Private ruling: Income tax deductions - entertainment expenses
Date of advice: 17 April 2024
Published: 3 June 2024
Ruling period: Income tax year ending 30 June 2020 | Income tax year ending 30 June 2021 | Income tax year ending 30 June 2022 | Income tax year ending 30 June 2023
Date scheme commenced: 1 July 2019

Ruling: Q1: Is expenditure incurred by the company on the delivery of resident events and the provision of personal training and yoga deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) because it is an expense of the type covered by item 3.1 in the table in section 32-40 of the ITAA 1997? | A1: No

Relevant facts and circumstances: 1. The Company is an Australian Private Company. It is part of a consolidated entity. 2. The Company is registered for GST. 3. The Company is a property manager for apartment buildings. 4. The Company engages with key stakeholders. 5. The Company does not own any apartments in the building. 6. There are past and current employees of the Company who reside in individual apartments within the buildings. None of these employees partook in the entertainment. 7. The Company provides services to all residents (both owner/occupiers or tenants) of the building. 8. The Company's business activities generally fall under one of the following categories: • acting as property manager on behalf of one of the stakeholders and collecting rent from tenants; • providing caretaking services to all residents of the building on behalf of one of the stakeholders; and • providing access to facilities, services and amenities. 9. Services provided to residents include access to complimentary entertainment. These services are available to the residents of the building and publicised on the Company's website and through other forms of advertisement as a key component of the Company's offerings. 10. The Company charges a management fee that is typically above the industry average. 11. For the ruling period, total costs to the Company were provided.

Relevant legislative provisions: Section 8-1 of the Income Tax Assessment Act 1997 | Section 32-5 of the Income Tax Assessment Act 1997 | Section 32-10 of the Income Tax Assessment Act 1997 | Section 32-40 of the Income Tax Assessment Act 1997 | Subsection 995-1(1) of the Income Tax Assessment Act 1997

Reasons for decision: Summary: For item 3.1 of the table in section 32-40 to be satisfied, the entertainment must be provided for payment in the ordinary course of a business that is carried on. The resident events, yoga and personal training provided by the Company to the residents are provided free of charge as they are complimentary. | Detailed Reasoning - Detailed reasoning: Under section 32-5 of the ITAA 1997, a deduction is not allowable under section 8-1 of the ITAA 1997 to the extent that you incur a loss or outgoing in respect of providing entertainment, unless it's one of the exceptions as set out in Subdivision 32-B of the ITAA 1997. Subsection 32-10(1) 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. 'Recreation' is defined under subsection 995-1(1) of the ITAA 1997 as including amusement, sport or similar leisure time pursuits. There are two items in the table in section 32-40 of the ITAA 1997. The first item states that entertainment must be provided for payment in the ordinary course of a business that is carried on. The second item is not applicable on your facts. Application to circumstances The Company provides complimentary resident events, yoga and personal training to the residents (tenants) of the apartments within the residential living buildings managed by the Company. The resident events, yoga and personal training provided by the Company are an opt in form of entertainment. There is no obligation on the residents to attend and these are provided free of charge as they are complimentary. Therefore the resident events, yoga and personal training do not meet the testing in item 1 of the table in section 32-40 of the ITAA 1997 as they are not provided for payment. None of the other exceptions in Subdivision 32-B of Part 2-5 of the ITAA 1997 have scope for application. For these reasons, the general rule in section 32-5 of the ITAA 1997 stops the claiming of a deduction under section 8-1 of the ITAA 1997.