ATO ID 2008/60: Residual fringe benefit: tax-exempt body - recreation centre
Date of decision: 26 February 2008
Year of income: Year ended 31 March 2008
Business line: Superannuation and Employer Obligations

Issue
Does the employer, a local government council who provides an employee with the use of the local recreation centre including use of a swimming pool and gymnasium, provide the employee with a residual benefit under section 45 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Decision
Yes. The benefit provided to the employee is not a tax-exempt body entertainment benefit and is therefore a residual benefit under section 45 of the FBTAA.

Facts
The employer is a local government council and is wholly exempt from income tax on income derived from its activities. The employer owns and operates a recreation centre which provides members of the public with the use of various sporting facilities including swimming pool, spa, sauna, gymnasium, basketball and volleyball facilities. The employer carries on a business of providing the recreation centre for use by members of the public. The employer charges the public for use of the recreation centre. The employer incurs expenditure in operating the centre. For example, it pays for electricity usage, for employee's wages and for swimming pool chemicals. The employer provides an employee the use of the recreation centre for one year.

Reasons for decision
Summary: The term 'benefit' in subsection 136(1) of the FBTAA includes any right, privilege, service or facility. In the present case the benefit provided to the employee is the employee's use of the centre over the course of the year. Section 45 of the FBTAA provides: 45 RESIDUAL BENEFITS A benefit is a residual benefit for the purposes of this Act if the benefit is not a benefit by virtue of a provision of Subdivision A of Divisions 2 to 11 (inclusive). Section 38 of the FBTAA needs to be considered before section 45 of the FBTAA because it is one of the provisions within Divisions 2 to 11 which take precedence over residual benefits. Section 38 of the FBTAA provides: 38 TAX-EXEMPT BODY ENTERTAINMENT BENEFITS 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. 'Entertainment' as defined in subsection 136(1) of the FBTAA and by extension section 32-10 of the Income Tax Assessment Act 1997 (ITAA 1997) includes in its meaning, entertainment by way of recreation. The term recreation is further defined in subsection 995-1(1) of the ITAA 1997 to include amusement, sport or similar leisure-time pursuits. The employee's use of the recreation centre is entertainment by way of recreation under section 32-10 of the ITAA 1997. As provided by section 38 of the FBTAA, the employer incurs expenditure operating the recreation centre, which is partly in respect of the provision, in respect of the employment of the employee, of entertainment to the employee. Where this expenditure is also 'non-deductible exempt entertainment expenditure', as defined in subsection 136(1) of the FBTAA, the incurring of the expenditure will be deemed to constitute a benefit as described in section 38 of the FBTAA. Subsection 136(1) of the FBTAA provides: 'non-deductible exempt entertainment expenditure' means non-deductible entertainment expenditure to the extent to which it is not incurred in producing assessable income. 'non-deductible entertainment expenditure' means a loss or outgoing to the extent to which: (a) section 32-5 of the Income Tax Assessment Act 1997 applies to it, or would apply if it were incurred in producing assessable income; and (b) apart from that section, it would be deductible under section 8-1 of that Act, or would be if it were incurred in producing assessable income; The employer, a local government council, would be deriving assessable income and deducting its operating expenses if it were not exempt from income tax. Where this operating expenditure would also be entertainment expenditure under section 32-5 of the ITAA 1997 then the employer will have incurred 'non-deductible entertainment expenditure' which is also 'non-deductible exempt entertainment expenditure'. Under these circumstances the employer would have provided a benefit under section 38 of the FBTAA. However, section 32-40 of the ITAA 1997 provides an exception to what is considered entertainment expenditure in section 32-5 of the ITAA 1997. Section 32-40 of the ITAA 1997, at Item 3.1, provides: Section 32-5 does not stop you deducting a loss or outgoing for ... 3.1 providing *entertainment for payment in the ordinary course of a *business that you carry on. The employer carries on a business of providing the use of the recreation centre to members of the public for payment. The business is one of providing recreation which is entertainment and the activity is considered to be 'in the ordinary course of a business'. Section 32-40 of the ITAA 1997 is therefore satisfied. This means that the employer's expenditure is not entertainment expenditure within section 32-5 of the ITAA 1997; is not 'non-deductible entertainment expenditure' within subsection 136(1) of the FBTAA and is not 'non-deductible exempt entertainment expenditure' within subsection 136(1) of the FBTAA. The benefit provided to the employee, being the use of the recreation centre over the course of the year is therefore not a benefit which is covered by section 38 of the FBTAA. As the benefit provided to the employee does not fall within any of the categories of benefits covered by Subdivision A of Divisions 2 to 11 (inclusive) of Part III of the FBTAA, it is therefore a 'residual benefit' under section 45 of the FBTAA.

Legislative references: Fringe Benefits Tax Assessment Act 1986 section 38 section 45 subsection 47(2) subsection 136(1)
Subject references: Entertainment expenses FBT entertainment FBT recreation FBT tax-exempt body Fringe benefits tax Residual fringe benefits