Edited version of your written advice

Authorisation Number: 1013118914909

Date of advice: 18 November 2016

Ruling

Subject: Fringe benefits tax - Exempt benefits - Exempt property benefits

Question 1

Will the provision of lunches to current employees give rise to a property benefit as defined in section 40 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes.

Question 2

If the provision of lunches to current employees gives rise to a property benefit, is the property benefit an exempt property benefit pursuant to section 41 of the FBTAA?

Answer

No.

Question 3

Will the provision of lunches to new employees give rise to a property benefit as defined in section 40 of the FBTAA?

Answer

Yes.

Question 4

If the provision of lunches to new employees gives rise to a property benefit, is the property benefit an exempt property benefit pursuant to section 41 of the FBTAA?

Answer

The benefit will be an exempt property benefit if the arrangement does not constitute a salary packaging arrangement. If the arrangement is a salary packaging arrangement the benefit will not be exempt.

Question 5

Will the provision of lunches to your current employees give rise to a fringe benefit tax liability?

Answer

Yes.

Question 6

Will the provision of lunches to new employees give rise to a fringe benefit tax liability?

Answer

You will be liable for tax if the arrangement constitutes a salary packaging arrangement. If the arrangement is not a salary packaging arrangement you will not be liable for tax.

Question 7

Will the expenditure incurred for providing lunches to current employees be an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 8

Will the expenditure incurred for providing lunches to new employees be an allowable deduction under section 8-1 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Fringe Benefits Tax

Year ended 31 March 2017

Year ended 31 March 2018

Year ended 31 March 2019

Year ended 31 March 2020

Income Tax

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

The scheme commences on:

1 April 2016

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You employ employees in the carrying on of your business.

You propose providing lunches to your employees on a work day on your business premises.

The lunches will be provided for the purpose of refreshment.

The lunches will not be provided in a social situation where entertainment of your employees is the expected outcome.

The lunches will not include the provision of alcohol.

To accommodate the cost of providing lunches to your current employees, current employees who participate in this arrangement will be forgoing part or all of their pay rise for the coming year, as will be negotiated between you and your current employees.

Some, or all of your current employees, may enter into this arrangement with you.

The arrangement(s) negotiated between you and your current employees will be entered into before your current employees have earned the entitlement to receive the relevant amount foregone as salary or wages.

The arrangement(s) entered between you and your current employees will specify that the pay rise foregone is foregone for the provision of lunches by you as the employer.

Your current employees who enter into this arrangement and who forego part or all of their pay rise are not obliged to eat the lunches provided and are able to bring their own meals or go out to lunch offsite at their own cost.

The cost of the lunches provided to your current employees who forego all or part of their pay rise may not equal the pay rise forgone; the cost may be greater than or less than the pay rise forgone.

If you reimburse your current employees for the lunch they purchase and bring back to the workplace, the total reimbursement amount received in a year by an employee may not be limited to the pay rise amount foregone by the employee. It may be greater or less than the amount foregone.

You also propose providing lunches to your new employees on a work day on your business premises.

If your new employees do not want, or choose not to, consume the lunches offered it won't change the amount they are paid (i.e. if a new employee doesn't want the lunches, they won't be able to exchange not having lunches for money.)

The provision of lunches to new employees is effectively an incentive for them to work for you over other firms and to help with staff retention.

The potential ways in which lunch may be provided to current and new employees are:

(1) A stocked fridge with lunch items which employees could help themselves to, to make a sandwich or whatever they wish from the items provided (e.g. bread, salads, meat, etc.).

(2) A catered lunch provided each day from which employees can help themselves (e.g. Subway platter).

(3) An order system whereby employee's lunch orders are sent to a local lunch bar and are made to order and then delivered or collected and brought back to the work premises (e.g. Bakery).

(4) The employee purchases lunch with their own money from where they want and bring it back to the workplace, and is reimbursed by you for the cost of the lunch (e.g. McDonalds).

(5) The employee purchases lunch, using a business card provided by you to pay for the lunch, from where they want and bring it back to the workplace (e.g. McDonalds).

(6) Any combination of the above. For example, food could be provided in the fridge and on occasion a Subway platter may be ordered for the day and/or week.

If lunch is provided by stocking a fridge with lunch items, by providing a catered lunch or by using an order system it is likely you would establish an account with the supplier and the supplier would charge your account with the cost of the food provided/purchased. You would be liable to pay this account.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 section 40

Fringe Benefits Tax Assessment Act 1986 section 41

Fringe Benefits Tax Assessment Act 1986 subsection 41(1)

Fringe Benefits Tax Assessment Act 1986 subsection 41(2)

Fringe Benefits Tax Assessment Act 1986 section 66

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 paragraph 136(1)(a)

Fringe Benefits Tax Assessment Act 1986 paragraph 136(1)(b)

Fringe Benefits Tax Assessment Act 1986 Division 9A of Part III

Fringe Benefits Tax Assessment Act 1986 Subdivision A of Divisions 2 to 10 of Part III

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 32-10

Reasons for decision

Question 1

Summary

The lunches you provide to your current employees will be property benefits.

Detailed reasoning

A property benefit is defined in subsection 136(1) of the FBTAA to include a benefit as defined in section 40 of the FBTAA, but it does not include any other benefit types.

Subsection 136(1) of the FBTAA includes the following definitions relevant to property benefits:

property means:

(a) intangible property; and

(b) tangible property.

property benefit means a benefit referred to in section 40, but does not include a benefit that is a benefit by virtue of a provision of Subdivision A of Divisions 2 to 10 (inclusive) of Part III.

Subsection 136(1) of the FBTAA also defines 'benefit' to include any right, privilege, service or facility provided under an arrangement for or in relation to the performance of work.

Section 40 of the FBTAA states:

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.

As included in the definition of 'property benefit', a benefit will not however be a property benefit if the benefit is provided for in Subdivision A of Divisions 2 to 10 of Part III of the FBTAA. Of these divisions, Division 9A of Part III of the FBTAA, which deals with meal entertainment, is relevant to the provision of lunch by an employer.

As stated in Taxation Ruling TR 97/17 Income tax and fringe benefits tax: entertainment by way of food or drink (TR 97/17), whilst the provision of food and drink is the provision of property it is necessary to determine whether it constitutes entertainment. If food and drink provided by an employer is meal entertainment (i.e. entertainment) it will not be a property benefit.

Subsection 136(1) of the FBTAA states 'entertainment has the meaning given by section 32-10 of the Income Tax Assessment Act 1997' (ITAA 1997). Section 32-10 defines entertainment to include 'entertainment by way of food, drink or recreation'.

TR 97/17 sets out the Commissioner's view on the concept of entertainment by way of food or drink for the purposes of applying the relevant provisions of the FBTAA and the ITAA 1997. Paragraph 7 of TR 97/17 states an employer should consider the following matters to determine if the provision of food or drink to an employee is entertainment: why the food or drink is being provided; what type of food is being provided; when the food or drink is being provided; and where the food or drink is being provided.

TR 97/17 also states it will only be in a narrow category of cases that the provision of food and drink will not be entertainment and, at paragraph 19, refers to Taxation Ruling IT 2675 Income tax and fringe benefits tax: entertainment - morning and afternoon teas; light meals; and in-house dining facilities (IT 2675) stating:

19. …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.

IT 2675 states:

6. Morning and afternoon tea includes light refreshments such as tea, coffee, fruit drinks, cakes and biscuits, etc., but does not include alcohol.

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.

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.

You propose providing lunches to your current employees on a working day on your business premises. The types of lunches you anticipate providing are 'light lunches' as described in TR 97/17 and IT 2675 and are provided for the purpose of your employees' refreshment. The proposed lunches will not be entertainment.

The means by which you will provide the lunches is yet to be determined but you have proposed various scenarios including: providing a catered lunch, providing a stocked fridge, reimbursing employees for their purchase of lunch, providing employees with a business card, using an order system, or a combination of these. Whilst you propose various scenarios by which you will provide the lunches, the arrangement(s) you enter with your current employees will specify that the pay rise foregone is foregone for the provision of lunches (i.e. provision of property) by you as the employer. This is important as it will characterise the type of benefit you are providing as a property benefit.

The lunches you provide to your current employees will be a property benefit as defined in subsection 136(1) of the FBTAA and as provided for in section 40 of the FBTAA.

Question 2

Summary

The lunches you propose providing to your current employees will not be an exempt property benefit.

Detailed reasoning

Section 41 of the FBTAA specifies the circumstances under which a property benefit will be exempt, and also the circumstance under which property that is food and drink will not be exempt:

41(1)

Where:

(a) a property benefit is provided to a current employee of an employer in respect of his or her employment; and

(b) the property is provided to, and consumed by, the employee on a working day and 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.

41(2)

This section does not apply to food or drink provided to, and consumed by, an employee if the food or drink is provided under a salary packaging arrangement.

In relation to the requirements in subsection 41(1) of the FBTAA, paragraph 44 of TR 97/17 states:

44. Section 41 of the FBTAA provides that property (including food or drink) that is provided to and consumed by an employee on the employer's business premises on a working day is an exempt benefit. This exemption applies whether or not the food or drink amounts to meal entertainment; however, it does not apply where the employer has elected to value all meal entertainment benefits under the two methods provided by in Division 9A. The section 41 exemption applies even if food is not prepared on the employer's business premises. A working day is any 24 period during which work is usually performed by the employee.

'Business premises' is defined in subsection 136(1) of the FBTAA to include premises, or a part of premises, of the person used for the purposes of business operations of the person. Taxation Ruling TR 2000/4 Fringe benefits tax: meaning of 'business premises' (TR 2000/4) provides further discussion of what constitutes 'business premises' for the purposes of the FBTAA, and in particular in relation to section 41 of the FBTAA.

Whilst subsection 41(1) of the FBTAA specifies the circumstances under which the provision of property will be an exempt property benefit, exemption is subject to subsection 41(2) of the FBTAA which provides that food and drink provided under a salary packaging arrangement will not be an exempt property benefit.

Subsection 136(1) of the FBTAA provides the following definition of salary packaging arrangement:

salary packaging arrangement means an arrangement under which a benefit is provided to an employee, or an associate of an employee, if:

(a) the benefit is provided in return for the employee agreeing to a reduction in the employee's salary or wages that would not have happened apart from the arrangement; or

(b) the arrangement is part of the employee's remuneration package, and the benefit is provided in circumstances where it is reasonable to conclude that the employee's salary or wages would be greater if the benefit were not provided.

An 'arrangement' is broadly defined in subsection 136(1) of the FBTAA to mean any agreement, whether or not enforceable by legal proceedings and includes any scheme or course of conduct.

Chapter 17 of the ATO on-line publication Fringe benefits tax - a guide for employers (FBT guide) (QC 16123) provides the following example of a negotiated salary packaging arrangement as defined in paragraph 136(1)(a) of the FBTAA:

Example: Negotiated salary packaging arrangement

Felicity has just started working for a car company. In negotiating her remuneration package she agrees with her new employer to forego $25,000 of her yearly salary in order to receive the use of a car.

As she has entered into an agreement to reduce her salary and wages, Felicity would be taken to have entered into a salary packaging arrangement.

You propose providing lunches to your current employees in respect of their employment. The lunches will be provided to and consumed by your employees on your business premises on a working day. The arrangement you propose therefore satisfies subsection 41(1) of the FBTAA.

Your current employees who participate in the proposed lunch arrangement will forgo part or all of their pay rise for the coming year in return for the provision of lunches. The benefit received by your employees who enter this arrangement may not be the same amount as has been foregone as salary or wages. The arrangement(s) you propose entering with your current employees to accommodate the cost of providing the lunches will be a salary packaging arrangement as defined in paragraph 136(1)(a) of the FBTAA. That is, the benefit is provided in return for your employee agreeing to a reduction in their salary or wages that would not have happened apart from the arrangement. As a result, subsection 41(2) of the FBTAA applies to the proposed lunch arrangement.

Although your proposed arrangement will satisfy subsection 41(1) of the FBTAA, the property benefit (ie the lunches) will not be exempt because the arrangement will constitute a salary packaging arrangement and subsection 41(2) of the FBTAA precludes section 41 of the FBTAA from applying in that circumstance. The property benefit provided to your current employees will not be an exempt property benefit.

Question 3

Summary

The lunches you propose providing to your new employees will be property benefits.

Detailed reasoning

As explained in Question 1, where an employer provides light meals to their employees during a working day on their business premises for refreshment to enable the employee to complete the working day in comfort, the meal is a property benefit as defined in section 40 of the FBTAA.

You propose providing lunches to your new employees on a working day on your business premises. The lunches you describe are 'light lunches' and are provided for the purpose of your employees' refreshment, as described in TR 97/17 and IT 2675. The lunches you provide will not be entertainment. The lunches you provide to your new employees will be a property benefit as defined in subsection 136(1) of the FBTAA and as provided for in section 40 of the FBTAA.

Question 4

Summary

The lunches you provide to your new employees will be exempt property benefits provided the arrangement does not constitute a salary packaging arrangement as defined in subsection 136(1) of the FBTAA.

Detailed reasoning

As explained in Question 2, section 41 of the FBTAA specifies the circumstances under which a property benefit will be an exempt benefit and also the circumstance under which the provision of food and drink will not be exempt. Food or drink that otherwise satisfies the requirements of subsection 41(1) of the FBTAA is not exempt where as part of the employee's remuneration package, it is reasonable to conclude that the employee's salary or wages would be greater if the food or drink were not made part of that package. That is, if the food or drink is provided under a salary packaging arrangement (subsection 41(2) of the FBTAA).

The definition of salary packaging arrangement in paragraph 136(1)(b) of the FBTAA is relevant to the arrangement you propose with your new employees:

salary packaging arrangement means an arrangement under which a benefit is provided to an employee, or an associate of an employee, if:

(a) …; or

(b) the arrangement is part of the employee's remuneration package, and the benefit is provided in circumstances where it is reasonable to conclude that the employee's salary or wages would be greater if the benefit were not provided.

Paragraph 136(1)(b) of the FBTAA provides that a salary packaging arrangement can still occur where a reduction in salary is not negotiated but you give your employee a benefit as part of their remuneration package. This type of arrangement may be referred to as an implicit salary packaging arrangement, an informal salary packaging arrangement or as referred to in The FBT guide as a non-negotiated salary packaging arrangement.

The FBT guide provides the following example of such an arrangement:

Example: Non-negotiated salary packaging arrangement

McKenzie has started employment with an IT firm. His job was previously advertised as having a total remuneration package of $100,000 per year.

McKenzie only receives $95,000 in salary and wages but is given by his employer, free of charge, gaming and photography software with a retail value of $5,000.

In this case, while McKenzie has not entered into a separate agreement to reduce his salary and wages, the salary and wages he would have received would clearly have been greater if the benefit had not been provided. Therefore, McKenzie has entered into a salary packaging arrangement.

The lunches you propose providing to your new employees will satisfy the requirements specified in subsection 41(1) of the FBTAA.

However, whether your provision of lunches to your new employees will be an exempt property benefit will depend upon whether the arrangement(s) for your new employees will be a non-negotiated salary packaging arrangement as defined in paragraph 136(1)(b) of the FBTAA. That is, would the salary and wages your new employees would have received been greater if you were not providing lunches to them. Whilst your new employees cannot choose to forego your provision of lunch in return for additional salary or wages, this fact in itself will not determine whether the arrangement is a non-negotiated salary packaging arrangement.

You will need to consider the facts of the arrangement you propose with your new employees and will need to determine whether the arrangement constitutes a salary packaging arrangement to determine if the provision of lunches will be an exempt property benefit or not.

If the salary or wages your new employees will receive is less than they would otherwise have received if you did not offer the provision of lunches to them then the arrangement you propose in respect of your new employees is a salary packaging arrangement. In this situation, the lunches you provide will not be an exempt property benefit pursuant to section 41 of the FBTAA, due to the operation of subsection 41(2) of the FBTAA.

If, in the alternative, the salary or wages your new employees will receive is not less than they would otherwise have received if you did not offer the provision of lunches to them, then the arrangement you propose in respect of your new employees is not a salary packaging arrangement. The lunches you will provide to your new employees will therefore be exempt property benefits pursuant to section 41 of the FBTAA.

Question 5

Summary

You will be liable for tax in respect of the property benefit (ie lunches) provided to your current employees.

Detailed reasoning

As discussed at Questions 1 and 2, the lunches you propose providing to your current employees will be a property benefit as provided for in section 40 of the FBTAA. That property benefit will not be an exempt property benefit pursuant to section 41 of the FBTAA.

As a result, and as provided for by section 66 of the FBTAA, you will be liable to pay tax in respect of your 'fringe benefits taxable amount' in a year of tax.

Question 6

Summary

You will be liable for tax if the property benefit (ie lunches) provided to your new employees is not an exempt property benefit.

Detailed reasoning

As discussed at Question 3, the lunches you propose providing to your new employees will be a property benefit as provided for in section 40 of the FBTAA.

Whether that property benefit will be exempt will depend upon whether the arrangement with your new employees constitutes a salary packaging arrangement (as discussed at Question 4).

If the arrangement you propose in respect of your new employees is a salary packaging arrangement, the food and drink you provide will not be an exempt property benefit pursuant to section 41 of the FBTAA. As a result, and as provided for by section 66 of the FBTAA, you will be liable to pay tax in respect of your 'fringe benefits taxable amount' in a year of tax.

If, in the alternative, the arrangement you propose in respect of your new employees is not a salary packaging arrangement, the lunches you provide to your new employees will be exempt property benefits pursuant to section 41 of the FBTAA. As the provision of lunches will be an exempt property benefit, you will not be liable to pay tax in respect of the benefit provided.

Question 7

Summary

You will be entitled to a deduction under section 8-1 of the ITAA 1997 for the expenditure you incur in providing lunches to your current employees.

Detailed reasoning

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income; except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income, or a provision of the ITAA 1997 prevents it.

Paragraph 48 of TR 97/17 states:

48. Food or drink which does not amount to meal entertainment and is provided on the employer's business premises is considered in Taxation Ruling IT 2675. The cost of providing the food or drink to employees is income tax deductible under the general deduction provisions of section 8-1 of the ITAA.

Further, IT 2675 states:

2. Providing morning or 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 the provision of entertainment. The cost of providing these refreshments is therefore not excluded as a deduction by section 32-5 of the ITAA. In most cases, an income tax deduction is allowable under section 8-1 of the ITAA.

3. However, it is necessary that the requirements of section 8-1 be met in each particular case for the cost of providing the morning or afternoon tea to be deductible. Broadly stated, the requirements are that the expenditure be incurred in the course of gaining assessable income (or carrying on business for this purpose) and that it not be of a capital, private or domestic nature.

17. Expenditure incurred by a taxpayer on morning and afternoon tea and meals consumed by the taxpayer is generally private expenditure and not deductible under section 8-1 of the ITAA. However, a taxpayer who is an employer may provide morning or afternoon tea or light meals to employees on a working day and consume some of these refreshments from the same source available to employees. The additional costs for the morning or afternoon tea or light meals consumed by the employer is not denied deductibility. This is because the entire expenditure in these circumstances has the essential character of an income-producing expense.

The lunches you propose providing to your current employees are light lunches which do not amount to meal entertainment. The expenditure you will incur to provide the lunches will be incurred in gaining or producing assessable income from your carrying on of a business, therefore you are entitled to a deduction under section 8-1 of the ITAA 1997 for the expenditure you incur to provide the lunches.

Question 8

Summary

You will be entitled to a deduction under section 8-1 of the ITAA 1997 for the expenditure you incur in providing lunches to your new employees.

Detailed reasoning

As discussed at Question 7, section 8-1 of the ITAA 1997 allows a deduction for losses and outgoings to the extent they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

The lunches you propose providing to your new employees are light lunches which do not amount to meal entertainment. The expenditure you will incur to provide the lunches will be incurred in gaining or producing assessable income from your carrying on of a business, therefore you are entitled to a deduction under section 8-1 of the ITAA 1997 for the expenditure you incur to provide the lunches.