Edited version of your written advice

Authorisation Number: 1012714910140

Ruling

Subject: Fringe benefits tax

Question 1

Will the calculation of the employer's aggregate non-exempt amount include the capital expenses incurred by the employer in respect of the use of the gym facility located on its premises by an employee?

Answer

No.

Question 2

Will the calculation of the employer's aggregate non-exempt amount include the leasing expenses incurred by the employer in respect of the use of the gym facility located on its premises by an employee?

Answer

No.

Question 3

Will the calculation of the employer's aggregate non-exempt amount include the electricity expenses and equipment repairs incurred by the employer as a result of an employee using the gym facility located on its premises?

Answer

Yes.

This ruling applies for the following period:

1 April 2014 to 31 March 2017

The scheme commences on:

1 April 2014

Relevant facts and circumstances

The employer is a registered health promotion charity.

A gym facility was installed on the employer's premises primarily for research purposes. The gym is located within the business premises of the employer.

The employer leases the building including the room which has been converted to a gym facility.

There are a number of research projects which have been run in the gym including programs using employees as participants.

The gym facility is currently under-utilised and consideration is being given to the possibility of employees using the gym at times when it is not being used for other purposes.

The employer has identified several items of expenditure incurred in relation to the provision of the use gym facility by employees:

• a proportion of lease costs of the premises that includes the room that has been converted into a gym facility

• electricity used when employees use certain equipment on lighting or cooling fans whilst using the gym facility

• ad hoc repairs to the equipment

• cleaning costs for the general area as well as the shower/toilet area

• costs for monitoring the gym facility such as installation of cameras for occupational health and safety purposes

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Division 1 of Part IIA

Fringe Benefits Tax Assessment Act 1986 Section 38

Fringe Benefits Tax Assessment Act 1986 Section 57

Fringe Benefits Tax Assessment Act 1986 Subsection 47(2)

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Income Tax Assessment Act 1986 Section 8-1

Income Tax Assessment Act 1986 Section 32-5

Income Tax Assessment Act 1986 Subdivision 32-B

Income Tax Assessment Act 1986 Section 995

Reasons for decision

Under the arrangement the employer is considering providing its employees with the use of a gym facility located on its premises.

The provision of the use of the gym facility by the employer to an employee will give rise to a 'benefit' as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA).

Subsection 57A(5) of the FBTAA provides that a benefit provided in respect of employment of an employee by an employer that is a registered health promotion charity is an exempt benefit.

As the employer is a registered health promotion charity the benefit arising from the use of the gym facility by an employee will be an exempt benefit under subsection 57A(5) of the FBTAA where the use is provided in respect of the employment of the employee. An example of a situation where the use will not be in respect of the employment of the employee is where the employee uses the gym as a result of being chosen to be a participant in a research program. In such a situation, neither a fringe benefit, nor an exempt benefit will arise from the use of the gym.

Although the benefit is an exempt benefit, it may be included in the calculation of the employer's aggregate non-exempt amount. In general terms, a health promotion charity will not be liable to pay fringe benefits tax unless a particular employee receives benefits with a value in excess of $30,000.

The method for calculating the employer's aggregate non-exempt amount is set out in subsections 5B(1E) to 5B(1L) of the FBTAA. In general terms, these provisions provide that the value of a benefit will be included in the calculation of the aggregate non-exempt amount unless the benefit is:

• a benefit that would be exempt if it was provided by an employer that did not come within section 57A; or

• a benefit constitutes the provision of meal entertainment; or

• a car parking benefit; or

• the taxable value of the benefit is wholly or partly attributable to entertainment facility leasing expenses.

For the purpose of this Ruling, the exceptions relating to the provision of meal entertainment and a car parking benefit are not relevant.

For the purpose of this Ruling, the relevant exceptions are:

1. the exemption provided under subsection 47(2) of the FBTAA for a residual benefit that consists of the use of a recreational facility located on business premises of the employer; and

2. the exception that applies to benefits that are wholly or partly attributable to entertainment facility leasing expenses.

If either of these exceptions applies to the benefit arising from the use of a gym facility to an employee by the employer, the benefit will not be included in the calculation of the aggregate non-exempt amount.

1. Will the benefit be an exempt benefit under subsection 47(2) of the FBTAA?

Subsection 47(2) of the FBTAA states:

Where:

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

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

(ii) …; and

(b)  the recreational facility … is located on business premises of:

(i) the employer; or

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

the benefit is an exempt benefit.

It is agreed that the benefit that is the subject of this Ruling can be considered to be the use of a recreational facility located on the business premises of the employer. Therefore, the benefit will be an exempt benefit under subsection 47(2) of the FBTAA if it is a residual benefit.

Is the benefit a residual benefit?

Section 45 of the FBTAA provides that a benefit will be a residual benefit if it is not a benefit by virtue of a provision of Subdivision A of Divisions 2 to 11 (inclusive). For the purpose of this Ruling the relevant Division is Division 10 which applies to tax-exempt body entertainment benefits. If the benefit is a tax-exempt body entertainment benefit, it will not be a residual benefit. However, if the benefit is not a tax-exempt body entertainment benefit, it will be a residual benefit.

Is the benefit a tax-exempt body entertainment benefit?

Section 38 of the FBTAA sets out the circumstances in which a tax-exempt body entertainment benefit will arise. Section 38 states:

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

This section contains the following 3 requirements:

(i) a person (the provider) incurs non-deductible exempt entertainment expenditure;

(ii) the expenditure is wholly or partly in respect of the provision of entertainment to an employee, or an associate of an employee;

(iii) the provision of entertainment is in respect of the employment of the employee to whom, or to whose associate the entertainment is provided.

Therefore, for a tax-exempt body entertainment benefit to arise from the use of the gym facility by an employee, the employer must incur expenditure. Further, the expenditure must be respect of the provision of entertainment. The benefit arises at the time the expenditure is incurred.

Entertainment for the purposes of the FBTAA is defined as 'entertainment by way of food drink or recreation' and recreation in turn is defined to include 'amusement, sport or similar leisure-time pursuits'. It is agreed that for FBTAA purposes the provision of the use a gym facility is the provision of entertainment.

The employer has identified several items of expenditure incurred in relation to the provision of the use gym facility by employees:

• a proportion of lease costs of the premises that includes the room that has been converted into a gym facility

• electricity used when employees use certain equipment on lighting or cooling fans whilst using the gym facility

• ad hoc repairs to the equipment

• cleaning costs for the general area as well as the shower/toilet area

• costs for monitoring the gym facility such as installation of cameras for occupational health and safety purposes

Expenditure in relation to cleaning and monitoring of the gym facility is not considered to be in respect of the provision of entertainment to an employee (or associate) and therefore does not come within section 38 of the FBTAA.

However, expenditure in relation to lease costs of the premises, electricity used when employees use certain equipment on lighting or cooling fans whilst using the gym facility and repairs to the equipment used by employees will fall for consideration under section 38 of the FBTAA as a tax-exempt body entertainment benefit.

In order to satisfy the requirements of section 38, it is necessary to consider whether such expenditure is 'non-deductible exempt entertainment expenditure'. If the expenditure is considered to be non-deductible entertainment expenditure it will be a tax-exempt body entertainment benefit and the exemption in subsection 47(2) of the FBTAA will not apply to the benefit.

Non-deductible exempt entertainment expenditure

Subsection 136(1) of the FBTAA defines non-deductible exempt entertainment expenditure to mean:

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

As the employer is a health charity any expenditure incurred will not be incurred in producing assessable income. Therefore, the issue to be determined is whether the relevant lease costs, electricity and repairs are non-deductible entertainment expenditure.

Non-deductible entertainment expenditure

Subsection 136(1) of the FBTAA defines non-deductible entertainment expenditure to mean:

… a loss or outgoing to the extent to which:

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

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

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

Section 32-5 of the ITAA 1997 prevents an income tax deduction being claimed for a loss or outgoing incurred in providing entertainment under section 8-1 of the ITAA 1997 unless the expenditure comes within one of the exceptions contained in sections 32-20 to 32-50 of the ITAA 1997.

Therefore, a fundamental requirement that must be satisfied for the expenditure to be a tax-exempt body entertainment benefit is for the expenditure to come within section 8-1 of the ITAA 1997.

Expenditure that is deductible under section 8-1 of the ITAA 1997

Section 8-1 of the ITAA 1997 states:

8-1(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.

8-1(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 prevents you from deducting it.

Therefore, a tax-exempt body entertainment benefit will not arise in relation to expenditure that is a loss or outgoing of capital, or of a capital nature. For example, gym equipment purchased by the employer which is used by the employees, would not cause a tax-exempt body entertainment benefit to arise as the expenditure is of a capital nature.

In the case of expenditure on lease costs, electricity and repairs it is necessary to consider the exceptions contained in sections 32-20 to 32-50 of the ITAA 1997.

The exceptions contained in sections 32-20 to 32-50 of the ITAA 1997

The Ruling application identified the following two exceptions:

• item 1.5 of the table in section 32-30 of the ITAA 1997; and

• item 3.1 of the table in section 32-40 of the ITAA 1997.

Does item 1.5 of the table in section 32-30 of the ITAA 1997 apply?

Item 1.5 of the table in section 32-30 of the ITAA 1997 states:

The gym facility was installed several years ago on the employer's premises for research and the treatment of patients and is managed and operated for those purposes. Any use of the gym facility by employees is incidental to its use for research and medical purposes.

Taking account of the particular facts in this case, it is determined that regardless of the comparative time employees may use the facility for recreational purposes, it is not 'mainly operated' for employees to use.

Therefore, item 1.5 of the table in section 32-30 of the ITAA 1997 will not apply.

Does item 3.1 of the table in section 32-40 of the ITAA apply?

Item 3.1 of the table in section 32-40 of the ITAA 1997 states:

The intention of item 3.1 of the table in section 32-40 of the ITAA 1997 is to allow an entity that carries on a business of providing entertainment to claim a deduction for losses or outgoings incurred in providing that entertainment.

The employer provides the use of the gym facility to both internal and external patients. The gym facility is provided to patients to assist them in their medical conditions and is not provided for the purpose of 'amusement, sport or similar leisure-time pursuits'.

Therefore, the employer does not provide entertainment in the ordinary course of its business and, as such, item 3.1 of the table in section 32-40 of the ITAA 1997 will not apply to the provision of the gym facility to employees.

As neither of the exceptions applies, the expenditure incurred in relation to lease costs, electricity and repairs in providing an employee with the use of the gym facility will give rise to a tax-exempt body entertainment benefit.

As the benefit (being the expenditure incurred in relation to relevant lease costs, electricity and repairs in providing an employee with the use of the gym facility) is a tax-exempt body entertainment benefit it cannot be a residual benefit. As such, the exemption at subsection 47(2) of the FBTAA will not apply to the benefit.

However, a tax-exempt body entertainment benefit whose taxable value is wholly or partly attributable to entertainment facility leasing expenses will not be included in the calculation of the employer's aggregate non-exempt amount.

It is clear that expenditure incurred in relation to electricity and repairs will not fall for consideration as a benefit whose taxable value is wholly or partly attributable to entertainment facility leasing expenses and will therefore be included in the calculation of the aggregate non-exempt amount.

However, expenditure incurred in relation to leasing costs will fall for consideration as a benefit whose taxable value is wholly or partly attributable to entertainment facility leasing expenses. If the expenditure incurred in relation to leasing costs is considered to be wholly or partly attributable to entertainment facility leasing expenses it will give rise to a benefit that will be excluded from the calculation of the aggregate non-exempt amount.

2. Are the expenses in relation to leasing costs a benefit whose taxable value is wholly or partly attributable to an entertainment facility leasing expense?

Step 1 of the method statement at subsection 5B(1L) of the FBTAA provides that the taxable value of a benefit (in this case the tax-exempt body entertainment expense being the leasing costs incurred in relation to the building) whose taxable value is wholly or partly attributable to an entertainment facility leasing expense is excluded in the calculation of the aggregate non-exempt amount.

Section 39 of the FBTAA provides that the taxable value 'is so much of the expenditure referred to in section 38 as is attributable to the provision of the entertainment referred to in that section'. Therefore, it is the expense that is the proportion of leasing costs incurred in relation to the building that is attributable to the provision of entertainment to employees that is subject to consideration as an entertainment facility leasing expense.

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

… expenses incurred by the person in hiring or leasing:

(a)  a corporate box; or

(b)  boats, or planes, for the purpose of the provision of entertainment; or

(c)  other premises, or facilities, for the purpose of the provision of entertainment;

but does not include so much of any of such expenses that:

(d)  is attributable to the provision of food or drink; or

(e)  is attributable to advertising and is an allowable deduction for the person under the Income Tax Assessment Act 1936 or the Income Tax Assessment Act 1997.

The relevant paragraph is paragraph (c) which provides that an expense will be an entertainment facility leasing expense if it is an expense incurred in hiring or leasing premises or facilities (which are not a corporate box, a boat or a plane) for the purpose of the provision of entertainment.

The expense that is the proportion of leasing costs incurred in relation to the building that is attributable to the provision of entertainment to employees satisfies the definition of an entertainment leasing expense at subsection 136(1) of the FBTAA.

Therefore, the taxable value of the benefit, being the leasing costs incurred in relation to the building, is wholly or partly attributable to an entertainment facility leasing expense and will be excluded from the calculation of the employer's aggregate non-exempt amount.

Summary

The calculation of the employer's aggregate non-exempt amount will not include the following expenses:

• expenditure incurred in purchasing gym equipment;

• the lease costs;

• cleaning costs for the general area as well as the shower/toilet area; and

• costs for monitoring the gym facility such as the installation of cameras.

The calculation of the employer's aggregate non-exempt amount will include the following expenses:

• electricity; and

• repairs of the equipment.

The taxable value of a tax-exempt body entertainment benefit

The method for calculating the taxable value of a tax-exempt body entertainment benefit is set out in section 39 of the FBTAA. Section 39 states:

Subject to this Part, the taxable value of a tax-exempt body entertainment fringe benefit in relation to an employer in relation to a year of tax is so much of the expenditure referred to in section 38 as is attributable to the provision of the entertainment referred to in that section.

Therefore, the taxable value of the tax-exempt body entertainment benefit that arises from the arrangement that is the subject of this Ruling will be determined by the portion of the electricity and repairs that is attributable to the provision of entertainment to an employee.