Private ruling: FBT - exempt property benefits, Income Tax deductions -entertainment expenses, and GST - input tax credit entitlement
Date of advice: 26 September 2016
Published: November 2016
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Will the purchase of food and drink provided to employees at the employer's business premises give rise to a property fringe benefit as defined in section 40 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA), and be subject to a property fringe benefits exemption pursuant to section 41 of the FBTAA? | A1: Yes | Q2: Will the expenditure incurred by the employer in providing meals to staff on work days, be in respect of the provision of entertainment, and therefore be precluded by section 32-5 of the Income Tax Assessment Act 1997 (ITAA 1997) from being an allowable deduction under section 8-1 of the ITAA 1997? | A2: No | Q3: If the answer to question 2 is no, would the employer be entitled to claim input tax credits pursuant to section 11-20 of A New Tax System (Goods and Service Tax) Act 1999 (GST Act), on the purchase of meals provided to employees? | A3: Yes

Relevant facts and circumstances: The taxpayer is an employer of a business, and provides lunch (food and non-alcoholic drink) to its employees three to four times a week during work days. The meals are provided on the employer's business premises. The meals consist of take away lunches, being sandwiches and other fast food, and non-alcoholic drinks. They are ordered and delivered to the motor vehicle mechanic shop, and left in a kitchen of the workshop. As the workshop is always busy, employees take turns at different times of the day to have their lunch. The entity has an Australian Business Number (ABN), and is registered for Goods and Services Tax (GST).

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 Section 40 | Fringe Benefits Tax Assessment Act 1986 Section 41 | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 32-5 | Income Tax Assessment Act 1997 Section 32-10 | A New Tax System (Goods and Service Tax) Act 1999 Section 11-5 | A New Tax System (Goods and Service Tax) Act 1999 Section 11-15 | A New Tax System (Goods and Service Tax) Act 1999 Section 11-20 | A New Tax System (Goods and Service Tax) Act 1999 Division 69.

Reasons for decision: Summary: The purchase of food and drink provided to employees at the employer's business premises gives rise to a property fringe benefit under section 40 of the FBTAA, and constitutes an exempt property benefit pursuant to section 41 of the FBTAA. | Detailed Reasoning - Detailed reasoning: Section 40 of the FBTAA provides: '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.' A property benefit pursuant to section 40 of the FBTAA arises at the time that property is provided by one person to another person, either free or at a discount. That is, there must be property and the property must be provided for there to be a property benefit. Property is defined in section 136 of the FBTAA to include all tangible and intangible property. Food and drink is considered to be a property fringe benefit in accordance with section 40 of the FBTAA. The food is provided by the employer to the employees three to four times per week during week days at the employer's business premises. As such section 40 of the FBTAA is satisfied. Property provided to an employee on a working day and consumed on the business premises of the employer, is exempt from FBT pursuant to subsection 41(1) of the FBTAA. Subsection 41(1) of the FBTAA provides: '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.' Paragraph 10 of Taxation Ruling IT 2675 (IT 2675) provides that the provision of morning and afternoon tea and light meals to employees is an exempt benefit under section 41 (exempt property benefit). Additionally, paragraph 27 of Taxation Ruling TR 97/17 (TR 97/17) considers the FBT implications for employers who are not income tax exempt bodies, and provides that where the meal is provided to and is consumed by the employee at the employer's business premises at any time on a working day, and provided that the meal is a property benefit and not an expense payment fringe benefit, the benefit is exempt from FBT under section 41 of the FBTAA. | Detailed Reasoning - Conclusion: The provision of light meals to employees is therefore an exempt property benefit as it is provided to and consumed by employees on a working day on the business premises of the employer. Accordingly, the requirements of subsection 41(1) of the FBTAA are satisfied. | Summary: The expenditure incurred by the employer in providing light meals to staff is not considered to constitute entertainment for the purposes of section 32-5 of the ITAA 1997, and therefore constitutes an allowable deduction pursuant to section 8-1 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: The general rule against the deductibility of entertainment expenditure is contained in section 32-5 of the ITAA 1997. Section 32-5 provides: '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.' | Detailed Reasoning - Taxation Ruling TR 97/17: TR 97/17 considers the concept of entertainment as it relates to the provision of food or drink for the purposes of applying the relevant provisions of the ITAA 1997 and the FBTAA. | Detailed Reasoning - What is entertainment?: Subsection 136(1) of the FBTAA provides that the term 'entertainment' has the meaning given by section 32-10 of the ITAA 1997. Entertainment is defined in subsection 32-10 of the ITAA 1997 as follows: '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: These are some examples of what is entertainment: • business lunches • social functions. These are some examples of what is not entertainment: • meals on business travel overnight • theatre attendance by a critic • a restaurant meal of a food writer.' It is necessary therefore to establish the meaning of the words 'entertainment by way of food and drink' as contained in paragraph 32-10(1)(a) of the ITAA 1997. As these terms are not defined in the ITAA 1997, they are taken to have their ordinary meaning. The definition contained in paragraph 14 of TR 97/17 is extracted from the Macquarie Dictionary as follows: (a) agreeable occupation for the mind, diversion or amusement; or (b) something affording diversion or amusement; or (c) hospitable provision for the wants of a guest. Paragraph 17 of TR 97/17 briefly concludes that that an element of entertainment is required before the provision of food or drink becomes meal entertainment…. 'entertainment is the gathering together of a number of people to carry out some activity or to be present at some activity presumably with a view of enjoying themselves.' "entertainment" to receive its meaning in ordinary language, and that meaning in this connection is "amusement". Paragraph 19 of TR 97/17 then makes reference to IT 2675 which considers that 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. Paragraph 8 of IT 2675 further provides that if alcohol is provided at a morning or afternoon tea or at a light meal: (a) this will constitute the provision of entertainment in terms of section 32-5 of the ITAA 1997; and (b) unless one of the exemptions set out in subdivision 32-B of the ITAA 1997 applies, expenses incurred on the food and drink (including the alcohol) are denied deductibility. Paragraph 23 of TR 97/17 indicates that the determination of whether or not the provision of food or drink constitutes entertainment requires an objective analysis of all the circumstances surrounding that provision, and identifies the following relevant factors that should be considered in undertaking any objective analysis: (a) Why is the food or drink being provided? This test is a 'purpose test'. For example, food or drink provided for the purposes of refreshment does not generally have the character of entertainment, whereas food or drink provided in a social situation where the purpose of the function is for employees to enjoy themselves has the character of entertainment. (b) What food or drink is being provided? As noted above, morning and afternoon teas and light meals are generally not considered to constitute entertainment. However, as light meals become more elaborate, they take on more of the characteristics of entertainment. (c) When is the food or drink being provided? Food or drink provided during work time, during overtime or while an employee is travelling is less likely to have the character of entertainment. This is because in the majority of these cases food provided is for a work-related purpose rather than an entertainment purpose. (d) Where is the food or drink being provided? Food or drink provided on the employer's business premises or at the usual place of work of the employee is less likely to have the character of entertainment; refer to the reasons in (b) and (c) above. However, food or drink provided in a function room, hotel, restaurant, cafe, coffee shop or consumed with other forms of entertainment is more likely to have the character of entertainment. This is because the provision of the food or drink is less likely to have a work-related purpose. | Detailed Reasoning - Conclusion: In the present case, and having regard to the factors provided in paragraph 23 of TR 97/17, it is concluded as follows: • the food and drink is being provided for the purpose of the employee's refreshment, as it is not provided in a social situation where the purpose of the function is for employees to enjoy themselves. Rather, the food and drink is provided at work at a time when employees are available to stop for lunch. • the type of food provided consists of light take away lunches and non-alcoholic drinks. The nature of the food itself does not confer entertainment of the employee. • the food and drink is provided during work time when employees have an opportunity to stop for lunch, which gives it a work related purpose. • the food and drink is provided on the employer's business premises, or the usual place of work of the employee, and as such is less likely to have the character of entertainment. Additionally, paragraph 25 of TR 97/17 contains a table, which assists to determine if food and drink provided in a given circumstance constitutes meal entertainment. The table provides that food or drink (consisting of morning and afternoon teas and light lunches) consumed on the employers premises by employees, is not considered to be meal entertainment, and is not subject to FBT, but is considered to be a deductible expense for the employer (item (a)(i)(4) of the table). Accordingly, the food or drink does not amount to meal entertainment, so that the employer is not precluded by section 32-5 of the ITAA from claiming a deduction under section 8-1 of the ITAA 1997 for the cost of providing such lunches. | Summary: The employer will be entitled to an input tax credit for the purchase of meals provided to employees as it satisfies the requirements of section 11-20 of the GST Act. | Detailed Reasoning - Division 11 of the GST Act: Input tax credits in respect of creditable acquisitions can be claimed by a registered GST entity in accordance with Division 11 of the GST Act. A creditable acquisition is defined in section 11-5 of the GST Act. There are four elements to the definition, and it is necessary that all four elements are satisfied for an input tax credit entitlement to arise. Section 11-5 of the GST Act provides: 'You make a creditable acquisition if: (a) you acquire anything solely or partly for a *creditable purpose; and (b) the supply of the thing to you is a *taxable supply; and (c) you provide, or are liable to provide, *consideration for the supply; and (d) you are *registered, or *required to be registered The asterisks denote a defined term in the GST Act.' One of the requirements for an acquisition to be creditable is that it be made solely or partly for a creditable purpose. Subsections 11-15(1) and 11-15(2) of the GST Act give the meaning of creditable purpose: '(1) You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise. (2) However, you do not acquire the thing for a creditable purpose to the extent that: (a) the acquisition relates to making supplies that would be *input taxed; or (b) the acquisition is of a private or domestic nature.' | Detailed Reasoning - Division 69 of the GST Act: However, Division 69 of the GST Act denies input tax credits for specific types of acquisitions. Subsection 69-5(1) of the GST Act states that: 'An acquisition is not a *creditable acquisition to the extent that it is a *non-deductible expense.' Subsection 69-5(3) of the GST Act states that: 'An acquisition or importation is a non-deductible expense if it is not deductible under Division 8 of the *ITAA 1997 because of ... (f) Division 32 of the *ITAA 1997 (Entertainment expenses);' Therefore, subsection 69-5(1) of the GST Act disallows any entitlement to input tax credits for acquisitions of entertainment provided to clients where the expense is not deductible for income tax purposes. ATO Interpretative Decision ATO ID 2005/122 (ATO ID 2005/122) considers whether a business operator is entitled to an input tax credit under section 11-20 of the GST Act, for goods and services tax (GST) included in acquisitions made to provide meals to clients in an in-house dining facility. ATO ID 2005/122 provides that the requirements of section 11-5 of the GST Act were satisfied because the entity made the acquisitions in the course of its business, the supplies to it were taxable supplies, and it was registered for GST. ATO ID 2005/122 further considered Division 69 of the GST Act, which provides that some acquisitions that are not deductible under the ITAA 1997 are not creditable acquisitions. In this case however, the entity was entitled to an input tax credit under section 11-20 of the GST Act for GST included in acquisitions made to provide meals to clients in an in-house dining facility. | Detailed Reasoning - Conclusion: As previously discussed in Question 2, it is considered that the expenditure incurred in providing light meals to employees on work days at the employer's business premises is deductible in accordance with section 8-1 of the ITAA 1997, and is therefore not precluded by section 32-5 of the ITAA 1997 from being an allowable deduction. Accordingly, paragraph 69-5(3)(f) of the GST Act does not apply. The meals provided to employees are considered to have been acquired for a creditable purpose, as they were acquired in the course of carrying out the employer's enterprise. The acquisition of the meals is a taxable supply, as consideration was provided for the supply, and the acquisition of the meals is not of a private or domestic nature. Additionally, the employer is registered for GST. The employer is therefore entitled to an input tax credit under section 11-20 of the GST Act, for GST included in acquisitions made to provide meals to employees, as the purchase of light meals is made for a creditable purpose in accordance with subsections 11-15(1) and 11-15(2).