Edited version of private advice

Authorisation Number: 5010066043087

Date of advice: 11 August 2020

Ruling

Subject: Fringe benefits tax

Question 1

Does the entity in providing an employee with the use of a recreation centre provide the employee with a residual benefit under section 45 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes

Question 2

Is the entity able to access the tax exemption available for the employee's use of the recreation centre under subsection 47(2) of the FBTAA?

Answer

Yes

Question 3

In providing the benefit referred to above, would the salary sacrifice arrangement be deemed effective pursuant to section 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) and section 23L of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

This ruling applies for the following periods:

FBT year 1 April 20XX to 31 March 20XX

FBT year 1 April 20XX to 31 March 20XX

FBT year 1 April 20XX to 31 March 20XX

FBT year 1 April 20XX to 31 March 20XX

The scheme commenced on:

1 April 20XX

Relevant facts and circumstances

The entity is a tax-exempt body.

The entity owns a recreation centre which provides members of the public with the use of various sporting facilities.

The recreation centre is operated by an association that is wholly owned by the entity.

The entity also uses the recreation centre for various other activities.

The establishment of the association and the rules governing its operation are subject to the approval of the entity.

The association is also wholly exempt from income tax.

The arrangement between the entity and the association is a historical one, rather than any formal arrangement and there is no formal lease.

The association carries on a business of providing the recreation centre for use by members of the public including students and university staff and charges the public for use of the recreation centre.

The association incurs expenditure in operating the centre. For example, it pays for employee wages and for equipment.

The entity currently provides employees with the use of the recreation centre by way of a salary sacrifice arrangement.

The salary sacrifice arrangement is in relation to the foregoing of future earnings.

Relevant legislative provisions

Subsection 136(1) of the FBTAA

Section 38 of the FBTAA

Section 45 of the FBTAA

Subsection 47(2) of the FBTAA

Section 6-5 of the ITAA 1997

Section 6-10 of the ITAA 1997

Section 32-10 of the ITAA 1997

Section 32-25 of the ITAA 1997

Section 32-40 of the ITAA 1997

Section 23L of the ITAA 1936

Reasons for decision

Under section 45 of the FBTAA, a benefit is a residual benefit if it does not fall within the benefits listed in Subdivision A of Divisions 2-11.

The term 'benefit' in subsection 136(1) of the FBTAA includes any right (including a right in relation to, and an interest in, real or personal property, privilege, service or facility and, without limiting the generality of the foregoing includes a right, benefit, privilege, service or facility that is, or is to be, provided under:

a)    An arrangement for or in relation to:

              i.        The performance of work (including work of a professional nature) whether with or without the provision of property

             ii.        The provision of or of the use of facilities for, entertainment, recreation or instruction; or

           iii.        The conferring of rights, benefits or privileges for which remuneration is payable in the firm of a royalty, tribute, levy or similar exaction.

b)    A contract of insurance

c)    An arrangement for or in relation to the lending of money.

In this case, the entity provides its employees with the use of a recreation facility. This would fall under the definition of a 'benefit' above.

As the entity is a tax-exempt entity, section 38 of the FBTAA which relates to tax-exempt body entertainment fringe benefits needs to be considered.

Section 38 of the FBTAA states:

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.

Subsection 136(1) of the FBTAA provides that 'non-deductible exempt entertainment expenditure' means non-deductible expenditure to the extent to which it is not incurred in producing assessable income.

Non-deductible entertainment expenditure is defined in subsection 136(1) of the FBTAA as a loss or outgoing to the extent to which:

a)    section 32-5 of the ITAA 1997 applies or would apply; and

b)    apart from that section, it would be deductible under section 8-1 of that Act or would be if producing assessable income.

Therefore, in combining the above definitions, a tax-exempt body entertainment fringe benefit will arise where the following conditions are satisfied:

·         you incur expenditure in the provision of entertainment;

·         the expenditure is not incurred in producing assessable income; and

·         if the expenditure had been incurred in producing assessable income, section 32-5 of the ITAA 1997 would have prevented a deduction from being claimed.

Entertainment

The term 'entertainment' has the meaning given by section 32-10 of the ITAA 1997 as:

32-10(1) Entertainment means:

(a) Entertainment or travel 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 also taken to provide entertainment even if business discussions or transactions occur.

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

In this case, the employee's use of the recreation centre is entertainment by way of recreation under paragraph 32-10(1)(a) of the ITAA 1997.

Expenditure not incurred in producing assessable income

The entity is an income tax exempt body. Therefore, this criterion is satisfied.

Section 32-5

In general terms section 32-5 of the ITAA 1997 prevents a deduction being claimed for an expense incurred in providing entertainment.

However, item 3.1 of the table in section 32-40 of the ITAA 1997 provides an exception to the general rule

Section 32-5 does not stop you from deducting a loss or outgoing for... providing entertainment for payment in the ordinary course of a business that you carry on.

Therefore, if the entity incurs the expenditure in the ordinary course of carrying on its business it will not be considered as entertainment expenditure and therefore not subject to section 38 of the FBTAA.

In ATO Interpretive Decision ATO ID 2008/60 Residual fringe benefit: tax exempt body - recreation centre, the local government council operated a recreation centre which provided members of the public with the use of various sporting facilities including a swimming pool, spa, sauna, gymnasium, basketball and volleyball facilities. It was found that the employer carried on a business of providing the use of the recreation centre to members of the public for payment. Consequently, the business is one of providing recreation which is entertainment and the activity was 'in the ordinary course of a business' and section 32-40 of the ITAA 1997 was satisfied.

The entity owns a recreation centre which provides sporting facilities to the public. Although, the association manages the recreation centre, the entity wholly owns and controls the association. Further, the rules governing the operation of the association are subject to the approval of the entity. Therefore, the operations of the association are an extension of the entity's operations. Subsequently, it is considered that the entertainment expenditure is incurred in the ordinary course of the entity's business and therefore, is deductible pursuant to item 3.1 of the table in section 32-40 of the ITAA 1997.

As the use of the recreation centre will not be considered a tax-exempt body entertainment fringe benefit and does not fall within any of the other categories of benefits covered in Divisions 2 to 11, it is therefore a residual fringe benefit under section 45 of the FBTAA.

Question 2

Summary

Detailed summary

Section 47 of the FBTAA provides a list of exempt residual benefits. Subsection 47(2) of the FBTAA states that:

Where:

a)            a residual benefit provided to a current employee in respect of his or her employment consists of:

                      i.        the provision, or use, of recreational facility; and

                     ii.        the care of children of the employee in a chills care facility; and

b)            the recreational facility or childcare facility, as the case may be, is located 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.

a)    Residual benefit provided to employee in respect of their employment

In this case, the use of the recreation centre will be provided to current employees of the entity. This is a residual fringe benefit under section 45 of the FBTAA.

Therefore, requirement a) is satisfied.

b)    Recreation facility located on business premises of the employer

Business premises

Subsection 136(1) of the FBTAA defines 'business premises' in relation to a person to mean:

'premises, or a part of premises, of the person used, in whole or in part, for the purposes of business operations of the person, but does not include:

a)            premises, or a part of premises, used as a place of residence of an employee of the person or an employee of an associate of the person; or

b)            a corporate box; or

c)            boats or planes used primarily for the purpose of providing entertainment unless the boat or plane is used in the person's business of providing entertainment; or

d)            other premises used primarily for the purpose of providing entertainment unless the premises are used in the person's business of providing entertainment.'

Taxation Ruling 2004/4 states at paragraph 4 that the definition of a 'business premises' requires two conditions to be satisfied:

...unless any of the specific exclusions apply, premises are only 'business premises' in relation to a person if two requirements are met. The first requirement is that the premises or part of premises are 'of' the person. Secondly, the premises or part of premises must be used by the person, in whole or in part, for the purposes of their business operations.

Premises are 'of' the person

Paragraphs 7 and 8 of TR 2004/4 provide guidance of the meaning of premises of the person:

7. If a person has ownership of premises, or has exclusive occupancy rights as lessee of premises, the premises would ordinarily be described as premises of the person.

8. In other circumstances, for example, where a person has non-exclusive possession of premises, the person satisfies this requirement if they have a right to possession of the premises, at least to the extent necessary to enable the conduct thereon of their business operations.

Paragraph 48 of TR 2004/4 further provides:

48. The employer must have a right of possession and control over the use of the premises during the course of its business operations. The absence of a right of possession and control may indicate the premises are not of the person, or the activities being carried on the premises are not truly business operations of the person.

Paragraph 50 of TR 2004/4 further states:

It should be noted that situations do arise where a person has ownership of premises, which at the same time another person has exclusive occupancy rights as a lessee of the premises, and so the premises could be described as premises of each of those persons. In other words, the premises could, in a particular period, be described as the premises of the owner and the premises of the lessee. However, while the Ruling at paragraphs 6 to 8 above may allow the identification of two persons, each of whom could satisfy the 'of the person' requirement, it does not automatically follow that each of those persons would satisfy the requirement that the premises be used for their business operations'.

In this case, the entity leases the recreation centre to the association, although there is no formal lease in place. The association is then responsible for the management and operation of the recreation centre; however, its operations are subject to the approval of the entity. It is therefore considered that the entity retains control of the premises during its business operations through being the sole member of the association and its own use of the recreation centre.

The premises can be described as the premises of both the entity and the association in line with paragraph 50 of TR 2004/4. Therefore, the first requirement that the premises are 'of' the person has been satisfied.

Business operations

The term 'business operations' is also defined in subsection 136(1) of the FBTAA and that definition states that in relation to a government body or non-profit company 'business operations' includes any operation or activities that are carried out by that body or company.

In this case, the entity owns the recreation centre which the association operates. It is considered that the recreation centre is a business operation of the entity.

Conclusion

Therefore, the recreation centre is not excluded by paragraph (d) of the definition of business premises as the premises is used by the entity's business of providing entertainment and the entity's actions and activities on the premises are consistent with the entity's normal practice of providing recreation.

The recreational centre is therefore located on the entity's business premises and the conditions in subsection 47(2) of the FBTAA are satisfied. The residual benefit provided is therefore exempt from FBT.

Question 3

A salary sacrifice arrangement (SSA) is an arrangement between an employer and an employee, whereby the employee agrees to forego part of their future entitlement to salary or wages in return for the employer providing benefits of a similar value.

Taxation Ruling TR 2001/10 Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangementsdiscusses effective and ineffective SSAs and at paragraph 19 and 21 states:

19. Salary sacrifice arrangement - in this Ruling, the term salary sacrifice arrangement means an arrangement under which an employee agrees to forego part of his or her total remuneration, that he or she would otherwise expect to receive as salary or wages, in return for the employer or someone associated with the employer providing benefits of a similar value, The main assumption made by the parties is that the employee is then taxed under the income tax laws only on the reduced salary or wages and that the employer is liable to pay FBT, if any, on the benefits provided.

21. Effective SSA - an effective SSA involves the employee agreeing to receive part of his or her total amount of remuneration as benefits before the employee has earned the entitlement to receive that amount as salary or wages.

If the SSA is effective, salary and wages of the employee will be forgone and not assessable under either section 6-5 or 6-10 of the ITAA 1997. In addition, the fringe benefit derived is not assessable income and is not exempt income under section 23L of the ITAA 1936.

The entity will be entering into a SSA with its employees where they will forego some of their future entitlements to salary in order to use the facilities in the recreation centre.

Therefore, it will be an effective SSA and the amounts forgone will not be assessable under 6-5 and 6-10 of the ITAA 1997 and the fringe benefit will not be assessable under section 23L of the ITAA 1936.