Edited version of your written advice

Authorisation Number: 1012786626728

Ruling

Subject: Fringe benefits tax

Question 1

Will the provision of food and drink provided to employees who attended Event 1 be considered entertainment and therefore subject to fringe benefits tax (FBT) in accordance with section 38 of the Fringe Benefits Tax Assessment Act 1986 (FBT Act)?

Answer

Yes

Question 2

Will the provision of food and drink provided to employees who attended Event 2 be considered entertainment and therefore subject to FBT in accordance with section 38 of the FBTAA?

Answer

Yes

Question 3

Will the provision of food and drink provided to employees who attended Event 3 be considered entertainment and subject to FBT in accordance with section 38 of the FBTAA?

Answer

Yes

Question 4

Will the provision of food and drink provided to employees who attended Event 4 be considered entertainment and therefore subject to FBT in accordance with section 38 of the FBTAA?

Answer

Yes

This ruling applies for the following period

Year ended 31 March 2015

The scheme commences on

1 April 2014

Relevant facts and circumstances

The employer currently classifies professional development events or functions that do not exceed four hours in duration and provides substantial (elaborate) meals to employees as meal entertainment and subject to fringe benefits tax.

Details of four events have been provided.

All of the events were less than 4 hours in duration.

All events provided more elaborate meals (i.e.: not finger food or light refreshments).

The applicant also advises that none of the above events meet the definition of "seminar" in section 32-35 of the ITAA 1997.

None of the events are compulsory. Attendance at events three and four would be at the request of an employee and/or the suggestion of their manager based on the topic(s) to be discussed and the perceived benefit to the attendee.

Relevant legislative provisions

Division 1AB of Part III of the Income Tax Assessment Act 1936

Section 38 of the Fringe Benefits Tax Assessment Act 1986

Section 136 of the Fringe Benefits Tax Assessment Act 1986

Division 32 of the Income Tax Assessment Act 1997

Section 32-5 of the Income Tax Assessment Act 1997

Section 32-10 of the Income Tax Assessment Act 1997

Section 32-20 of the Income Tax Assessment Act 1997

Section 32-35 of the Income Tax Assessment Act 1997

Reasons for decision

You are a tax-exempt body.

Section 38 of the Fringe Benefits Tax Assessment Act 1986 (FBT Act) defines a "tax-exempt body entertainment benefit" as: -

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.

Therefore, a tax-exempt body entertainment fringe benefit will arise when the following conditions are satisfied: -

• the employer incurs a non-deductible exempt entertainment expenditure;

• the benefit is wholly or partly in respect of the employment of the employee; and

• the benefits constitutes the provision of entertainment.

Condition 1: "Non-deductible exempt entertainment expenditure"

"Non-deductible exempt entertainment expenditure" is defined under section 136 of the FBT Act as non-deductible entertainment expenditure to the extent to which it is not incurred in producing assessable income.

Section 136 defines a "non-deductible entertainment expenditure" as 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 Income Tax Assessment Act 1997 (ITAA 1997) provides that there is no deduction for entertainment expenses. However, there are a number of exceptions to section 32-5 of the ITAA 1997 which are set out in sub-division 32-B of the ITAA 1997. These are summarised in Chapter 14.15 of Fringe benefits tax: a guide for employers and include:

• The cost of food and drink that is reasonably incidental to a person's attendance at an 'eligible seminar'. This is a conference, convention, lecture and so on of at least four hours duration that is not held to conduct normal business discussions in relation to the particular business

• for the purpose of advertising the goods or services of a particular business

• for the dominant purpose of providing entertainment.

• The cost of food and drink that is reasonably incidental to a person's attendance at an 'exempt training seminar' of at least four hours duration, organised by, or on behalf of, you solely for training employees. The session must be conducted in conference facilities operated by a business unrelated to you.

Item 2.1 of the table in section 32-35 of the ITAA provides that if the seminar goes for at least 4 hours and does not satisfy one of the specified exceptions, then any food or drink consumed by the employee that is "reasonably incidental" to the attendance at the seminar is not precluded by section 32-5 from being deductible under section 8-1 of the ITAA.

However, in your situation, all of the events run for less than 4 hours and therefore the expenses are not tax deductible.

Your events do not fall within the exceptions, thus the entertainment expense provided by you is not deductible for income tax purposes.

Condition 1 is satisfied.

Condition 2: The benefit is wholly or partly in respect of the employment of the employee

None of the events were provided exclusively for employees. The first two events were organised and paid for by the taxpayer, but include other participants. The other two events were organised by other entities and were open to a wider audience.

You pay for staff members to attend the relevant functions if you perceive there is a benefit to them from either a professional development or networking opportunities in doing so. It can be seen that the benefit is provided to the attendees in their capacity as employees.

The benefit is provided in respect of employment and therefore Condition 2 is satisfied.

Condition 3: The benefit constitutes the provision of entertainment.

The definition of "entertainment" in section 38 of the FBTAA adopts the definition provided in section 32-10 of the ITAA as follows: -

Meaning of entertainment

             (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.

(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.

Taxation Ruling TR 97/17: Income tax and fringe benefits tax: entertainment by way of food or drink provides guidance on the concept of what is entertainment as it relates to the provision of food or drink.

Paragraph 7 of TR 97/17 states:

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'.

Paragraph 23 provide further details on the above four factors that should be considered when undertaking an objective analysis of the criteria.

Paragraph 24 indicates that no one of the paragraph 23 factors will be determinative; however, paragraphs (a) and (b) are considered the more important. The application of the above factors results in the determination for whether the food or drink amounts to meal entertainment.

Paragraph 18 takes the view that the mere provision of food or drink in any circumstance does not necessarily constitute "entertainment." An element of entertainment is required before the provision of food or drink becomes meal entertainment. However, it was noted that in most cases the mere provision of food or drink will satisfy the 'entertainment' test. It is only in a narrow category of cases where the mere provision of food or drink does not amount to 'entertainment' for the purposes of Division 32 of the ITAA.

Paragraphs 19 and 20 contrasts the consideration of providing light meals with non-deductible entertainment expenses as follows: -

19. We have expressed this view previously, for example, in Taxation Ruling IT 2675. That Ruling considers that the provision of morning and afternoon tea to employees (and associates of employees) on a working day, either on the employer's premises or at a worksite of the employer, is not entertainment. The provision of light meals (finger food, etc.), for example in the context of providing a working lunch, is not considered to be entertainment. The provision of food or drink in these circumstances does not confer entertainment on the recipient.

20. The provision of light meals can be contrasted with the examples of non-deductible entertainment given in the explanatory memorandum to Taxation Laws Amendment Bill (No 4) 1985, i.e., business lunches and drinks, dinners, cocktail parties and staff social functions. In these examples the provision of the food or drink confers entertainment on the recipient. The wording of section 32-10 of the ITAA shows a clear intention to treat food or drink consumed in these situations as entertainment, whether or not business discussions or business transactions occur at the same time.

In considering whether your provision of food and drink constitutes entertainment, it is necessary for an objective analysis of all the circumstances against factors provided in paragraphs 7 and 23 of TR 97/17. None of the factors are determinative, however (a) and (b) are the more important factors.

a) Why is the food and drink being provided?

TR 97/17 describes this test as 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.

In your situation, no specific reasons have been given for why the food or drink is provided. However, it is clear that events 1, 2 and 4 provide a focus on the fact that the breakfasts will be provided by the name alone. The agendas for events 1 and 2 detail specific scheduling of what time the breakfasts will be served. The information in respect to event 3 is not detailed enough to determine what emphasis was given to the lunch to be provided.

Whilst it can be seen that the events (particularly Event 2) may have a work or business focus, it can be seen that the meals themselves are a substantial part of each event.

b) What type of food and drink is provided?

Morning and afternoon teas and light meals are generally not considered to constitute 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 greater the likelihood that entertainment arises from the consumption of the meal. Therefore, the meals take on more of the characteristics of entertainment.

Similarly, paragraph 16 of Taxation Ruling IT 2675: Income tax and fringe benefits tax: entertainment - morning and afternoon teas; light meals; and in-house dining facilities provides the following guidance: -

16. The provision of biscuits and drinks such as tea, coffee, soft drinks and fruit juices to employees or their associates on a working day for morning or afternoon tea cannot be said to provide amusement or even to be an agreeable occupation. It is merely the provision of refreshments to enable the employees or associates to complete the working day in comfort. The same may be said of light meals provided by a taxpayer to employees or their associates on a working day.

However, there is no definite guidelines as to when a light meal becomes more elaborate as expressed in paragraph 7 of IT 2675: -

7. Light meals are treated in the same way as morning and afternoon tea. It is not the provision of entertainment to provide sandwiches and other 'hand food', salads, orange juice, etc.,. that are intended to, and can, be consumed on the taxpayer's premises or worksite. As 'light' meals become more elaborate, they take on more of the characteristics of entertainment. There is no particular point at which this will become obvious. Normal business practice will be the yardstick.

In each event, from the information provided by the applicant, the meals that were provided were more elaborate than a "light" meal or refreshment. Therefore, the meals take on more of the characteristics of entertainment.

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 have the character of 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 upon whether the entertainment of the recipient is the expected outcome of the provision of the food or drink.

Three of the events provided breakfast, all starting prior to what might be considered be normal working hours, and the other event was a lunch time event.

It is noted that each event was less than four hours. The Commissioner considers that the food and drink would take on more of the characteristics of entertainment if the meals would be considered to encourage participants to attend the events.

d) Where is the food or drink 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.

All of the events were held off work premises although you advise that event 1 was held on associate premises in an in-house dining facility.

Meals provided in an in-house dining facility are generally exempt from FBT unless it is a social function. You have advised that the purpose of event 1 is for recognition of achievement.

Conclusion

On the application of the above factors, the Commissioner has determined that the provision of food and drink in each event amounts to entertainment.

The Commissioner gave weight to the following factors: -

• The events are not "seminars".

• None of the events are mandatory and all last for less than 4 hours.

• Based on the information provided, three of the events (events 1, 3 and 4) are not considered by the Commissioner to necessarily have a strong work focus as there are also recognition, personal development and/or networking opportunities that may also entice an employee to attend.

• Event 2 may have a stronger work or training focus, however there is an emphasis on a substantial meal being provided during the three hour session.

• The food and drink provided is more elaborate than a "light meal" as it exceeds the provision of refreshments.

• The meal appears in each case to be a significant part of the event rather than being "incidental" to attendance. It is considered that the provision of these meals would provide an incentive for an employee to attend the events.