Edited version of private advice

Authorisation Number: 1051765929414

Date of advice: 25 February 2021

Ruling

Subject: Entertainment

Question 1

Does food, drink and recreation provided to a company's employees while in the process of discharging their duties to manage client relationships at company sponsored events constitute entertainment for the purposes of section 32-10 of the Income Tax Assessment Act 1997?

Answer

No.

Question 2

Are input tax credits available with respect to amounts of expenditure associated with the food, drink and recreation provided to a company's employees while in the process of discharging their duties to manage VIP customer relationships at company sponsored events as a creditable acquisition under section 11-20 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

This ruling applies for the following periods

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts

A company provides on-line wagering services to clients. In order to reward and attract very important persons (VIP) customers, the company hosts a number of VIP customer events where entertainment is provided to customers. Employees attend with the sole purpose of facilitating these functions and to manage the welfare of VIP customers attending the events.

The company employs Customer Relations Managers. The primary function of employees in these positions is to maintain and grow a portfolio of high value customers by delivering superior customer service and a personalised VIP experience.

Based on the Customer Relations Manager role descriptions, during these events the individuals are responsible for the following duties:

•         Host and attend events with VIP customers;

•         Promote the company's industry leading VIP offering;

•         Prospect and acquire new customers through networks and sales opportunities;

•         Reactivate inactive customers;

•         Utilise Salesforce CRM (Customer Relationship Management) software to manage client relationships, including updating after events have taken place with any insights learned;

•         Focus on key customer metrics to meet growth objectives; and

•         Develop an understanding of customer preferences through regular contact and engagement.

•         The company also has formal internal guidance outlining responsibilities and expectations with respect to actions prior to, during, and after events where Customer Relations Managers are performing their duties. These responsibilities include:

•         Organisation of invitations, addressing dietary requirements, arranging transport and accommodation for attending VIP customers;

•         Engaging with VIP customers to generate and enhance business, by providing knowledge of the event, active promotions and insights into wagering activities;

•         Managing the behaviour of VIP customers, including possessing strategies to address antisocial conduct, or intoxication, in accordance with requirements under Responsible Service of Gaming (RSG) and Responsible Service of Alcohol (RSA) regulations; and

•         Follow up with VIPs to gauge insights into overall perception of experience at the relevant event and maintain this information within internal CRM software.

Company policy mandates that a professional demeanour must be maintained while hosting an event, excessive intoxication and consumption of illicit substances is against company policy.

The aforementioned duties and regulatory obligations of a Customer Relationship Manager must be performed simultaneously in service of multiple VIP customers at an event. A manager may be accountable for as few as 3 or up to 8 persons at one time, requiring a substantial amount of focus to navigate.

The types of events hosted by the company where Customer Relationship Managers are fulfilling their employment duties include, but are not limited to, horse race meets, and attendance at various sporting events and often take place outside standard business hours.

The costs of these events (i.e. costs of attendance for both Customer Relationship Managers and VIP customers) are incurred by the company.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 11-20

A New Tax System (Goods and Services Tax) Act 1999 section 69-5

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

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 subsection 995-1(1)

Reasons for decision

Question 1

Does food, drink and recreation provided to a company's employees while in the process of discharging their duties to manage client relationships at company sponsored events constitute entertainment for the purposes of section 32-10 of the Income Tax Assessment Act 1997?

Generally, an income tax deduction is not allowable in respect of entertainment expenses as provided section 32-5 of the Income Tax Assessment Act 1997 (ITAA 1997):

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 provides:

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: There are some examples of what is entertainment:

•         business lunches

•         social functions

These are some examples of what is not entertainment:

•         meals on business travel

•         theatre attendance by a critic

•         a restaurant meal of a food writer.

The term 'recreation' is defined in subsection 995-1(1) of the ITAA 1997 to include amusement, sport or similar leisure time pursuits.

Taxation Ruling TR 97/17 Income tax and fringe benefits tax: entertainment by way of food or drink (TR 97/17) provides guidance in relation to entertainment.

Paragraphs 22 to 24 of TR 97/17 state that in determining whether entertainment is provided, an objective consideration of the circumstances in which the entertainment is provided are required. Paragraph 23 of TR 97/17 suggests the following tests be applied:

(a)  Why is the food, drink and recreation being provided? Food, drink and recreation provided in a social situation where the purpose of the function is for the employees to enjoy themselves has the character of entertainment.

(b)  What in the way of food, drink and recreation is being provided? The more elaborate the food, drink and recreation, the greater the likelihood that entertainment will arise.

(c)   When is the food, drink and recreation provided? Food or drink provided during work time, overtime or travelling on business is less likely to have the character of entertainment.

(d)  Where is the food, drink and recreation provided? Food or drink provided on the employer's business premises is less likely to have the character of entertainment.

Why is the food, drink and recreation being provided?

The food, drink and recreation is primarily focused on the entertainment of VIP customers of the company. Customer Relations Managers attend the functions as part of the employment duties to manage the welfare of VIP customers and facilitate their entertainment.

Although the Customer Relations Managers primarily attend the functions to attend to the welfare of VIP customers, they also consume food and drink. The food, drink and recreation is being provided to the Customer Relations Managers in the course of their employment. This is similar to the examples of what does not constitute entertainment as outlined in the note to subsection 32-10 of the ITAA 1997 being:

•         theatre attendance by a critic, and

•         a restaurant meal of a food writer.

The provision of food and drink is principally directed at facilitating entertainment of VIP customers as its core purpose. Customer Relations Managers who attend these events are fulfilling their employment duties, namely, to be a contact point for services or offerings, to provide security and to ensure relevant regulations are adhered to with respect to attendees. Any food, drink and recreation they are provided with is ancillary in nature, and not for their own entertainment.

What food, drink and recreation is being provided?

As stated in paragraph 23 of TR 97/17, the more elaborate meals are the more likely that they have the characteristics of entertainment.

The food, drink and recreation provided to the Customer Relations Managers and VIP customers is generally in the context of VIP areas at race meets and sporting events. This is considered to be elaborate, and has the characteristics of entertainment.

The extent to which Customer Relations Managers partake in the food, drink and recreation varies; however, it is likely to be of a lesser extent than that of the VIP customers. As the employees are working, they are expected to partake in alcohol consumption at a lesser extent that that of VIP customers. Customer Relations Managers hosting events are expected to maintain a professional demeanour and to effectively perform their duties whilst at events.

It is considered that to the extent the employee partakes of the food, drink and recreation that this food, drink and recreation is considered to be of a type that is in the nature of entertainment.

When is the food, drink and recreation being provided?

TR 97/17 provides at paragraph 23 that:

Food or drink provided during work time ...is less likely to have the character of entertainment.

Many of the events are conducted on a Saturday to promote racing and sporting events and be on call. While outside usual core business hours, the position description states that Customer Relations Managers are required to have an ability to work outside the core business hours.

The food, drink and recreation is provided during work time and is less likely to have the characteristics of entertainment.

Where is the food, drink and recreation being provided?

TR 97/17 provides at paragraph 23 that:

...food or drink provided in a function room, restaurant, café, coffee shop or consumed with other forms of entertainment is more likely to have the character of entertainment;

The food, drink and recreation is being provided at locations that are designed for the provision of recreational entertainment. This includes at sporting grounds, in corporate boxes or marquees, and at restaurants.

This is indicative of the food, drink and recreation being characterised as entertainment.

Has entertainment been provided?

Applying the above tests can be summarised as follows:

•         the purpose of providing food, drink and recreation is to entertain VIP customers, not the employees;

•         what has been provided to the employees is in the nature of entertainment;

•         the food, drink and recreation is provided during work time and is less likely to have the character of entertainment; and

•         the food, drink and recreation is provided at entertainment venues.

The situation of a theatre critic or food writer are mentioned in subsection 32-10 of the ITAA 1997 as examples of what is not entertainment. Taxation Ruling TR 98/14 Income tax: employee journalists - allowances, reimbursements and work-related deductions (TR 98/14) provides guidance in relation to entertainment at paragraphs 161 to 164:

161. A deduction is not allowable under section 8-1 of the ITAA 1997 for expenditure incurred in attending staff dinners or similar functions. Such expenditure qualifies as an entertainment expense under section 51AE of the ITAA 1936. The costs of attending functions such as staff dinners and farewell dinners are not incurred in the course of producing income and they are essentially a private expense.

162. In Frankcom v. F C of T (1982) 65 FLR 25; 82 ATC 4599; (1982) 13 ATR 636, a magistrate was denied a deduction for the costs of attending a cocktail party hosted by the Bar Association and Law Society and dinners given by the Queensland Stipendiary Magistrates' Association. The taxpayer's duties as a magistrate did not necessitate his attendance at social functions. Hence, the expenditure was not incidental and relevant to the taxpayer gaining his salary and also were of a private nature.

163. A deduction is generally not allowable for the cost of providing entertainment by way of food, drink or recreation (whether to the taxpayer or another person). However, if an employee journalist is required as part of their work to report on a particular social function, the costs associated with attending are deductible.

164. Example: Edwina, a reporter for a major magazine, is responsible for the paper's social and society pages. In order to gather the necessary information for her articles, Edwina is required to attend several functions a year regarded as important to the city's socialites. The cost of attending these functions is an allowable deduction to Edwina due to the specialised nature of her work as a journalist.

It is considered that Customer Relations Managers, similar to the journalist in TR 98/14, are attending events which are integral to their employment duties. It is accepted that the food, drink and recreation provided to Customer Relations Managers whilst facilitating and hosting events in the course of their employment duties is not entertainment for the purposes of section 32-10 of the ITAA 1997.

Question 2

Are input tax credits available with respect to amounts of expenditure associated with the food, drink and recreation provided to a company's employees while in the process of discharging their duties to manage VIP customer relationships at company sponsored events as a creditable acquisition under section 11-20 of the GST Act?

Section 69-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states:

Non-deductible expenses do not give rise to creditable acquisitions or creditable importations

(1)  An acquisition is not a creditable acquisition to the extent that it is a non-deductible expense.

(2)  An importation is not a creditable importation to the extent that it is a non-deductible expense.

(3)  An acquisition or importation is a non-deductible expense if it is not deductible under Division 8 of the ITAA 1997 because of one of the following:

...

(e)  Division 32 of the ITAA 1997 (Entertainment expenses);

Section 11-20 of the GST Act states:

You are entitled to the input tax credit for any creditable acquisition that you make.

It has been determined above that the Customer Relations Managers are not provided with entertainment. An income tax deduction is not denied by section 32-5 of the ITAA 1997. Section 69-5 of the GST Act does not apply, as the expenses are deductible, and therefore are creditable acquisitions.

Being creditable acquisitions, the company is entitled to claim input tax credits to recover Goods and Service Tax (GST) included in the portion of goods and services provided to the Customer Relations Managers in the course of hosting the VIP events.