Edited version of your written advice

Authorisation Number: 1012847873810

Date of advice: 24 August 2015

Ruling

Subject: Fringe Benefits Tax - entertainment leasing facility expenses

Question 1

Will the expenses incurred by an employee and their family in obtaining a hotel or motel room, rented holiday house, on-site caravan or similar accommodation whilst undertaking non-work related travel fall within the definition of entertainment facility leasing expenses in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986?

Answer

Yes.

Question 2

Where the employer reimburses these expenses incurred by the employee, is the amount that would be the taxable value of the fringe benefit had section 57A of the Fringe Benefits Tax Assessment Act 1986 not applied, excluded from the calculation of the employer's fringe benefits taxable amount under subsection 5B(1D) or the employer's aggregate non-exempt amount under subsection 5B(1E) of the Fringe Benefits Tax Assessment Act 1986?

Answer

Yes.

Question 3

Will the expenses incurred by an employee and their family in hiring a hotel or motel function room, temporary marquee or similar function room facility fall within the definition of entertainment facility leasing expenses in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986?

Answer

Yes.

Question 4

Where the employer reimburses these expenses incurred by their employee, is the amount that would be the taxable value of the fringe benefit had section 57A of the Fringe Benefits Tax Assessment Act 1986 not applied, excluded from the calculation of the employer's fringe benefits taxable amount under subsection 5B(1D) or the employer's aggregate non-exempt amount under subsection 5B(1E) of the Fringe Benefits Tax Assessment Act 1986?

Answer

Yes.

This ruling applies for the following periods:

Year ended 31 March 2016

Year ended 31 March 2017

Year ended 31 March 2018

Year ended 31 March 2019

Year ended 31 March 2020

The scheme commences on:

1 April 2015

Relevant facts and circumstances

The employer is a public benevolent institution (PBI) and will offer employees the opportunity to enter into a valid salary sacrifice arrangement for certain costs related to a holiday or other recreational pursuits undertaken by employees and their families.

The employee, who will be the person hiring or leasing the accommodation facility or function room will incur the costs of hiring the accommodation facility or function room.

The accommodation is to be for recreation and leisure pursuits in the nature of employee holidays.

The function room is provided for personal recreation and entertainment of a private party.

The hire or leasing of the accommodation facility or function room will be limited to those hire costs only and will not include food, drink, advertising or travel costs.

A condition of the salary sacrifice arrangement is that the salary sacrificed amounts can only be applied where the relevant accommodation or function room hire will be used for non-work related purposes and the employee will use the accommodation whilst undertaking a holiday or other recreational pursuits.

The duration of the use of the accommodation will vary from one day/night to several weeks.

The duration of the use of the function room will most likely be for one day/night, but could extend to several days, but less than one week.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Subsection 5B

Fringe Benefits Tax Assessment Act 1986 Section 57A

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 Section 152B

Income Tax Assessment Act Section 32-10

Income Tax Assessment Act Subsection 995-1(1)

Reasons for decision

All references made in these reasons for decision are to the Fringe Benefits Tax Assessment Act 1986 (FBTAA) unless otherwise stated.

Question 1 and 3

Summary

The expenses incurred by an employee and their family:

• in obtaining the use of a hotel or motel room, rented holiday house, on-site caravan or similar accommodation whilst undertaking non-work related travel, and

• in hiring a hotel or motel function room, temporary marquee or similar function room facility

are entertainment facility leasing expenses as defined in subsection 136(1).

Detailed reasoning

There are a number of requirements that must be satisfied in considering whether expenses incurred satisfy the definition of 'entertainment leasing expenses'. Subsection 136(1) defines 'entertainment leasing expenses':

…for a person, means expenses incurred by the person in hiring or leasing:

(a) a corporate box; or

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

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

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

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

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

Hiring or leasing

Under the definition of 'entertainment facility leasing expenses', an expense must be 'incurred by the person in hiring or leasing …'.

As the word 'hiring' is not defined in the Fringe Benefits Tax Assessment Act 1986 (FBTAA) it has its natural meaning, taken in the context in which it appears in the legislation.

The Macquarie Dictionary defines 'hire' as:

1. to engage the services of for payment: to hire a clerk.

2. to engage the temporary use of for payment: to hire a car.

3. Also, hire out. to grant the temporary use of, or the services of, for a payment.

Subsection 136(1) proved that 'leased' means:

… let on hire (including a letting on hire that is described in the relevant agreement as a lease) under an agreement other than a hire-purchase agreement.

The taxpayer's employees will incur expenses in obtaining the use of:

• a room in a motel or hotel, rented holiday house, on-site caravan or similar accommodation

• private function rooms at a motel or hotel, a temporary marquee or similar function room facilities

which falls within the dictionary definition of 'hire' and with the FBTAA definition of 'leased'.

Therefore, these expenses which the taxpayer's employees will incur fall within the meaning of 'hiring or leasing' in the definition of 'entertainment facility leasing expenses'.

Other Premises or facilities

Under the definition of 'entertainment facility leasing expenses', the hiring or leasing must be of a corporate box, boat, plane or other premises or facilities.

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

The Macquarie Dictionary defines 'premises' to mean:

2a. the property forming the subject of a conveyance.

2b. a house or building with the grounds, etc., belonging to it.

'Facilities' is defined in the Macquarie Dictionary to include:

8. a building or complex of buildings, designed for a specific purpose, as for the holding of sporting contests … etc.

From these definitions it is clear that a holiday house is included within the meaning of premises.

In the case where the employee hires a:

• private function room at a motel, hotel or club, or

• single room in a hotel (or similar accommodation)

he or she has not hired the hotel (or similar) in its entirety. Accordingly, there is a difficulty in determining whether the employee has hired premises or a facility by reference to the dictionary meaning, which only refers to a property, house and grounds or a specific purpose building. In addition, the legislative reference to boats or planes would not ordinarily be considered as a (type of) premises or facility.

Taxation Laws Amendment (FBT Cost of Compliance) Bill 1995 introduced the subsection 136(1) definition of 'entertainment facility leasing expenses'. In introducing section 152B, the Explanatory Memorandum to that Bill describes the new amendment as being:

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

It is considered that the phrase 'other premises or facility' has a wide meaning. Hiring or leasing of a corporate box would generally only involve the hiring or leasing of part of premises or a facility as the corporate box is part of a sporting stadium complex. However, a corporate box is also a separate or distinct area or room, which is able to be hired as a separate room or distinct area. In the same way that a corporate box is part of larger premises or a facility, the hiring or leasing of a separate room or distinct area for other hospitality purposes, such as:

• a function room in a club or hotel that has been hired to the exclusion of others

• a hotel/motel room

• a room in a bed or breakfast facility a function room in a club or hotel that has been hired to the exclusion of others

• a marquee

would be considered to be 'other premises or facilities' for providing entertainment.

Therefore, in the case where the employee hires or leases a:

• private function room at a motel or hotel, or

• separate hotel room at a hotel (or similar accommodation)

they will be premises or facilities for the purposes of the definition of 'entertainment facility leasing expenses'.

Provision of entertainment

The definition of 'entertainment facility leasing expenses' provides that the expenses incurred on hiring or leasing the premises or facilities must be 'for the purpose of the provision of entertainment'.

Subsection 136(1) defines 'entertainment' as having the meaning given by section 32-10 of the Income Tax Assessment Act 1997 (ITAA 1997). Section 32-10 of the ITAA 1997 provides that 'entertainment' means:

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

(b) accommodation or travel to do with providing entertainment by way of food, drink or recreation.

Subsection 995-1 of the ITAA 1997 provides the meaning of 'recreation' to include 'amusement, sport or similar leisure-time pursuits'.

In relation to the use of a hotel room (and other holiday) accommodation, whilst the employee is travelling on a holiday and is not on work-related duties, a relevant question to consider under paragraph 32-10(1)(a) of the ITAA 1997 is whether the use of the room is for the purposes of providing entertainment by way of recreation. While 'recreation' is defined, the words 'entertainment by way of recreation' is not defined. As these words are not defined, they have their natural meaning, taken in the context in which they appear in the legislation.

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

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

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

3. hospitable provision for the wants of guests.

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

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

Further, 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) states that:

in determining whether providing an item of property constitutes entertainment, regard should be given to all the circumstances of the case. In particular, regard should be given to the character of the entertainment to be derived from the item of property provided.

Specifically, in Example 2 in TD 94/55, costs incurred in providing holiday accommodation are incurred in providing property that would constitute the provision of entertainment.

Similarly, when the employee incurs expenses in hiring or leasing a hotel room (or similar accommodation), those expenses are for the purposes of the provision of entertainment, as entertainment is defined in subsection 136(1) and section 32-10 of the ITAA 1997.

As required in the definition of 'entertainment facility leasing expenses', the taxpayer's employees' expenses will not be attributable to food or drink, or advertising.

Where a room or a marquee is being used for a family celebration, it is clearly being used for the purpose of providing entertainment.

The expenses incurred by the taxpayer's employees:

• in obtaining the use of a hotel or motel room, rented holiday house, on-site caravan or similar accommodation whilst undertaking non-work related travel, and

• in hiring private function rooms at a motel or hotel, temporary marquee or similar function room facilities

are 'entertainment facility leasing expenses' as defined in subsection 136(1).

Question 2 and 4

Summary

The expenses that the taxpayer's employees will be incurring are entertainment facility leasing expenses. Where the taxpayer reimburses these expenses the taxpayer will be providing expense payment benefits. The amount that would be the taxable value of those benefits had section 57A of the Fringe Benefits Tax Assessment Act 1986 not applied, is currently excluded from the calculation of the taxpayer's aggregate non-exempt amount under subsection 5B(1E) of the Fringe Benefits Tax Assessment Act 1986.

Proposed changes to the law, limiting FBT concessions on salary packaged entertainment benefits were announced in the 2015-16 Budget. These changes are contained in the Exposure Draft for Tax and Superannuation Laws Amendment (2015 Measures No. 4) Bill 2015.

The measure, which applies from 1 April 2016, will introduce a separate single grossed-up cap of $5,000 for salary packaged meal entertainment and entertainment facility leasing expenses for employees of PBIs.

All salary packaged entertainment benefits will also become reportable fringe benefits.

Detailed reasoning

Section 57A provides that certain employers are generally exempt from fringe benefits tax (FBT) on benefits provided to their employees. In particular, subsection 57A(1) provides:

Where the employer of an employee is a public benevolent institution endorsed under section 123C, a benefit provided in respect of the employment of the employee is an exempt benefit.

The employer is an endorsed PBI; therefore benefits provided to employees will be exempt benefits. However, subsection 5B(1D) provides that for PBIs, the employer's fringe benefits taxable amount will include the employer's aggregate non-exempt amount.

The method for calculating the employer's aggregate non-exempt amount is contained in subsection 5B(1E). It provides that a PBI will only be liable to pay FBT on the amount by which the total grossed-up value of certain benefits provided to an individual employee exceeds $30,000.

Broadly, subsections 5B(1K) and 5B(1L) provide that the calculation of the value of the benefits provided to each individual employee will include the value of all but three of the benefits that would have been fringe benefits if the employer had not been a PBI.

The method statement set out in subsection 5B(1L) specifically excludes three types of benefits from the calculation of the employee's subsection 5B(1L) amount. According to Step 1 of subsection 5B(1L), the three types of benefits not included in the calculation are the benefits:

(a) that constitute the provision of meal entertainment as defined in section 37AD…or

(b) that are car parking fringe benefits, or

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

The expense payment benefits arising from the reimbursement of an employee's expenses would have a taxable value (but for section 57A) which is wholly or partly attributable to entertainment facility leasing expenses. As a result, the expense payment benefits are disregarded for the purposes from Step 1 of subsection 5B(1L) under paragraph (c) of that step.

Consequently, the benefit of entertainment facility leasing expenses will currently be excluded from the employer's aggregate non-exempt amount under subsection 5B(1E). The effect of this is that the benefit will remain exempt from FBT and does not form part of the FBT capping threshold in respect of the employer's employees.

Proposed changes to the law, limiting FBT concessions on salary packaged entertainment benefits were announced in the 2015-16 Budget. These changes are contained in the Exposure Draft for Tax and Superannuation Laws Amendment (2015 Measures No. 4) Bill 2015: Limiting Fringe Benefits Tax Concessions on Salary Packaged Entertainment Benefits (the Bill).

The measure, which applies from 1 April 2016, will introduce a separate single grossed-up cap of $5,000 for salary packaged meal entertainment and entertainment facility leasing expenses for employees of PBIs which remain eligible for the current FBT exemption. Where this cap is exceeded any benefits may firstly be taken into account under the existing caps before determining whether there is any excess to be taxed.

All salary packaged entertainment benefits will also become reportable fringe benefits.

A comparison of the new and current law taken from the Explanatory Materials to the Bill is provided below:

If both houses of Parliament agree to the Bill and it is assented to by the Governor-General, the proposed changes will become law and will apply to the employer and their employees.