Edited version of private advice

Authorisation Number: 1051987194488

Date of advice: 14 June 2022

Ruling

Subject: NDIS business - deductions

Issue 1 - Your Employees' Costs

Question 1

Are the entry costs to the skill building activities paid by you for the employees subject to Fringe Benefits Tax under the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes, however the fringe benefit taxable value may be reduced to zero using the otherwise deductible rule.

Question 2

Are your employee's entry costs to the skill building activities, paid by you, in relation to their employment, deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 3

Is the food and drinks provided to your employees at skill building activities subject to Fringe Benefits Tax under the FBTAA?

Answer

Yes.

Question 4

Are the costs incurred by you for the purchase of food and drinks consumed by your employees at skill building activities deductible under section 8-1 of the ITAA 1997?

Answer

No.

Question 5

Are the costs incurred by you for the purchase of food and drinks consumed by your employees at skill building activities deductible under 8-1 of the ITAA 1997 because of the operation of section 32-20 of the ITAA 1997?

Answer

No.

Issue 2 - Your Clients' Costs

Question 1

Are your client's entry costs to the skill building activities paid by you, deductible under section 8-1 of the ITAA 1997?

Answer

Yes.

Question 2

Are the costs incurred by you for the purchase of your client's food and drinks consumed at skill building activities deductible under section 8-1 of the ITAA 1997?

Answer

No.

Question 3

Are the costs incurred by you for the purchase of ingredients for group cooking classes with your clients held at your home, which is partly used as your business premises, deductible under section 8-1 of the ITAA 1997.

Answer

Yes.

Issue 3 - Your Costs

Question 1

Are the entry costs to the skill building activities paid by you, in your capacity as a supervisor of children, deductible under section 8-1 of the ITAA 1997?

Answer

Yes.

Question 2

Are the costs incurred by you for the purchase of food and drinks consumed at skill building activities deductible under section 8-1 of the ITAA 1997?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

18 February 20XX

Relevant facts and circumstances

You operate a business a care business as a sole trader.

You have employees.

You and your employees actively provide the care service to clients who have an approved self-managed NDIS plan.

You provide us with details on your client base.

The responsibilities of providing care to the clients involve following the participants' NDIS plan which entails social skill building and accessing their community through means such as attending various group and individual activities ('skill building activities'). You provided us with a list of these activities.

You incurred costs for yourself and on behalf of the clients and employees for the admission to the activities. Your clients must be accompanied by an adult to ensure that the goals of their NDIS plans are being met. The supervision is a requirement of the caregiver's employment and role.

When going to the activities with the client, you purchased the food and drinks for yourself, your clients, and your employees.

Your incurred costs for the ingredients used for group cooking classes with your clients. The group cooking classes involve building the clients social skills.

NDIS sets an hourly rate that you can charge your clients. NDIS does not allow you to charge your clients for the cost of the admission to the activities and food consumed.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 32-5/p>

Income Tax Assessment Act 1997 section 32-10

Income Tax Assessment Act 1997 section 32-20

Income Tax Assessment Act 1997 section 32-40

Income Tax Assessment Act 1997 subsection 995-1(1)

Fringe Benefits Tax Assessment Act 1986 section 38

Fringe Benefits Tax Assessment Act 1986 section 40

Fringe Benefits Tax Assessment Act 1986 section 45

Fringe Benefits Tax Assessment Act 1986 section 50

Fringe Benefits Tax Assessment Act 1986 section 52

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Reasons for decision

Employee's Food and Drink for FBT purposes

The minor fringe benefit exemption will not apply as it is frequently and regularly provided in the line of work of the employee.

The food expenses will be an external property fringe benefit. An external property fringe benefit may arise under section 40 of the FBTAA where the employer provides property to their employee. The taxable value of an external property fringe benefit is the expenditure at arm's length value reduced by any employee contribution.

Employee's Activities for FBT purposes

Subsection 136(1) of the FBTAA 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 defines entertainment as:

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.

As the admission costs to concerts and events do not constitute food and drink, it is necessary to determine if they constitute recreation.

Recreation is defined in subsection 136(1) of the FBTAA to include:

a)    amusement;

b)    sport or similar leisure-time pursuits; and

c)    recreation or amusement provided on, or by means of, a vehicle, ship, vessel or aircraft.

The purpose of purchasing admission tickets to venues is so that the employees can escort their clients and care for them at these events.

During the event, the employees are on duty and also assist their clients with other needs as required.

The expected outcome of providing the recreation is not of a social nature as their employment role is to accompany the service recipient to the event.

Therefore, the purchase of the admission costs is not for the purpose of conferring entertainment on the employee. The purchase of the admission costs to various activities for the employees while on duty does not constitute entertainment for the purposes of section 38 of the FBTAA.

The provision of entertainment may give rise to a number of different types of fringe benefit, depending on the circumstances under which you provide the entertainment.

Where the employer incurs expenses for a benefit provided to the employee that is not covered under any other provision of the FBTAA, the benefit will be a residual fringe benefit under section 45 of the FBTAA. The taxable value of a residual fringe benefit is the amount paid or payable by the employer for the benefit reduced by any employee contribution.

The taxable value of a residual fringe benefit can be reduced under section 52 of the FBTAA by the amount the employee would have been entitled to claim as an income tax deduction. Under this section, the residual benefit could have its taxable value reduced to nil if the employee would have been entitled to claim an income tax deduction for the full amount of the expense had the employee incurred the expense, and the employee is able to provide a declaration in an approved form.

Food, Drinks & Activities for Income Tax purposes

Section 8-1 of the ITAA 1997 allows for a deduction for all losses and outgoing to the extent to which they are incurred in gaining or producing your assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing your 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.

Section 32-5 of the ITAA 1997 denies an income tax deduction to the extent that an entity incurs expenditure on entertainment unless that expenditure is related to any of the exceptions outlined in Subdivision 32-B of the ITAA 1997.

Entertainment is defined in section 32-10 of the ITAA 1997 and includes entertainment by way of food, drink or recreation.

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

Under section 32-20 of the ITAA, section 32-5 does not prevent a deduction for a loss or outgoing to the extent that it is incurred in respect of providing entertainment by way of providing a fringe benefit. However, the exemption does not apply to the amount where the fringe benefit is reduced for example: employee contributions.

Section 32-40 of the ITAA 1997 allows a deduction for entertainment expenses where the business is in the entertainment industry. For example, restaurants and theatres.

Expenditure on food and drink is usually considered to be private in nature and will not ordinarily provide the necessary connection to a taxpayer's income earning activities (Federal Commissioner of Taxation v Cooper (1991) 21 ATR 1616).

Application to your situation

Issue 1 - Your Employees' Costs

Question 1

The payment of entry costs by you (the employer) is a residual fringe benefit which may be reduced to zero using the otherwise deductible rule.

Question 2

It is considered that skill building activities does not constitute entertainment under Division 32 of the ITAA 1997. As the skill building activities are incurred in gaining or producing your assessable income and not entertainment expenses the costs are deductible under section 8-1 of the ITAA 1997.

Question 3

The payment of food and drink by you (the employer) is an external property fringe benefit with the taxable amount being the expenditure incurred by the employer at arm's length value reduced by any employee contribution.

Question 4

Food and drinks during the normal course of your employee's day are considered to be private expenses for which you cannot claim a deduction. Therefore, in your case the cost of the food and drinks consumed at activities by your employee's is considered to be a private expense and not deductible under section 8-1 of the ITAA 1997.

Question 5

As mentioned in question 4 food and drink is not an allowable deduction under section 8-1 of the ITAA 1997. However, as the cost of the food and drink is a fringe benefit it will be an allowable deduction (less any employee contributions) under section 8-1 of the ITAA 1997 because of the operation of section 32-20 of the ITAA 1997.

However, in your case whilst it is a fringe benefit you are not registered for FBT therefore the operation of section 32-20 of the ITAA 1997 does not apply.

You can find out more information on FBT by searching for webpage references 'QC 43874' and 'QC 43873' on ato.gov.au.

Issue 2 - Your Clients' Costs

Question 1

It is considered that skill building activities does not constitute entertainment under Division 32 of the ITAA 1997. As the skill building activities deductions are incurred in gaining or producing your assessable income and not entertainment expenses the costs are deductible under section 8-1 of the ITAA 1997.

Question 2

Food and drinks during the normal course of your client's day are considered to be private expenses for which you cannot claim a deduction. Therefore, in your case the cost of the food and drinks consumed at activities by your clients is considered to be a private expense and not deductible under section 8-1 of the ITAA 1997.

Question 3

The ingredients used for group cooking classes with your clients does not constitute entertainment under Division 32 of the ITAA 1997. As the deductions in relation to your group cooking classes with your clients are incurred in gaining of producing your assessable income and not entertainment expenses the costs are deductible under section 8-1 of the ITAA 1997.

Issue 3 - Your Costs

Question 1

It is considered that skill building activities does not constitute entertainment under Division 32 of the ITAA 1997. As the skill building activities are incurred in gaining or producing your assessable income and not entertainment expenses the costs are deductible under section 8-1 of the ITAA 1997.

Question 2

Food and drinks during the normal course of your day are considered to be private expenses for which you cannot claim a deduction. Therefore, in your case the cost of the food and drinks consumed at activities with your clients is considered to be a private expense and not deductible under section 8-1 of the ITAA 1997.