurred the expense themselves.

Would your employees have been entitled to claim a once only deduction for the costs of the return airfares and transfers had they incurred the expense themselves?

The ITAA 1997 stipulates in what circumstances an individual can claim an income tax deduction in their individual tax return for a relevant work related expense. The general rules about deductions are found in section 8-1 of the ITAA 1997 as follows:

8-1 General deductions

(1) You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.

(2) However, you cannot deduct a loss or outgoing under this section to the extent that:

(a) it is a loss or outgoing of capital, or of a capital nature; or

(b) it is a loss or outgoing of a private or domestic nature; or

(c) it is incurred in relation to gaining or producing your *exempt income or your *non-assessable non-exempt income; or

(d) a provision of this Act prevent you from deducting it.

In summarising, to deduct an amount for a loss or outgoing under section 8-1 of the ITAA 1997 one of the following requirements must be met:

· the loss or outgoing must be incurred in gaining or producing assessable income, or

· the loss or outgoing must be necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income

In addition, subsection 8-1(2) prescribes that a deduction will not be allowed as a general deduction if any of the following exists:

· the expense is capital or capital in nature

· private or domestic in nature

· used to produce exempt income or non assessable non-exempt income

· prevented from being deducted by a provision of the ITAA 1997 or the Income Tax Assessment Act 1936

Taxation Ruling TR 98/9 Income tax: deductibility of self-education expenses incurred by an employee or a person in business (TR 98/9) clarifies the circumstances in which self education expenses are allowable as deductions to individuals under the Income Tax Assessment Act 1997 (ITAA 1997). TR 98/9 states:

Circumstances in which self-education expenses are allowable

Section 8-1 of the ITAA 1997

12. Self-education expenses are deductible under section 8-1 where they have a relevant connection to the taxpayer's current income-earning activities.

13. If a taxpayer's income-earning activities are based on the exercise of a skill or some specific knowledge and the subject of self-education enables the taxpayer to maintain or improve that skill or knowledge, the self-education expenses are allowable as a deduction.

14. If the study of a subject of self-education objectively leads to, or is likely to lead to, an increase in a taxpayer's income from his or her current income-earning activities in the future, the self-education expenses are allowable as a deduction.

…

Types of self-education expense allowable

23. Subject to the general tests under section 8-1 being met, the following types of expenses related to self-education are allowable:

…

a) airfares incurred on overseas study tours or sabbatical, on work-related conferences or seminars, or attending an educational institution. They are part of the necessary cost of participating in the tour, etc.;

b) subject to paragraph 24(c) of this Ruling, where a taxpayer is away from home overnight, accommodation and meals expenses incurred on overseas study tours, on work-related conferences or seminars, or attending an educational institution; and

c) …

…

Airfares

111. Airfares incurred on overseas study tours or sabbatical, on work related conferences or seminars or attending an educational institution are deductible under section 8-1. They are part of the necessary cost of participating in the tour or attending the conference or seminar or the educational institution.

The costs of the return airfares and transfers were incurred to enable your employees to attend the seminar. Section 8-1 of the ITAA 1997 allows a deduction 'to the extent that' the loss or outgoing is incurred in gaining or producing assessable income and disallows a deduction 'to the extent that' the expenditure is private or domestic in nature. Further, section 32-5 of the ITAA 1997 specifically disallows a deduction for entertainment expenses. Section 32-5 states:

Section 32-5 No deduction for entertainment expenses

32-5 To the extent that you incur a loss or outgoing in respect of providing *entertainment, you cannot deduct it under section 8-1. However, there are exceptions, which are set out in Subdivision 32-B.

Section 32-10 of the ITAA 1997 defines the term 'entertainment':

Section 32-10 Meaning of entertainment

32-10(1) 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.

32-10(2) You are taken to provide entertainment even if business discussions or transactions occur.

Note: These are some examples of what is entertainment:

· business lunches

· social functions

These are some examples of what is not entertainment:

· meals on business travel overnight

· theatre attendance by a critic

· a restaurant meal of a food writer.

It is therefore necessary to consider in the context of section 8-1 of the ITAA 1997, whether the whole expenditure on the airfares and accommodation would be deductible to the employer, or whether only part of the expenditure would be deductible as a portion relates to entertainment or some private purpose.

TR 95/10 discusses the potential requirement to apportion expenses:

89. If the dominant purpose in incurring the cost is the attendance at the conference, seminar or training then the existence of any private activity would be merely incidental and the cost would be fully deductible. If the attendance at the conference, seminar or training course is only incidental to a private activity (e.g., a holiday) then only the costs directly attributable to the conference, seminar or training course are an allowable deduction. The cost of accommodation, meals and travel directly relating to the private activity is not allowable under subsection 51(1) of the Act.

The case of FC of T v Amway of Australia Ltd FCFCA 273; 2004 ATC 4893 (Amway) provides assistance in determining the dominant purpose in incurring the costs of airfares and transfers in order to attend the event.

Amway concerned the deductibility of certain expenses incurred by Amway in relation to annual Australian Leadership Seminars (ALS) seminars that it held for its distributors. The case considered sections 51(1) and 51AE of the Income Tax Assessment Act 1936 (ITAA 1936) which have since been replaced by Divisions 8-1 and 32 of the ITAA 1997 and therefore the principles determined in the case are still of assistance. Attendance at the seminars was by invitation only and the seminars were held at holiday destinations, mostly overseas. The attendees' travelled and stayed at Amway's expense. They participated in a number of business sessions and as well as recreational activities and gala dinners. In order to determine the deductibility of the costs incurred in hosting the seminars the Court was required to determine the purpose of the seminar. The Court held that the costs of the airfares and accommodation were expended to bring the attendees to a seminar, not in order to provide them with food, drink and recreation. Therefore the travel and accommodation costs were held not to have been incurred for the purpose of facilitating entertainment, provided by way of food, drink and recreation and were fully deductible to Amway.

In discussing the findings and conclusions of fact drawn by the Primary Judge, Hill, Sundberg and Kenny JJ stated:

12. In relation to an ALS, his Honour found that, from Amway's point of view, "an ALS was solely for business purposes". More generally, he found that "an ALS was a serious business occasion for all concerned"; "there were serious business purposes served by an ALS", and "an ALS is an important business occasion for a distributor in various ways". …

13. His Honour also held that "[t]he existence of seminars was designed to (and did) motivate the network of distributors by acting as a reward for and an incentive towards success". He remarked that, "Amway certainly publicised the seminars on that basis" and that

"[a] powerful message of wealth and prestige which could be aspired to with success in the business was conveyed in various ways". His Honour said:

"[A]n ALS was designed to be, and was seen to be, an attractive event because of the exotic location, the standard of the venue and the opportunity it provided for combining business with pleasure. The element of hospitality afforded to a distributor (and, so, entertainment) was not slight or insignificant."

14. In summary, his Honour accepted that:

"[A] purpose of the seminar was to enable the participants to give information relating to the business to, receive information relating to the business from, and discuss matters relating to the business with other participants in the business. However,…another purpose of the seminar from Amway's point of view was to provide both a reward and an incentive to the distributors who attended and to those who had not yet attended but aspired to do so."

As between these purposes, his Honour said "I am satisfied that business is the principal purpose of an ALS and that the other purposes are ancillary, although significant".

…

17. His Honour went on to hold that "[t]he fares and accommodation were expended to bring distributors to a business seminar, not in order to provide the participants with food, drink and recreation".

Your seminar has a similar character to the ALS in Amway. The seminar has a serious business purpose for you by providing relevant training to staff which they were expected to share with their colleagues upon their return to work and, to provide the staff with the opportunity to meet and build relationships with representatives of your clients. Therefore, following the Amway decision, we conclude that the principal purpose of the seminar is a business purpose with other significant ancillary purposes. Accordingly, the cost of the airfares and transfers was a cost expended to bring your employees to the seminar, not in order to provide them with food, drink and recreation. Therefore, had the employees incurred the expenditure themselves they would have been entitled to a deduction for the whole amount.

Conclusion

The provision of the airfares and transfers to your employees is a residual fringe benefit. Had the employees incurred the expense themselves they would have been entitled to a once only deduction for the cost and therefore under the otherwise deductible rule contained in section 52 of the FBTAA the taxable value of the residual fringe benefit will be reduced to nil and you will therefore not have a fringe benefits tax liability in relation to the provision of the airfares and transfers to your employees.

b) Will you incur a fringe benefits tax liability for the airfares and transfers provided to your clients?

Subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) provides the following definition of a 'fringe benefit':

fringe benefit, in relation to an employee, in relation to the employer of the employee, in relation to a year of tax, means a benefit:

(a) provided at any time during the year of tax; or

(b) provided in respect of the year of tax;

being a benefit provided to the employee or to an associate of the employee by:

(c) the employer; or

(d) an associate of the employer; or

(e) a person (in this paragraph referred to as the arranger) other than the employer or an associate of the employer under an arrangement covered by paragraph (a) of the definition of arrangement between:

(i) participates in or facilitates the provision or receipt of the benefit; or

(ii) participates in, facilitates or promotes a scheme or plan involving the provision of the benefit;

and the employer or associate knows, or ought reasonably to know, that the employer or associate is doing so;

in respect of the employment of the employee, but does not include:

(f) …

Subsection 136(1) defines 'employee' as:

employee means:

(a) a current employee;

(b) a future employee; or

(c) a former employee.

Definitions of current, former and future employees are also provided in subsection 136(1):

current employee means a person who receives, or is entitled to receive, salary or wages.

…

former employee means a person who has been a current employee.

…

future employee means a person who will become a current employee.

Section 66 of the FBTAA also sets out the tax obligations in respect of FBT:

66 Liability to pay tax

(1) Subject to this Act, tax imposed in respect of the fringe benefits taxable amount of an employer of a year of tax is payable by the employer.

Chapter 1 of Fringe benefits tax - a guide for employers (NAT 1054) (FBT guide for employers), summaries:

1.1 What is a fringe benefit?

A fringe benefit is a 'payment' to an employee, but in a different form to salary of wages.

According to the fringe benefits tax (FBT) legislation, a fringe benefit is a benefit provided in respect of employment. This effectively means a benefit is provided to somebody because they are an employee. The 'employee' may even be a former or future employee.

An employee is a person who is entitled, or has been entitled, to receive salary or wages…

…

1.2 Who pays the tax?

FBT is paid by you, as the employer.

You will be an employer for FBT purposes if you make a payment to an employee, company director or office holder that is subject to withholding obligations…

As an employer, you pay FBT irrespective of whether you are a sole trader, partnership, trustee, corporation, unincorporated association, government or government authority.

This is the case regardless of whether you actually provide the benefit, or it is provided by an associate or under an arrangement you have with a third party.

In summary, you will only have an FBT liability for benefits provided to your employees or to an associate of your employee, whether the benefit is provided by you, an associate of yours or by an arranger. The clients are not your employees for the purposes of the FBTAA according to the definition of 'employee' provided by subsection 136(1) of the FBTAA. Therefore, you cannot incur an FBT liability for the airfares and transfers provided to your clients.

c) Can you claim an income tax deduction in relation to the airfares and transfers provided to your employees?

Refer to question 2(a) above. As discussed in question 2(a), section 8-1 of the ITAA 1997 allows a deduction for a loss or outgoing to the extent that:

· the loss or outgoing is incurred in gaining or producing assessable income, or

· the loss or outgoing is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income;

Subsection 8-1(2) disallows a deduction to the extent that the expense is:

· capital or capital in nature

· private or domestic in nature

· used to produce exempt income or non assessable non-exempt income

· prevented from being deducted by a provision of the ITAA 1997 or the Income Tax Assessment Act 1936

The cost of providing the return airfares and transfers to your employees is an outgoing incurred in carrying on a business for the purpose of gaining or producing assessable income and is not prevented from being a deduction for any of the reasons contained in subsection 8-1(2) of the ITAA 1997. Therefore the costs incurred in providing the return airfares and transfers to your employees are deductible under section 8-1 of the ITAA 1997.

d) Can you claim an income tax deduction in relation to the airfares and transfers provided to your clients?

You incur the costs of the return airfares and transfers for your clients in order to bring the clients to the seminar to train your employees.

Refer to the reasoning in question 2(c) above. The same reasoning can be applied to conclude that you are entitled to claim an income tax deduction under section 8-1 of the ITAA 1997 for the costs of the return airfares and transfers provided to the clients.

Question 3

(a) Will you incur a fringe benefits tax liability for the accommodation provided to your employees?

Refer to question 2(a) above.

The same reasoning can be applied to conclude that the provision of the accommodation to your employees is a residual fringe benefit and the taxable value of the benefit can be reduced to nil in accordance with the otherwise deductible rule in section 52 of the FBTAA. Therefore, you will not incur a FBT liability for the accommodation provided to your employees.

(b) Will you incur a fringe benefits tax liability for the accommodation provided to your clients?

Refer to question 2(b) above.

The same reasoning can be applied to conclude that the provision of the accommodation to your clients will not result in a FBT liability for you as your clients are not you employees as required by subsection 136(1) of the FBTAA.

(c) Can you claim an income tax deduction in relation to the accommodation provided to your employees?

Refer to question 2(c) above.

The same reasoning can be applied to conclude that the cost of providing the accommodation to your employees is an outgoing incurred in carrying on a business for the purpose of gaining or producing assessable income and is not prevented from being a deduction for any of the reasons contained in subsection 8-1(2) of the ITAA 1997. Therefore the costs incurred in providing the accommodation to your employees are deductible under section 8-1 of the ITAA 1997.

(d) Can you claim an income tax deduction in relation to the accommodation provided to your clients?

Refer to question 2(d) above.

The same reasoning can be applied to conclude that you incurred the cost of providing the accommodation to your clients in order to bring your clients to the seminar to train your employees and therefore you are entitled to claim an income tax deduction for these costs in accordance with section 8-1 of the ITAA 1997.

Question 4

(a) Will you incur a fringe benefits tax liability for the breakfasts provided to your employees?

You provide breakfasts to your employees in conjunction with the accommodation.

Refer to the discussion at question 2(a) above. The provision of the breakfasts to your employees is a fringe benefit in accordance with the definition provided by subsection 136(1) of the FBTAA.

The most relevant types of benefit in relation to the provision of the breakfasts are:

· Meal entertainment in accordance with Division 9A of the FBTAA; and

· Property fringe benefits in accordance with Division 11 of the FBTAA.

Section 37AD of the FBTAA provides a definition of 'meal entertainment':

37AD Meaning of provision of meal entertainment

A reference to the provision of meal entertainment is a reference to the provision of:

(a) entertainment by way of food or drink; or

(b) accommodation or travel in connection with, or for the purpose of facilitating, entertainment to which paragraph (a) applies; or

(c) the payment or reimbursement of expenses incurred in providing something covered by paragraph (a) or (b);

whether or not:

(d) business discussions or business transactions occur; or

(e) in connection with the working of overtime or otherwise in connection with the performance of the duties of any office or employment; or

(f) for the purposes of promotion or advertising; or

(g) at or in connection with a seminar.

Paragraph 14.3 in chapter 14 of FBT Guide for employers provides guidance on how to identify whether the provision of food or drink is entertainment:

14.3 How to identify whether the provision of food or drink is entertainment

In order to determine when food or drink provided to a person results in entertainment, you need to examine the circumstances surrounding that provision of the food or drink. You need to look at the following.

None of the factors below on their own will determine if the food or drink provided is meal entertainment. However, (a) and (b) are considered the more important factors.

(a) Why is the food or drink being provided?

This is a purpose test. For example, food or drink provided for the purposes of refreshment does not generally have the character of entertainment, whereas food or drink provided in a social situation where the purpose of the function is for employees to enjoy themselves has the character of entertainment.

(b) What food or drink is being provided?

Morning and afternoon teas and light meals are generally not considered to be entertainment. However, as light meals become more elaborate, they take on more of the characteristics of entertainment. The reason for this is that the more elaborate a meal, the more likely it is that entertainment arises from consuming the meal.

(c) When is the food or drink being provided?

Food or drink provided during work time, during overtime or while an employee is travelling is less likely to be entertainment. This is because, in the majority of these cases, food provided is for a work-related purpose rather than an entertainment purpose. This, however, depends on whether the entertainment of the person is the expected outcome of the food or drink. For example, a staff social function held during work time still has the character of entertainment.

(d) Where is the food or drink being provided?

Food or drink provided on the employer's business premises or at the usual place of work of the employee is less likely to have the character of entertainment. However, food or drink provided in a function room, hotel, restaurant, café, coffee shop or consumed with other forms of entertainment is more likely to have the character of entertainment. This is because the provision of food or drink is less likely to have a work related purpose.

Taxation Ruling TR 97/17 Income Tax and fringe benefits tax: entertainment by way of food or drink (TR 97/17) discusses the concept of what is entertainment as it relates to the provision of food or drink for the purposes of the FBTAA and the ITAA 1997. Relevantly, TR 97/17 provides:

6. The definition of 'entertainment' contained in section 32-10 of the ITAA, and adopted by the FBTAA in the definition of 'entertainment' in subsection 136(1), does not prescribe that entertainment occurs every time food or drink is provided.

7. In order to determine when the provision of food or drink to a recipient results in the entertainment of that person, an objective analysis of all the circumstances surrounding the provision of the food or drink is required. In making this determination an employer should consider:

· why the food or drink is being provided ;

· what type of food or drink is being provided;

· when that food or drink is being provided; and

· where the food or drink is being provided.

Food or drink which is determined by these criteria to constitute entertainment is taken to be 'meal entertainment'.

In relation to meals provided to an employee who is travelling in the course of their employment, TR 97/17 states:

21. Where an employee is travelling in the course of performing their employment duties, the food or drink provided is consumed as a result of the work-related travel. In the absence of supplementary entertainment, the food or drink is not provided by the employer in order to confer entertainment on that employee. Therefore, the meal does not have the character of entertainment.

…

117. An employer pays for an employee and spouse to attend an international accounting conference which is being held in another State capital city. The program is as follows:

*	Day 1	7:00pm	Welcome dinner and opening speeches
*	Day 2	Morning	Breakfast with accompanying person
			Technical sessions
		Lunch	Separate lunch provided for accompanying person
		Afternoon	Technical sessions
		Evening	Dinner
*	Day 3	Morning	Breakfast with accompanying person
			Technical sessions
		Afternoon	Sightseeing trip
		Evening	Gala dinner dance

118. The question to be asked is whether the meals amount to meal entertainment. Because the employee is travelling in the course of this employment to attend the seminar, meals such as breakfast, lunch and dinner are not, generally, regarded as meal entertainment and, because of the 'otherwise deductible' rule, do not give rise to an FBT liability.

Your employees were travelling in the course of their employment in order to attend the seminar. In accordance with TR 97/17 the provision of the breakfasts to your employees does not constitute entertainment by way of food or drink for the purposes of paragraph 37AD(a) of the FBTAA. The breakfasts also do not meet the character of paragraph 37AD(b) or 37AD(c). As such, the provision of the breakfasts to your employees does not constitute the provision of meal entertainment defined in section 37AD of the FBTAA and therefore cannot be classified as meal entertainment fringe benefits.

The other relevant category of benefit is property fringe benefits. Section 40 of the FBTAA sets out the criteria for a benefit to be considered a property benefit:

40 Property benefits

Where, at a particular time, a person (in this section referred to as the provider) provides property to another person (in this section referred to as the recipient), the provision of the property shall be taken to constitute a benefit provided by the provider to the recipient at that time.

When you provide your employees with breakfast, you are a provider proving them with property. Therefore the provision of the breakfasts to your employees will be a property fringe benefit in accordance with Division 11 of the FBTAA.

The taxable value of a property fringe benefit can be reduced in certain circumstances by the otherwise deductible rule provided for in section 44 of the FBTAA:

44 Reduction of taxable value - otherwise deductible rule

(1) Where:

(a) the recipient of a property fringe benefit in relation to an employer in relation to a year of tax is an employee of the employer; and

(b) if the recipient had, at the provision time, incurred and paid unreimbursed expenditure (in this subsection called the gross expenditure) in respect of the purchase of the recipients property, equal to the amount that, but for this subsection and Division 14 and the recipients contribution, would be the taxable value of the property fringe benefit in relation to the year of tax - a once-only deduction (in this subsection called the gross deduction) would, or would if not for section 82A of the Income Tax Assessment Act 1936, and Divisions 28 and 900 of the Income Tax Assessment Act 1997, have been allowable to the recipient under either of those Acts in respect of the gross expenditure; and

(ba) the amount (in this subsection called the notional deduction) calculated in accordance with the formula:

GD - RD

…

exceeds nil; and

(c) except where the property fringe benefit is:

(i) an exclusive employee property benefit; or

(ia) covered by a recurring fringe benefit declaration (see section 152A); or

(ii) an extended travel property benefit; or

(iii) a car property benefit;

the recipient gives to the employer, before the declaration date, a declaration, in a form approved by the Commissioner, in respect of the recipients property; and

…

the taxable value, but for Division 14, of the property fringe benefit in relation to the year of tax is the amount calculated in accordance with the formula:

TV - ND

…

In summary, the taxable value of property fringe benefits can be reduced to the extent that the employee would have been able to claim an income tax deduction had the employee themselves incurred the expense.

Would your employees have been entitled to claim a once only deduction for the cost of the breakfasts had they incurred the expense themselves?

As previously discussed, section 8-1 of the ITAA 1997 allows a deduction for a loss or outgoing that is incurred in the gaining or producing of assessable income or that is necessarily incurred in carrying on a business for the purposes of gaining or producing assessable income. However section 8-1 disallows a deduction to the extent that it is capital or capital in nature, private or domestic in nature, used to produce exempt income or non assessable non-exempt income or prevented from being deducted by a provision of the ITAA 1997 or the ITAA 1936.

As referenced in question 2(a) above TR 98/9 and TR 95/10 provide that when an employee is travelling in the course of their employment to attend a seminar or conference, the costs incurred in attending the conference or seminar such as meals, are deductible as a necessary cost of participating in the conference or seminar.

ATO Interpretative Decision ATO ID 2002/807 Income Tax Deductions: meal expenses whilst on overnight business travel (ATO ID 2002/807) confirms the deductibility for meal expenses when an employee is travelling overnight on business:

Generally, meal expenses are not allowable as a deduction under section 8-1 of the ITAA on the basis there isn't a sufficient connection between the expenditure and the income earning activities of a taxpayer. However, there is, no general proposition that meal expenses can never be deductible: FC of T v. Cooper 91 ATC 4396; (1991) ATR 1616, Roads and Traffic Authority of NSW v FC of T 93 ATC 4508; (1993) 26 ATR 76, Re Carlaw and FC of T 95 ATC 2166; (1995) 31 ATR 1190, AAT decision in Case 9/96 96 ATC 186.

The deductibility of expenditure on meals will depend on the essential character of the expenditure on the basis of the facts of each case. In this case, the relevant expenses are considered to be incurred in carrying on the business as the business requires overnight travel. The meal expenses are not considered to be private in nature.

As a result, the taxpayer's meal expenses incurred while travelling overnight in the course of the taxpayer's business, are deductible under section 8-1 of the ITAA 1997, provided the relevant substantiation provisions of the ITAA 1997 are satisfied.

Miscellaneous Taxation Ruling MT 2030 Fringe benefits tax: living-away-from-home allowance benefits (MT 2030) further clarifies:

36. When an employee is travelling on business on behalf of an employer, expenses of travel are incidental to the proper carrying out of the employment function and do not have the character of being private or domestic expenses. As it was stated in Case No. B 84, 2 TBRD 390, "…where the employment actually involves the duty of travelling and therefore staying away from home, the extra expenses of living at hotels, etc., together with costs of conveyance, etc., are deductible as, to that extent, they cease to be of a private or domestic nature."

As discussed at question 1, section 32-5 of the ITAA 1997 specifically prevents a deduction for entertainment expenses. It has been concluded above that the breakfasts do not amount to meal entertainment for the purposes of section 37AD of the FBTAA. The classification of a benefit as meal entertainment in accordance with section 37AD of the FBTAA is consistent with the definition of entertainment in section 32-10 of the ITAA 1997. Therefore the breakfasts would not be considered to be entertainment for the purposes of section 32-10 and a deduction is not specifically prevented by section 32-5 of the ITAA 1997.

Therefore, your employees would have been entitled to claim a deduction for the whole cost of the breakfasts under section 8-1 of the ITAA 1997 had they incurred the expenditure themselves.

Conclusion

The provision of the breakfasts to your employees does not amount to meal entertainment and is a property fringe benefit. Had the employees incurred the expense themselves they would have been entitled to a once only deduction for the cost and therefore in accordance with the otherwise deductible rule contained in section 44 of the FBTAA, the taxable value of the property fringe benefit will be reduced to nil. You will therefore not have a fringe benefits tax liability in relation to the provision of the breakfasts to your employees.

(b) Will you incur a fringe benefits tax liability for the breakfasts provided to your clients?

Refer to question 2(b) above.

The same reasoning can be applied to conclude that as your clients are not your employees for the purposes of the FBTAA you will not incur a FBT liability for the breakfasts provided to your clients.

(c) Can you claim an income tax deduction in relation to the breakfasts provided to your employees?

Refer to question 2(c) above. The cost of providing the breakfasts to your employees is an outgoing incurred in carrying on a business for the purpose of gaining or producing assessable income. It has been concluded that the breakfasts do not amount to the provision of meal entertainment and therefore, section 32-5 of the ITAA 1997 does not operate to prevent a deduction for the expenditure. None of the other reasons for denying a deduction contained in contained in subsection 8-1(2) of the ITAA 1997 operate to deny a deduction. Therefore, the costs incurred in providing the breakfasts to your employees are deductible under section 8-1 of the ITAA 1997. TR 97/17 confirms:

Result of providing food or drink other than meal entertainment

41. The provision of food or drink to an employee that does not amount to meal entertainment is deductible to the employer under section 8-1 of the ITAA, whether or not it is subject to FBT.

(d) Can you claim an income tax deduction in relation to the breakfasts provided to your clients?

Refer to question 2(d) above.

The same reasoning can be applied to conclude that the cost of the breakfasts provided to your clients are incurred in carrying on a business for the purpose of gaining or producing assessable income as you incur the costs of the breakfasts provided to your clients in order for them to attend the overseas seminar to train your employees. None of the reasons for denying a deduction set out in subsection 8-1(2) of the ITAA 1997 apply. The costs are therefore deductible under section 8-1 of the ITAA 1997.

Question 5

(a) Will you incur a fringe benefits tax liability for the gifts provided to your employees?

Over the course of the event you provided a number of gifts to the attendees.

Refer to the reasoning at question 2(a) above. Each of the gifts to your employees is a fringe benefit in accordance with the definition provided by subsection 136(1) of the FBTAA. Each gift constitutes a separate fringe benefit.

The most relevant type of benefit in relation to the gifts is the property benefit category provided for in Division 11 of the FBTAA.

Refer to question 4 above. The same reasoning can be applied to conclude that the provision of the gifts each constitutes a property benefit.

Question 4(a) above, also explains the manner in which the taxable value of a property benefit can be reduced by the use of the otherwise deductible rule contained in section 44 of the FBTAA. That is, the taxable value of a property benefit may be reduced to the extent that the employee would have been able to claim an income tax deduction had the employee themselves incurred the expense.

Would your employees have been entitles to claim a once only deduction for the cost of the gifts had they incurred the expense themselves?

Refer to question 2(a) above.

Section 8-1 of the ITAA 1997 allows a deduction for a loss or outgoing that is incurred in the gaining or producing of assessable income or that is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, section 8-1 disallows a deduction to the extent that the expense is capital or capital in nature, private or domestic in nature, used to produce exempt income or non-assessable non-exempt income or prevented from being deducted by a provision of the ITAA 1997 or the ITAA 1936.

Generally expenditure on clothing or accessories would not be considered to have been incurred in gaining or producing assessable income and is considered to be expenditure of a private or domestic nature. Taxation Ruling TR 97/12 Income Tax and fringe benefit tax: work related expenses: deductibility of expenses on clothing, uniform and footwear (TR 97/12) states:

6. … The expenditure is only deductible where there is a sufficient connection between the clothing and the activities productive of assessable income such that its essential character is work related and not private or domestic in nature…

7. Costs of buying, renting, laundering, dry cleaning, repairing and replacing clothing are private in nature except where the expense is directly attributable to the income earning activities of the taxpayer.

…

12. Generally, the costs of living, such as the purchase of conventional clothing, food, drink and shelter are private or domestic in nature and therefore not deductible.

…

Conventional clothing

19. Expenditure on conventional clothing is often not an allowable deduction under section 8-1 of the ITAA 1997. This is because there is not usually a sufficient connection between expenditure on clothing and the income earning activities of the taxpayer.

…

Considering the requirements of section 8-1 of the ITAA 1997 and the guidance provided by TR 97/12, it is concluded that had your employees incurred the cost for the gifts they would not have been entitled to an income tax deduction for any of the cost.

Therefore, the taxable value of the property benefits arising from the provision of each of the gifts can not be reduced by the otherwise deductible rule.

In order to determine whether you will incur an FBT liability for the provision of any of the gifts it must be determined whether any exemptions apply. Section 58P of the FBTAA exempts in certain circumstances benefits that are considered to be 'minor'. Section 58P states:

58P Exempt benefits - minor benefits

(1) Where:

(a) a benefit (in this section called a minor benefit) is provided in, or in respect of, a year of tax (in this section called the current year of tax) in respect of the employment of an employee of an employer;

...

(e) the notional taxable value of the minor benefit in relation to the current year of tax is less than $300; and

(f) having regard to:

(i) the infrequency and irregularity with which associated benefits, being benefits that are identical or similar to:

(A) the minor benefit; or

(B) benefits provided in connection with the provision of the minor benefit;

have been or can reasonably be expected to be provided;

(ii) the amount that is, or might reasonably be expected to be, the sum of the notional taxable values of the minor benefit and any associated benefits, being benefits that are identical or similar to the minor benefit, in relation to the current year of tax or any other year of tax;

(iii) the amount that is, or might reasonably be expected to be, the sum of the notional taxable values of any other associated benefits in relation to the current year of tax or any other year of tax;

(iv) the practical difficulty for the employer in determining the notional taxable values in relation to the current year of tax:

(A) if the minor benefit is not a car benefit - the minor benefit; and

(B) if there are any associated benefits that are not car benefits - those associated benefits; and

(iii) the circumstances surrounding the provision of the minor benefit and any associated benefits including, but without limiting the generality of the foregoing:

(A) whether the benefit concerned was provided to assist the employee to deal with an unexpected event; and

(B) whether the benefit concerned was provided otherwise than wholly or principally by way of a reward for services rendered, or to be rendered, by the employee;

it would be concluded that it would be unreasonable to treat the minor benefit as a fringe benefit in relation to the employer in relation to the current year of tax;

the minor benefit is an exempt benefit in relation to the current year of tax.

Taxation Ruling TR 2007/12 Fringe benefits tax: minor benefits (TR 2007/12) summarises the requirements of section 58P:

8. A minor benefit is an exempt benefit under section 58P where:

· the notional taxable value of the minor benefit is less than $300; and

· it would be concluded that it would be unreasonable, having regard to the specified criteria in paragraph 58P(1)(f), to treat the minor benefit as a fringe benefit.

In summarising, a benefit is an exempt benefit under section 58P of the FBTAA if:

1. the notional taxable value of the benefit is less than $300

2. it would be concluded that it would be unreasonable, having regard to the specified criteria in paragraph 58P(1)(f), to treat the minor benefit as a fringe benefit.

1. Is the notional taxable value of the benefit less than $300?

Paragraphs 176 to 186 of TR 2007/12 discuss this requirement:

176. Only a benefit which has not been specifically excluded, as discussed at paragraphs 159 to 175 of this Ruling, and that has a notional taxable value of less than $300 can be considered for exemption under section 58P.

177. What is commonly referred to as the 'minor benefits threshold test' is contained in paragraph 58P(1)(e). This test requires that the minor benefit, in relation to the current year of tax, has a notional taxable value of less than $300.

178. The threshold test applies to each separate minor benefit provided to the particular employee, or provided to an associate of an employee.

…

180. The term 'notional taxable value' is defined in subsection 136(1):

'notional taxable value', in relation to a benefit provided in, or in respect of, a year of tax in respect of the employment of an employee of an employer, means the amount that, if it were assumed that:

...

(b) in all cases - the benefit was a fringe benefit in relation to the employer in relation to the year of tax;

would be the taxable value of the fringe benefit in relation to the year of tax.

The benefits in question are not specifically excluded from being a minor benefit according to the criteria discussed at paragraphs 159 to 175 of TR 2007/12. The gifts all have a notional taxable value of less than $300 in accordance with the definition provided by subsection 136(1) of the FBTAA.

2. Would it be concluded that it would be unreasonable, having regard to the specified criteria in paragraph 58P(1)(f) of the FBTAA, to treat the minor benefit as a fringe benefit?

Paragraph 58P(1)(f) of the FBTAA sets out five criteria to be considered when deciding if it would be unreasonable to treat the minor benefit as a fringe benefit. Chapter 20 - Exempt benefits of FBT Guide for employers summarises these five criteria as follows:

1. The infrequency and irregularity with which associated benefits, being benefits that are identical or similar to the minor benefit and benefits fiving in connection with the minor benefit, are provided. The more frequently and regularly associated benefits are provided, the less likely that the minor benefit will qualify as an exempt benefit.

2. The total of the notional taxable values of the minor benefit an identical or similar benefits to the minor benefit, The greater the total value of the minor benefit and identical or similar benefits, the less likely it is the minor benefit will qualify as an exempt benefit.

3. The likely total of the notional taxable values of other associated benefits - that is, those provided in connection with the minor benefit. For example, where a meal, which is a minor benefit, is provided in connection with a nights accommodation and taxi travel, which themselves may or may not be a minor benefit. The total of their taxable values must be considered. The greater the total value of other associated benefits, in this case being the accommodation and the taxi travel, the less likely it is that the minor benefit will qualify as an exempt benefit.

4. The practical difficulty in determining what would be the notional taxable value of the minor benefit and any associated benefits. This would include consideration of the difficulty for you in keeping the necessary records in relation to the benefits.

5. The circumstances in which the minor benefit and any associated benefits were provided. This would include consideration as to whether the benefit was provided as a result of an unexpected event, and whether or not it could be considered principally as being in the nature of remuneration.

If, after considering the five criteria, you conclude that it would be unreasonable to treat the benefit as a fringe benefit, the benefit will be an exempt benefit.

Subsection 58P (2) of the ITAA sets out what is considered to be an associated benefit of a minor benefit for the purposes of considering the criteria above. Subsection 58P(2) states:

For the purposes of this section, a benefit is an associated benefit in relation to a minor benefit if, and only if:

(a) any of the following subparagraphs applies:

(i) the benefit is identical or similar to the minor benefit;

(ii) the benefit is provided in connection with the provision of the minor benefit;

(iii) the benefit is identical or similar to a benefit provided in connection with the provision of the minor benefit;

(b) the benefit and the minor benefit both relate to the same employment of a particular employee; and

(c) the benefit is not an exempt benefit by virtue of a provision of this Act other than this section.

In considering the requirements of paragraph 58P(1)(f) of the FBTAA, the following factors lead to a conclusion it would not be unreasonable to treat the gifts as a fringe benefit and therefore that the provision of each of the items will not be exempt as a minor benefit:

· The benefits were provided as part of the event that only certain attended. The sum of the notional taxable values of the other benefits provided in connection with each of the gift benefits is significant. The benefits discussed at question 7, 10, 13,15 and 16 are all fringe benefits that are not able to be reduced by the use of the otherwise deductible rule and the sum of the notional taxable values of these benefits is significant.

· There is little practical difficulty for you in determining what would be the notional taxable value of the gift benefits and any associated benefits. Similarly there is little practical difficulty for you in keeping the necessary records in relation to the benefits. You have kept a cost breakdown of total costs incurred in relation to each event or item provided to over the course of the event.

· The benefits were not provided as a result of an unexpected event. The benefits were provided as part of a training event.

Conclusion

In summarising, each of the gifts is a property benefit whose taxable value cannot be reduced by the operation of the otherwise deductible rule. Applying the requirements of subsection 58P(1), the benefits are not considered to be minor benefits and are therefore not exempt benefits. The benefits meet the definition of a fringe benefit in accordance with subsection 136(1) of the FBTAA and therefore you will incur an FBT liability in relation to the provision of each of the gifts to each of your employees.

(b) Will you incur a fringe benefits tax liability for the gifts provided to your clients?

Refer to question 2(b) above.

The same reasoning can be applied to conclude that the provision of any of the gifts to your clients will not result in an FBT liability for you as your clients are not your employees as required by subdivision 136(1) of the FBTAA.

(c) Can you claim an income tax deduction in relation to the gifts provided to your employees?

Refer to question 2(c) above.

Section 8-1 of the ITAA 1997 allows a deduction for a loss or outgoing to the extent that the loss or outgoing is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income but disallows a deduction to the extent that the expense is capital or capital in nature, private or domestic in nature, used to produce exempt income or non assessable non-exempt income or is prevented from being deducted by a provision of the ITAA 1997 or the ITAA 1936.

As concluded above, the gifts provided to your employees all constitute the provision of a fringe benefit. The costs incurred in providing a fringe benefit to your employee are deductible under subsection 8-1(1) of the ITAA1997. Regardless of whether the provision of the gifts constitutes entertainment a deduction would still be allowed as section 32-20 of the ITAA 1997 operates to allow a deduction for the provision of entertainment where the loss or outgoing is incurred in respect of providing entertainment by way of providing a fringe benefit. None of the other reasons to disallow a deduction described in subsection 8-1(2) of the ITAA 1997 are relevant in this instance and therefore you are entitled to claim a deduction in relation to the gifts provided to your employees.

(d) Can you claim an income tax deduction in relation to the gifts provided to your clients?

Refer to the discussions regarding general deductibility under section 8-1 of the ITAA 1997 in question 2 above.

As previously discussed subsection 8-1(1) allows a deduction for a loss or outgoing to the extent that:

· the loss or outgoing is incurred in gaining or producing assessable income, or

· the loss or outgoing is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

ATO Interpretative Decision ATOID 2004/427 Income Tax Deductions: gifts to clients (ATO ID 2004/427) provides guidance in this scenario:

… Where a taxpayer is carrying on a business for the purpose of gaining or producing assessable income, the commercial and practical implications of the term 'necessarily incurred' imply that voluntary expenditure incurred for business needs may be deductible. It is the taxpayer who decides whether the expenditure 'is dictated by the business ends to which it is directed' ( Federal Commissioner of Taxation v. Snowden & Wilson Pty Ltd (1958) 99 CLR 431; (1958)11 ATD 463; (1958) 7 AITR 308 (Snowden & Wilson's Case)). This was further supported in Magna Alloys & Research Pty Ltd v. Federal Commissioner of Taxation (1980) ATC 4542; (1980) 11 ATR 276 when the Court stated

For practical purposes and within the limits of reasonable human conduct, it is for the man who is carrying on the business to be the judge of what outgoings are necessarily incurred

In this case, the taxpayer provided a gift on the expectation that the gift would either generate future business from the client or motivate them to refer the taxpayer's services to others. The taxpayer had no other purpose in providing the gift. Therefore, it is considered that the expenditure on the gift was in the nature of business promotion.

Although the gift is provided to a client up to 12 months after the cessation of the services, there is a prospect that the expenditure may produce assessable income in the future (Ronpibon Case). Further, the taxpayer's expenditure can be regarded as necessarily incurred because it is dictated by 'the business ends to which it is directed'. In other words, the taxpayer has decided to voluntarily incur the expenditure in the practical conduct or administration of their business (Snowden & Wilson's Case)

The circumstances in which the gifts were provided to your clients are analogous with the principles discussed in ATO ID 2004/427. The purpose in providing the gifts to your clients was dictated by the business ends to which the expenditure was directed.

The expenditure on the gifts was, in the circumstances, necessarily incurred in carrying on a business for the purposes of gaining or producing assessable income and the requirements of subsection 8-1(1) are satisfied.

Subsection 8-1(2) of the ITAA 1997 disallows a deduction to the extent that the expense is:

· capital or capital in nature

· private or domestic in nature

· used to produce exempt income or non assessable non-exempt income

· prevented from being deducted by a provision of the ITAA 1997 or the Income Tax Assessment Act 1936

Refer to question 1. Section 32-5 of the ITAA 1997 specifically denies a deduction for entertainment expenses.

Guidance as to whether the provision of an item of property constitutes entertainment is provided by Taxation Determination TD 94/55 Income tax: when does providing an item of property constitute the provision of entertainment within the meaning of subsection 32-10(1) of the Income Tax Assessment Act 1997 (TD 94/55). TD 94/55 states:

2. In determining whether an item of property constitutes the provision of entertainment, regard should be had to all of 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. This character is distinct from the property itself and relates to the immediate and active use of the property.

3. In practice, the provision of entertainment can be determined by reference to the following characteristics:

· Timeliness

- entertainment occurs soon after provision of the item of property;

- the usefulness of the item of property expires after consumption; or

- the item of property is returned at the completion of use.

· Direct Connection

There should be a direct connection between the item of property and the entertainment:

- the entertainment should arise from the use of the item of property;

- the entertainment is the expected outcome of the provision of the property.

Example 1

Costs incurred in the giving of items of property, such as bottled spirits, groceries, games, TV sets, VCRs, computers, crockery, swimming pools, gardening equipment, etc; have an enduring character, and only an indirect nexus to any immediate entertainment. Consumption is usually delayed. The items of property usually require further steps before they can be consumed, and consumption can occur over a long period.

Hence, these items of property do not generally constitute provision of entertainment.

Example 2

Costs incurred in providing glasses of champagne, hot meals, theatre tickets, holiday accommodation, hired entertainers, and hired sporting equipment, have a dynamic and immediate character. Consumption can usually occur immediately. These items of property do not last beyond initial consumption (or are to be returned at the end of the hire period).

Hence, these items of property would generally constitute provision of entertainment.

Considering the characteristics and examples discussed in TD 94/55 it is concluded that the gifts provided to your clients align with the items described in example 1 and that the giving of these items does not constitute the provision of entertainment. Therefore, section 32-5 of the ITAA 1997 does not operate to prevent the deductibility for the costs incurred in providing the gifts to your clients.

None of the other reasons listed in subsection 8-1(2) of the ITAA 1997 work to prevent a deduction for the costs incurred in providing the items of property to your clients and therefore, you are entitled to deduct the costs incurred under section 8-1 of the ITAA 1997.

Question 6

a) Will you incur a fringe benefits tax liability for the arrival dinner provided to your employees on the arrival day?

You have provided that there was no additional element of entertainment to the dinner and after dinner drinks provided on the arrival day.

Refer to the reasoning discussed at question 4(a) above.

The same reasoning can be applied to conclude that the welcome dinner and after dinner drinks does not constitute the provision of meal entertainment. There is a difference between the dinner on day one compared with the breakfasts discussed in question 4 and that is, the provision of alcohol. Regarding the provision of alcohol and defining the dinner and after dinner drinks as meal entertainment TR 97/17 states:

(c) Alcohol

Question 3

63. Does the provision of alcohol automatically result in the provision of meal entertainment?

Answer

64. No. We do not believe that the provision of alcohol in every situation results in the provision of meal entertainment. Generally, the consumption of alcohol does have social connotations and provides or affords diversion or amusement. In those cases the provision of the alcohol has the characteristics of entertainment. However, there is a narrow category of situations that arises where the provision of alcohol is incidental to a larger event or work-related activity of an employee.

65. As a result, in order to determine whether the provision of alcohol constitutes meal entertainment, the tests discussed at paragraph 23 must be applied….

Therefore the provision of alcohol will not change the classification of the dinner. Following the same reasoning applied in question 4(a) above, the dinner will not amount to meal entertainment but will be a property fringe benefit, the taxable value of which can be reduced to nil by the use of the otherwise deductible rule in section 44 of the FBTAA. You will therefore not have a fringe benefits tax liability in relation to the provision of the dinner and after dinner drinks on the arrival day.

b) Will you incur a fringe benefits tax liability for the arrival dinner provided to your clients on the arrival day?

Refer to the reasoning at question 2(b) above.

The same reasoning can be applied to conclude that as your clients are not your employees for the purposes of the FBTAA you will not incur a FBT liability for the dinner provided to your clients.

c) Can you claim an income tax deduction in relation to the arrival dinner provided to your employees on the arrival day?

Refer to question 2(c) above. The cost of providing the dinner and after dinner drinks on the arrival day to your employees is an outgoing incurred in carrying on a business for the purpose of gaining or producing assessable income and is not prevented from being a deduction for any of the reasons contained in subsection 8-1(2) of the ITAA 1997. Therefore, the costs incurred in providing the arrival dinner to your employees are deductible under section 8-1 of the ITAA 1997.

d) Can you claim an income tax deduction in relation to the arrival dinner provided to your clients on the arrival day?

Refer to question 2(d) above.

The same reasoning can be applied to conclude that the cost of the dinner on the arrival day, provided to your clients are incurred in carrying on a business for the purpose of gaining or producing assessable income as you incur the costs in order for your clients to attend the overseas seminar to train your employees.

Question 7

a) Will you incur a fringe benefits tax liability each of the gala dinners provided to your employees?

Over the course of the event you provide the employees with food and drink at gala dinners where entertainment was provided with the meal.

Given the similar nature of the gala dinners, for the purposes of determining whether each is a fringe benefit and, if necessary, classifying the type of benefit, they can be dealt with together.

Refer to the discussion at question 2(a) above. The provision of the gala dinners meets the definition of fringe benefit provided by subsection 136(1) of the FBTAA.

The most relevant types of benefit in relation to each of the gala dinners are:

· meal entertainment in accordance with Division 9A of the FBTAA; and

· property fringe benefits in accordance with Division 11 of the FBTAA.

Refer to the discussion of the provision of meal entertainment at question 4(a) above.

Considering the guidance discussed at question 4(a) above, the provision of the gala dinners each constitute the provision of meal entertainment.

You have advised that you did not elect to value any meal entertainment in accordance with Division 9A of the FBTAA. Therefore you must calculate the taxable value of the benefit in accordance with the valuation rules for the applicable category of benefit.

The applicable category of benefit is therefore a property fringe benefit.

Refer to the discussion at question 4(a) above. The taxable value of a property fringe benefit can be reduced by the otherwise deductible rule contained in section 44 of the FBTAA.

As discussed in question 4(a) above, section 32-5 of the ITAA 1997 prevents a deduction for entertainment expenses. The dinners constitute the provision of entertainment as the definition of 'entertainment' provided by section 32-5 of the ITAA 1997 is shared by the definition provided in Division 9A of the FBTAA.

Therefore you cannot reduce the taxable value of the benefits cannot be reduced by the otherwise deductible rule.

In order to determine whether you will incur an FBT liability in relation to each of the gala dinners it must be determined whether any exemptions apply. The minor benefits exemption contained in section 58P is the only exemption that may apply to the provision of these benefits.

Refer to question 5. The same reasoning can be applied to conclude that it would not be unreasonable to treat each of the gala dinners as a fringe benefit and that therefore the provision of each of the dinners will not be exempt as a minor benefit.

In summarising, each of the gala dinners constitutes the provision of meal entertainment and will be valued as a property benefit where the taxable value cannot be reduced by the use of the otherwise deductible rule. The benefits are not considered to be minor benefits and are therefore not exempt benefits. The benefits meet the definition of a fringe benefit in accordance with subsection 136(1) of the FBTAA and therefore you will incur an FBT liability in relation to the provision of each of the themed dinners and after dinner drinks.

b) Will you incur a fringe benefits tax liability for each of the gala dinners provided to your clients?

Refer to question 2(b) above.

The same reasoning can be applied to conclude that as your clients are not your employees for the purposes of the FBTAA you will not incur a FBT liability for the gala dinners provided to your clients on days two, three and four.

c) Can you claim an income tax deduction in relation to each of the gala dinners provided to your employees?

Refer to the discussion at question 7(a) above. It has been concluded that the provision of the gala dinners constitutes the provision of meal entertainment but due to no election being made under Division 9A of the FBTAA the benefits are classified as property benefits and their taxable value cannot be reduced by the otherwise deductible rule. It has also been concluded that the benefits are not minor benefits and will therefore have a taxable value.

The provision of a fringe benefit is a loss or outgoing necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income and meets the requirements of subsection 8-1(1) of the ITAA 1997. As previously discussed subsection 8-1(2) of the ITAA disallows a deduction to the extent that the expense is prevented from being deducted by a provision of the ITAA 1997 or the ITAA 1936. Section 32-5 of the ITAA 19997 disallows a deduction for entertainment expenses but with some exceptions. The gala dinners constitute the provision of entertainment for these purposes and would normally be prevented from being deducted by section 32-5 unless one of the exceptions apply.

Section 32-20 sets out the main exception:

Section 32-20 The main exception - fringe benefits

32-20 Section 32-5 does not stop you deducting a loss or outgoing to the extent that you incur it in respect of providing *entertainment by way of *providing a *fringe benefit.

But this exception does not apply to the extent that the taxable value of the *fringe benefit is reduced under section 63A of the Fringe Benefits Tax Assessment Act 1986.

The gala dinners constitute the provision of entertainment by way of providing a fringe benefit. Section 32-20 of the ITAA 1997 applies to ensure that a deduction for the expenditure is not prevented by section 32-5 of the ITAA 1997.

None of the other reasons for denying deductibility listed in subsection 8-1(2) of the ITAA 1997 are applicable to prevent the deductibility of the expense.

Therefore you are entitled to deduct the expense incurred in providing the fringe benefits consisting of the gala dinners under section 8-1 of the ITAA 1997.

d) Can you claim an income tax deduction in relation to each of the gala dinners provided to your clients?

Refer to the discussion at question 7(c) above. As discussed section 32-5 of the ITAA 1997 generally acts to disallow a deduction under section 8-1 of the ITAA 1997 when the loss or outgoing is incurred in respect of providing entertainment. As discussed above, the main exception to this rule set out in section 32-20 of the ITAA 1997 is where you incur the expense in respect of providing entertainment by way of providing a fringe benefit.

Subsection 995-1(1) of the ITAA 1997 sets out when you will be considered to be 'providing a fringe benefit'. Subsection 995-1(1) states:

Provide a *fringe benefit or economic benefit includes allow, confer, give, grant or perform the benefit.

Note: This is based on the definition of provide in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986.

As discussed in question 2(b) above, subsection 136(1) provides the following definition of a fringe benefit:

fringe benefit, in relation to an employee, in relation to the employer of the employee, in relation to a year of tax, means a benefit:

(a) provided at any time during the year of tax; or

(b) provided in respect of the year of tax;

being a benefit provided to the employee or to an associate of the employee by:

(c) the employer; or

(d) an associate of the employer; or

(e) a person (in this paragraph referred to as the arranger) other than the employer or an associate of the employer under an arrangement covered by paragraph (a) of the definition of arrangement between:

(i) the employer or an associate of the employer; and

(ii) the arranger or another person; or

(ea) a person other than the employer or an associate of the employer, if the employer or an associate of the employer:

(i) participates in or facilitates the provision or receipt of the benefit; or

(ii) participates in, facilitates, or promotes a scheme or plan involving the provision of the benefit;

and the employer or associate knows, or ought reasonably to know, that the employer or associate is doing so;

in respect of the employer of the employee, but does not include…

'Arrangement' is also defined by subsection 136(1) of the FBTAA:

arrangement means:

(a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied, and whether or nor enforceable, or intended to be enforceable, by legal proceedings; and…

In summarising, an employee can be provided with a fringe benefit by either

· the employer

· an associate of the employer

· a person other than the employer or an associate of the employer under an arrangement covered by paragraph (a) of the definition of 'arrangement' in subsection 136(1) of the FBTAA, where the arrangement is between the employer or an associate of the employer and, the arranger or another person.

These provisions work together to allow you to be taken to have provided a fringe benefit to a person who is not your employee, for the purposes of the exception contained in section 32-20 of the ITAA 1997 in certain circumstances.

TR 97/17 clarifies:

(h) Meals provided under an 'arrangement'

Question 15

125. Where an employer provides a meal to an employee of a client, is the meal considered to be a fringe benefit provided to the employee of the client under an 'arrangement' between the employer and the client?

Answer

126. There is no fringe benefit unless the client participates in, facilitates or promotes the provision of or receipt of the benefit. There will be a fringe benefit only if the client knew or ought to have known, that he or she was participating, facilitating or promoting the provision or receipt of the benefit.

Example 15.1

127. Company A and Company B have a business relationship. An employee of Company A takes an employee of Company B out to lunch and uses his company credit card to pay for the lunch. Company B did not facilitate or promote the provision or receipt of the lunch provided to its employee. The provision of food and drink to the employee of Company A is entertainment and subject to FBT. The provision of food and drink to the employee of Company B is not a fringe benefit as Company B dud not agree and was not involved in relation to the provision or receipt of the benefit. Company A may claim a deduction for the costs of providing the fringe benefit to the employee under the provisions of section 32-20 of the ITAA. No income tax deduction is allowed in respect of the costs of providing the entertainment to the employee of the client as section 32-20 is not applicable, therefore the denying provisions of section 32-5 applies.

Your clients provided representatives of their businesses to you to attend the event in order to provide training to your staff and to build relationships between your staff and your clients. As previously discussed, the main purpose of the event was to provide training to staff and to provide staff with the opportunity to meet with representatives of your clients and build relationships with them.

Considering the definition of a fringe benefit contained in subsection 136(1) of the FBTAA, it is considered that the gala dinners provided to your clients constitute a fringe benefit. Your clients were provided with the dinners in respect of their employment. The employers of your clients did not provide the benefit to their employees, however as per the definition of fringe benefit, a fringe benefit can be provider to an employee by an associate of an employer or an 'arranger'.

The situation that occurred in your case falls within the subsection 136(1) definition of 'arrangement'. Therefore you, acting as an 'arranger', provided your clients' employees (your clients) with a fringe benefit.

Refer to question 7(c) above. The same reasoning can therefore be applied to conclude that you are therefore entitled to deduct the costs incurred in providing the benefit to your clients under section 8-1 of the ITAA 1997. Section 32-20 of the ITAA 1997 works to ensure that a deduction for the expenditure is not prevented by section 32-5 of the ITAA 1997 and none of the other reasons for denying deductibility listed in subsection 8-1(2) of the ITAA 1997 are applicable to prevent the deductibility of the expense.

Question 8

a) Will you incur a fringe benefits tax liability for the room hire and room set up for the training session in relation to your employees?

As previously discussed, subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) provides the following definition of a 'fringe benefit':

fringe benefit, in relation to an employee, in relation to the employer of the employee, in relation to a year of tax, means a benefit:

(a) provided at any time during the year of tax; or

(b) provided in respect of the year of tax;

being a benefit provided to the employee or to an associate of the employee by:

(c) the employer; or

(d) …

in respect of the employment of the employee, but does not include:

(e) …

Subsection 136(1) also provides a definition of the term 'benefit' in this context:

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.

In incurring the costs of the room hire and room set up for the training seminar for your employees you are not providing them with a benefit for the purposes of the FBTAA and therefore you will not incur an FBT liability in relation to the room hire and room set up for the training session.

b) Will you incur a fringe benefits tax liability for the room hire and room set up for the training session in relation to your clients?

Refer to the reasoning at question 2(b) above.

The same reasoning can be applied to conclude that as your clients are not your employees for the purposes of the FBTAA you will not incur a FBT liability for the room hire and room setup provided to your clients.

c) Can you claim an income tax deduction in relation to the room hire and room set up for the training session?

The costs incurred in relation to the room hire and room set up for the training session were expended in order for your clients to provide training to your employees at the training session.

Refer to the reasoning at question 2(c) and 2(d) above. The same reasoning can be applied to conclude that the costs incurred in relation to the room hire and room set up in relation to your employees' attendance at the training session, are deductible expenses under section 8-1 of the ITAA 1997. The costs are expended to enable your employees to receive the training provided at the training session and are considered to be an outgoing incurred in carrying on a business for the purpose of gaining or producing assessable income and are not prevented from being a deduction for any of the reasons contained in subsection 8-1(2) of the ITAA 1997. Therefore the costs are deductible under section 8-1 of the ITAA 1997.

Question 9

a) Will you incur a fringe benefits tax liability for the morning tea and lunch provided to your employees at the training session?

Refer to question 4(a) above. The provision of the morning tea and lunch to your employees on day two is a fringe benefit in accordance with the definition provided by subsection 136(1) of the FBTAA.

As was the case with the breakfasts considered in question 4(a), the most relevant types of benefit in relation to the provision of the morning tea and lunch to your employees are:

· Meal entertainment in accordance with Division 9A of the FBTAA; and

· Property fringe benefits in accordance with Division 11 of the FBTAA.

As discussed in question 4(a), TR 97/17 sets out the four relevant factors that should be considered in determining whether the provision of food or drink constitutes entertainment - why, what, when and where. At paragraph 23 TR 97/17 states that food or drink provided for the purpose of refreshment, during work time or while an employee is travelling on work is less likely to have the character of entertainment. Further, morning and afternoon teas and light meals are generally not considered to constitute entertainment. Considering the four factors and the examples provided by TR 97/17 the morning tea and light lunch provided would not constitute entertainment.

Applying the same reasoning as applied in question 4(a) above, the provision of food and drink in the form of the morning tea and light lunch will be a property benefit in accordance with section 40 of the FBTAA, the taxable value of which can be reduced by the use of the otherwise deductible rule contained in section 44 of the FBTAA. Therefore you will not have a fringe benefits tax liability in relation to the provision of the morning tea and lunch provided to your employees on day two.

b) Will you incur a fringe benefits tax liability for the morning tea and lunch provided to your clients at the training session?

Refer to question 2(b) above. The same reasoning can be applied to conclude that, as your clients are not your employees for the purposes of the FBTAA you will not incur a FBT liability for the morning tea and lunch provided to your clients.

c) Can you claim an income tax deduction in relation to the morning tea and lunch provided to your employees at the training session?

Refer to question 4(c) above. The same reasoning can be applied to conclude that the costs incurred in providing the morning tea and lunch to your employees is deductible under section 8-1 of the ITAA 1997.

d) Can you claim an income tax deduction in relation to the morning tea and lunch provided to your clients at the training session?

Refer to question 4(d) above. The same reasoning can be applied to conclude that the costs of the morning tea and lunch provided to your clients on day two are therefore deductible under section 8-1 of the ITAA 1997.

Question 10

a) Will you incur a fringe benefits tax liability for the recreational activities provided to your employees?

You provide your employees with the opportunity to participate in various recreational activities at the event.

The provision of these activities is a fringe benefit within the meaning provided by subsection 136(1) of the FBTAA.

The FBTAA states that 'entertainment' has the meaning given by section 32-10 of the ITAA 1997. As previously discussed the ITAA 1997 states that entertainment includes entertainment by way of recreation. Recreation is a defined term in the ITAA 1997 and the definition provided by section 995-1 is:

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

The recreational activities are considered to be entertainment by way of recreation for the purposes of the FBTAA.

There is no specific category of fringe benefit for the provision of entertainment. The FBT guide for employers provides guidance in classifying and calculating the taxable value for benefits that are recreational entertainment:

14.10 Recreational entertainment

Recreational entertainment includes amusement, sport and similar leisure time pursuits - for example, a game of golf, theatre or movie tickets, a joy flight or a harbour cruise.

If you provide recreational entertainment to your employees, you need to:

14.11 If the benefit provided is recreational entertainment, does an exemption apply?

Depending on the standard of entertainment provided, the minor benefits exemption may apply (refer to section 20.8 of Fringe benefits tax exempt benefits).

14.12 Taxable value of recreational entertainment

The taxable value of recreational entertainment is calculated using the respective valuation rule according to whether the benefit is an expense payment (refer to Expense payment fringe benefits), property (refer to Property fringe benefits) or residual fringe benefit (refer to Residual fringe benefits).

Where you provide recreational entertainment by hiring or leasing entertainment facilities, you may elect to use the 50-50 split method.

In summary in order to determine whether the provision of recreational entertainment will result in a FBT liability for you, you must:

1. consider whether an exemption applies

2. if no exemption applies, decide how you're going to value the entertainment (and determine whether there is a FBT liability in accordance with the classification of benefit).

1. Does an exemption apply?

The notional taxable value of some of the benefits is less than $300 and therefore the minor benefits exemption contained in section 58P of the FBTAA could potentially apply to exempt the benefits.

Refer to question 5. The same reasoning can be applied to conclude that it would not be unreasonable to treat any of the recreational activities as a fringe benefit and that therefore the provision of any of the recreational activities with a notional taxable value of less than $300 will not be exempt as a minor benefit.

None of the other exemptions in the FBTAA apply to exempt the benefit.

2. If no exemption applies, how will you value the entertainment and does this result in an FBT liability?

As stated above, the taxable value of recreational entertainment is calculated using the appropriate valuation rules depending on whether the benefit is an expense payment, property or residual fringe benefit and where you provide recreational entertainment by hiring or leasing entertainment facilities you can elect to use the 50-50 split method.

Chapter 14 of the FBT Guide for employers provides guidance on determining when you will be considered to be providing recreational entertainment by hiring or leasing entertainment facilities:

Hiring or leasing entertainment facilities

Entertainment facility leasing expenses are the expenses you incur in hiring or leasing:

· a corporate box

· boats or planes for providing entertainment

· other premises or facilities for providing entertainment.

…

Other premises or facilities for providing entertainment

The phrase 'other premises or facilities' has a wide meaning. 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

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

The following are examples of 'other premises or facilities' for providing entertainment:

· …

· where you hire or lease a golf course for a set time or full day to the exclusion of others for example, a corporate golf day

· where you hire one or more tennis courts to the exclusion of others for example, a corporate tennis day.

The following would not be 'other premises or facilities' for providing entertainment:

· a seat on a plane

· a seat at a sporting event

· table in the dining room of a club or hotel

· golf green fees or memberships

· caravan site fees.

In summary, depending on the arrangement that you entered into regrading the provision of some of the recreational entertainment events they may be entertainment facility leasing expenses or, for the same reasoning discussed in question 2(a), they will be residual benefits as defined by section 45.

If a benefit is an entertainment facility leasing expense you can elect to value the expense using the 50-50 split method contained in section 152B which will result in an FBT liability for you:

152B Employer may elect 50/50 split method for entertainment facility leasing costs

If:

(a) the taxable value of one or more fringe benefits of an employer for an FBT year is attributable, in whole or in part, to entertainment facility leasing expenses incurred by the employer in the FBT year; and

(b) the employer elects that this section applies for the FBT year; then:

(c) the aggregate fringe benefit amount for the employer for the FBT year is to be reduced by so much of the total taxable value of all fringe benefits as is attributable to entertainment facility leasing expenses; and

(d) the aggregate fringe benefit amount for the employer for the FBT year is to then be increased by 50% of the total of entertainment facility leasing expenses incurred by the employer in the FBT year (including expenses not taken into account under paragraph (a)).

Note: The effect of this is that the employer's aggregate fringe benefits amount (see section 5C) for the FBT year will include 50% of the entertainment facility leasing expenses incurred by the employer for the FBT year.

If the benefits are valued as residual fringe benefits then the taxable value can potentially be reduced by the otherwise deductible rule per section 52 of the FBTAA where the employee would have been entitled to a once off income tax deduction had they incurred the expense themselves.

Would your employee have been entitled to an income tax deduction for the cost of the recreational entertainment if they incurred the expense themselves?

As established above, recreational events constitute entertainment by way of recreation for the purposes of the FBTAA and in accordance with section 32-10 of the ITAA 1997. Section 32-5 of the ITAA disallows a deduction for entertainment expenses with certain exceptions. None of the exceptions listed are applicable in this instance and therefore your employee would not have been entitled to a deduction for the cost of the recreational events had they incurred the expense themselves.

Summary

You will therefore have a FBT liability in relation to the recreational entertainment benefits provided to your employees.

b) Can you claim an income tax deduction in relation to the recreational activities provided to your employees?

Refer to the reasoning discussed at question 10(a) above. In providing each of the activities you are providing entertainment by way of recreation and the provision of these activities is a fringe benefit provided to your employees.

The costs incurred in providing a fringe benefit to your employee are deductible under subsection 8-1(1) of the ITAA1997. Section 32-20 of the ITAA 1997 operates to allow a deduction for the provision of entertainment where the loss or outgoing is incurred in respect of providing entertainment by way of providing a fringe benefit. None of the other reasons to disallow a deduction described in subsection 8-1(2) of the ITAA 1997 are relevant in this instance and therefore you are entitled to claim a deduction under section 8-1of the ITAA1997 in relation to the provision of the recreational entertainment on day three.

Question 11

a) Will you incur a fringe benefits tax liability for the lunches provided to your employees following the recreational activities?

Refer to question 4(a).

The same reasoning can be applied to conclude that the provision of the lunches to your employees following the recreational activities are fringe benefits. The lunches do not constitute meal entertainment. The lunches are a property fringe benefit and their taxable value can be reduced to nil by the use of the otherwise deductible rule contained in section 44 of the FBTAA as the employees are travelling in the course of their employment and for the same reasons discussed in relation to the breakfasts in question 4(a) above, the employees would have been entitled to a deduction for the cost of the lunch had they incurred the expense themselves. Therefore you will not have a fringe benefits tax liability in relation to the provision of the lunches to your employees on day three.

b) Can you claim an income tax deduction in relation to the lunches provided to your employees following the recreational activities?

Refer to question 4(c).

The same reasoning can be applied to conclude that the cost of the lunches provided to your employees is an outgoing incurred in carrying on a business for the purpose of gaining or producing assessable income and is not prevented from being a deduction for any of the reasons contained in subsection 8-1(2) of the ITAA 1997. Therefore, the costs incurred in providing the lunches on day three are deductible under section 8-1 of the ITAA 1997.

Question 12

a) Will you incur a fringe benefits tax liability for the lunch provided to your employees at the feedback seminar?

Refer to question 2(a). The provision of the lunches to your employees at the feedback seminar constitutes a fringe benefit for the purposes of subsection 136(1) of the FBTAA.

The most relevant types of benefit in relation to the lunches are;

· Meal entertainment in accordance with Division 9A of the FBTAA.

· Property fringe benefits in accordance with Division 11 of the FBTAA.

Refer to the discussion of meal entertainment at question 4(a) above. An entertainment act performed at the lunch. Considering the relevant definitions and the guidance provided by paragraph 14.3 of the FBT Guide for employers and TR97/17, the lunch at the sales feedback session is considered to be meal entertainment.

As previously discussed, you did not elect to value any meal entertainment in accordance with the valuation rules contained in Division 9A of the FBTAA and therefore the standard valuation rules apply depending on what category of benefit the meal entertainment is.

The provision of the lunch constitutes a property fringe benefit in accordance with section 40 of the FBTAA, the taxable value of which can be reduced by the use of the otherwise deductible rule contained in section 44 of the FBTAA.

Would your employees have been entitled to a once off deduction for the cost of the lunch had they incurred the expense themselves?

Your employees are travelling in the course of their employment and as discussed at question 4 the costs of meals such as lunch are normally deductible.

However, the lunch at the feedback seminar has an element of entertainment and section 32-5 of the ITAA 1997 disallows a deduction for entertainment expenses. As concluded above the lunch is considered to be meal entertainment. As discussed above at question 1, section 32-5 of the ITAA 1997 however provides an exception to the rule in section 32-2 and allows a deduction for providing food, drink, accommodation or travel that it reasonably incidental to an individual attending a seminar that goes for at least four hours.

As concluded in question 1, the event is a seminar that goes for at least four hours in accordance with the definition provided by section 32-65.

For the exception contained in section 32-5 to apply further conditions must be satisfied. The food, drink, accommodation or travel must be reasonably incidental to the individuals attendance at the seminar and the exclusions to the exception must (32-35(a), (b) and (c)) must not apply.

The FBT Guide for employers provides guidance in determining when food and drink is considered to be reasonably incidental to an individual's attendance at a seminar. The FBT Guide for employers states at chapter 14:

What does reasonably incidental mean?

Food or drink is reasonably incidental to a seminar if it:

· is provided for sustenance because of the duration, time of day or location of the seminar

· is provided immediately before, during or immediately following working sessions of the seminar

· is available to all seminar participants

The lunch was provided to all seminar participants during a working session of the seminar. Considering the factors listed above, the lunch is considered to be reasonably incidental to the employees' attendance at a seminar.

Section 32-35 states that the exception provided by section 32-35 does not apply if:

(a) the seminar is a *business meeting; or

(b) the *seminar's main purpose is to promote or advertise a *business (or prospective *business) or its goods or services; or

(c) the *seminar's main purpose is to provide *entertainment at or in connection with, the seminar.

Section 32-65(3) provides the following definitions that assist in interpreting these requirements:

32-65(3) A *seminar is a business meeting if its main purpose is for individuals who are (or will be) associated with the carrying on of a particular *business to give or receive information, or discuss matters, relating to the business.

However, the *seminar is not a business meeting if it:

(a) is organised by (or on behalf of) an employer solely for either or both of these purposes:

(i) training the employer and the employer's employees (or just those employees) in matters relevant to the employer's *business (or prospective business);

(ii) enabling the employer and the employer's employees (or just those employees) to discuss general policy issues relevant to the internal management of the employer's *business; and

(b) is conducted on property that is occupied by a person (other than the employer) whose *business includes organising seminars or making property available for conducting seminars.

The seminar was not organised in order for individuals to give or received information relating to the business but was organised in order to provide training to the employees on matters relevant to your business. The working sessions of the seminar was conducted on property that is occupied by a person, other than by you, whose business includes organising seminars or making property available for conducting seminars. Therefore it is considered that the seminar is not a business meeting for the purposes of section 32-35.

The seminar's main purpose was not to promote or advertise a business or prospective business, or its goods or services and as discussed at question 2 above, considering Amway, the seminar's main purpose was not to provide entertainment at, or in connection with, the seminar. Therefore section 32-35(b) and 32-35(c) do not operate to exclude the exception contained in section 32-35 from operating.

Summary

Had the employees incurred the expense themselves they would have been entitled to a once off deduction for the cost of the lunch and therefore the otherwise deductible rule operates to reduce the taxable value of the lunch to nil and you will not incur an FBT liability for the cost of providing the lunch to your employees.

(b) Will you incur a fringe benefits tax liability for the lunch provided to your clients at the feedback seminar?

Refer to question 2(b) above.

The same reasoning can be applied to conclude that the provision of the lunch provided to your clients at the feedback seminar will not result in an FBT liability for you as your clients are not your employees as required by subdivision 136(1) of the FBTAA.

(c) Can you claim an income tax deduction in relation to the lunch provided to your employees at the feedback seminar?

You incur the costs in providing the lunch to your employees at the feedback seminar in order to provide your employees with entertainment by way of providing a fringe benefit.

Refer to question 7 above; the same reasoning can be applied to conclude that section 32-20 of the FBTAA operates to ensure that a deduction for the cost of providing the fringe benefit is not denied by the operation of section 32-5 of the ITAA 1997. None of the other exceptions listed in subsection 8-1(2) operate to deny the deductibility of the expense. Therefore you are entitled to deduct the costs incurred under section 8-1 of the ITAA 1997.

(d) Can you claim an income tax deduction in relation to the lunch provided to your clients at the feedback seminar?

Refer to the discussion at question 7 above. The same reasoning can be applied to conclude that you are entitled to a deduction for the costs of providing the lunch to your clients at the feedback seminar

Question 13

a) Will you incur a fringe benefits tax liability for the coach transfers and boat charter in relation to your employees?

The coach transfers and boat charter are entertainment for both the purposes of the FBTAA and the ITAA 1997. As concluded at question 1, the seminar is the whole of the event and therefore the coach transfers and boat charter are not considered to be transport to bring attendees to the seminar. The return airfares and transfers discussed at question 2 are provided to bring employees to the seminar. The coach transfers and boat charter on day 4 are provided as entertainment.

Refer to question 10.

The same reasoning can applied to conclude that the coach transfers and boat charter constituted the provision of recreational entertainment and meets the definition of a fringe benefit provided by subsection 136(1) of the FBTAA. The same reasoning can again be applied to conclude that the minor benefits exemption contained in section 58P of the FBTAA does not apply. The benefits will either be entertainment facility leasing expenses or residual benefits. Importantly in relation to entertainment facility leasing expenses chapter 14 of the FBT Guide for employers states:

Boats or planes for providing entertainment

Expenses incurred in hiring or leasing a boat or plane in their entirety for the purposes of providing entertainment will be 'entertainment facility leasing expenses'.

For example, the hiring or leasing of a houseboat or a charter flight where the whole plane is hired for entertainment purposes would meet the definition of entertainment facility leasing expenses

If the benefits are residual benefits the taxable value cannot be reduced by the otherwise deductible rule as section 32-5 operates to deny a deduction for the costs and as the expenses are not incurred as travel expenses to bring the individuals to the seminar, the exception contained in section 32-35 does not apply.

You will therefore have a FBT liability in relation to the recreational entertainment benefits provided to your employees in the form of the coach transfer and boat charter.

b) Will you incur a fringe benefits tax liability for the coach transfers and boat charter in relation to your clients?

Refer to question 2(b) above. The same reasoning can be applied to conclude that as your clients are not your employees for the purposes of the FBTAA you will not incur a FBT liability for the coach transfers and boat charter.

c) Can you claim an income tax deduction in relation to the coach transfers and boat charter in relation to your employees?

Refer to the reasoning discussed at 13(a) above. In providing the coach transfers and boat charter to your employees you are providing them with entertainment by way of recreation and the provision of these activities is a fringe benefit provided to your employees.

The costs incurred in providing a fringe benefit to your employee are deductible under subsection 8-1(1) of the ITAA1997. Section 32-20 of the ITAA 1997 operates to allow a deduction for the provision of entertainment where the loss or outgoing is incurred in respect of providing entertainment by way of providing a fringe benefit. None of the other reasons to disallow a deduction described in subsection 8-1(2) of the ITAA 1997 are relevant in this instance and therefore you are entitled to claim a deduction under section 8-1of the ITAA1997 in relation to the provision of the recreational entertainment on day four.

d) Can you claim an income tax deduction in relation to the coach transfers and boat charter in relation to your clients?

Refer to the reasoning at question 7(d) above. The same reasoning can be applied to conclude that you are providing your clients with entertainment by way of a fringe benefit and, for the same reasons, are entitled to an income tax deduction for the costs.

Question 14

a) Will you incur a fringe benefits tax liability for the hire of the seminar location in relation to your employees?

Refer to question 8 above.

The same reasoning can be applied to conclude that the hire of the seminar location by you as a venue for a working session of the seminar is not a fringe benefit provided to your employees. Therefore, you will not incur an FBT liability in relation to the hire of the seminar location for your employees.

b) Will you incur a fringe benefits tax liability for the hire of the seminar location in relation to your clients?

Refer to question 2(b) above.

The same reasoning can be applied to conclude that as your clients are not your employees for the purposes of the FBTAA you will not incur a FBT liability for the hire of the seminar location in relation to your clients.

c) Can you claim an income tax deduction in relation to hire of the seminar location?

The costs incurred in relation to the hire of the seminar location are expended in order to provide training to your employees.

Refer to the reasoning at question 8(c) above. The same reasoning can be applied to conclude that the costs incurred in relation to hire of the seminar location on day four are deductible expenses under section 8-1 of the ITAA 1997. The costs are expended to enable your employees to receive the training provided at the training session and are considered to be an outgoing incurred in carrying on a business for the purpose of gaining or producing assessable income and are not prevented from being a deduction for any of the reasons contained in subsection 8-1(2) of the ITAA 1997. Therefore the costs are deductible under section 8-1 of the ITAA 1997.

Question 15

(a) Will you incur a fringe benefits tax liability for the entertainment act provided to your employees at the feedback seminar?

Refer to question 10(a) above.

The same reasoning can be applied to conclude that the provision of the entertainment act to your employees constitutes recreational entertainment and is a fringe benefit for the purposes of subsection 136(1). For the same reasons as the other items of recreational entertainment discussed in question 10(a), the provision of the entertainment by way of the entertainment act to your employees is not a minor benefit, is a residual fringe benefit and the taxable value cannot be reduced by the otherwise deductible rule.

(b) Will you incur a fringe benefits tax liability for the entertainment act provided to your clients at the feedback seminar?

Refer to question 2(b) above.

The same reasoning can be applied to conclude that the provision of the entertainment act provided to your clients will not result in an FBT liability for you as your clients are not your employees as required by subsection 136(1) of the FBTAA.

(c) Can you claim an income tax deduction in relation to the entertainment act provided to your employees at the feedback seminar?

The provision of the entertainment act to your employees constitutes 'entertainment' for the purposes of both the FBTAA and the ITAA1997, is a fringe benefit.

Refer to question 7(c) above.

The same reasoning can be applied to conclude that you are entitled to claim an income tax deduction in relation to the entertainment provided by the entertainment act to your employees at the feedback seminar.

(d) Can you claim an income tax deduction in relation to the entertainment act provided to your clients at the feedback seminar?

Refer to the reasoning at question 7(d) above. The same reasoning can be applied to conclude that you are providing your clients with a fringe benefit under an arrangement and the costs incurred are deductible under section 8-1 of the ITAA 1997.

Question 16

(a) Will you incur a fringe benefits tax liability for the drinks provided to your employees on the boat trip?

Refer to 7(a) above. The same reasoning can be applied to conclude that the drinks on the boat trip on day four constitute meal entertainment and will be valued as a property benefit where the taxable value cannot be reduced by the use of the otherwise deductible rule. The benefits are not considered to be minor benefits and are therefore not exempt benefits. The benefits meet the definition of a fringe benefit in accordance with subsection 136(1) of the FBTAA and therefore you will incur an FBT liability in relation to the provision of the drinks on the boat trip.

(b) Will you incur a fringe benefits tax liability for the drinks provided to your clients on the boat trip?

Refer to question 2(b) above.

The same reasoning can be applied to conclude that as your clients are not your employees for the purposes of the FBTAA you will not incur a FBT liability for drinks provided on the boat trip.

(c) Can you claim an income tax deduction in relation to the drinks provided to your employees on the boat trip?

Refer to the reasoning at question 7(c) above.

The same reasoning can be applied to conclude that you are entitled to claim an income tax deduction in relation to the drinks provided to your employees on the boat trip.

(d) Can you claim an income tax deduction in relation to the drinks provided to your clients on the boat trip?

Refer to question 7(d) above.

The same reasoning can be applied to conclude that you are providing your clients with a fringe benefit under an arrangement and the costs incurred are deductible under section 8-1 of the ITAA 1997.

Question 17

a) Will you incur a fringe benefits tax liability for the lunches provided to your employees on the final day of the event?

Refer to question 4(a) above.

The same reasoning can be applied to conclude that the provision of lunches to your employees on the final day of the event:

· is a fringe benefit

· does not amount to meal entertainment for the purposes of Division 9A of the FBTAA

· is a property fringe benefit in accordance with section 40 of the FBTAA and the taxable value of the property fringe benefit provided can be reduced to nil under the otherwise deductible rule as, had the employee incurred the expense themselves they would have been entitled to an income tax deduction for the cost.

Therefore, you will not have a fringe benefits tax liability in relation to the provision of the lunches to your employees on the final day of the event.

b) Will you incur a fringe benefits tax liability for the lunches provided to your clients on the final day of the event?

Refer to question 2(b) above. The same reasoning can be applied to conclude that as your clients are not your employees for the purposes of the FBTAA you will not incur a FBT liability for the lunches provided to them on the final day of the event.

c) Can you claim an income tax deduction in relation to the lunches provided to your employees on the final day of the event?

Refer to question 4(c) above.

The same reasoning can be applied to conclude that you would be entitled to an income tax deduction in relation to the lunches provided to your employees on the final day of the event.

d) Can you claim an income tax deduction in relation to the lunches provided to your clients on the final day of the event?

Refer to question 4(d) above.

The same reasoning can be applied to conclude that you would be entitled to an income tax deduction in relation to the lunches provided to your clients on the final day of the event.