Private ruling: Fringe benefits tax: payment of employees' airfares
Published: June 2012
Ruling period: Year ended 31 March 2012 | Year ended 31 March 2013 | Year ended 31 March 2014
Date scheme commenced: 1 April 2011

Ruling: Q1: Will a fringe benefits tax liability arise from the payment of the cost of return airfares for an employee who travels overseas for both work-related and private purposes where the private purpose is incidental to the work related purpose? | A1: No | Q2: Will a fringe benefits tax liability arise from the payment of the cost of return airfares for an employee who travels overseas for both work-related and private purposes where the private purpose is not incidental to the work related purpose (e.g. where the travel is undertaken equally for work-related and private purposes)? | A2: Yes

Relevant facts and circumstances: You are an income tax exempt organisation that requires employees to attend training/conferences to keep up to date with developments in their area of expertise. To assist the employees to attend these events you will pay for the cost of airfares, car expenses, accommodation and meals that relate to the attendance at the training/conference. Employees are required to obtain the approval of their manager to attend the training/conference. Employees who receive approval to attend training/conference are able to apply for leave to extend the period travelling for personal purposes. Employees who extend their travel for personal reasons are required to pay for the expenses that relate to the personal travel e.g. cost of accommodation, car expenses and meals. However, you will pay for the return airfares. On most occasions flights are booked centrally by your travel department to ensure control of travel process. However, on a rare occasion when the employee pays for the cost of their flights you will reimburse the employee for the cost of the flights. Where this occurs employees are required to provide the relevant receipts before any reimbursement is made. Employees undertaking travel are generally required to complete travel diaries and itineraries. However, these are not required for domestic travel that is less than 5 nights in duration. You provided a copy of your Travel Policy.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 Section 20 | Fringe Benefits Tax Assessment Act 1986 Section 23 | Fringe Benefits Tax Assessment Act 1986 Section 24 | Fringe Benefits Tax Assessment Act 1986 Section 38 | Fringe Benefits Tax Assessment Act 1986 Section 39 | Fringe Benefits Tax Assessment Act 1986 Section 45 | Fringe Benefits Tax Assessment Act 1986 paragraph 50(a) | Fringe Benefits Tax Assessment Act 1986 Section 52 | Fringe Benefits Tax Assessment Act 1986 Subsection 136(1) | Income Tax assessment Act 1997 Section 32-5 | Income Tax assessment Act 1997 Section 32-10 | Income Tax assessment Act 1997 Section 32-30 | Income Tax assessment Act 1997 Section 32-35 | Income Tax assessment Act 1997 Section 32-40 | Income Tax assessment Act 1997 Section 32-50

Reasons for decision: Summary: Will a fringe benefits tax liability arise from the payment of the cost of return airfares for an employee who travels overseas for both work-related and private purposes? Under the arrangement you will either provide the employee with plane fights, or will reimburse the employee for the cost of their flights. In your private ruling application you accepted that there will be a 'fringe benefit' in both situations. The issue to be considered is the valuation of the 'fringe benefit'. The taxable value depends upon the type of benefit provided and whether the value can be reduced by the otherwise deductible rule. The travel provided can be divided into the following three categories: · travel undertaken solely for work-related purposes; · travel undertaken for both a work-related purpose and a private purpose where the private purpose is incidental to the work-related purpose; and · travel undertaken for both a work-related purpose and a private purpose where the private purpose is not incidental to the work-related purpose. Travel that comes within the first category will be either an expense payment fringe benefit (if the employee is reimbursed for the cost of the flights), or a residual benefit (where you pay for the cost of the flights). In both circumstances, a fringe benefits tax liability will not arise as the taxable value will be nil as a result of the application of the otherwise deductible rule. Travel that comes within the second category will be either an expense payment fringe benefit (if the employee is reimbursed for the cost of the flights) or a residual benefit (where you pay for the cost of the flights). In both circumstances, a fringe benefits tax liability will not arise as the taxable value will be nil as a result of the application of the otherwise deductible rule. Travel that comes within the third category will result in: · a tax-exempt body entertainment benefit arising in relation to the portion of the travel that is for a private purpose; and · either an expense payment fringe benefit (if the employee is reimbursed for the cost of the flights) or a residual benefit (where you pay for the cost of the flights) arising in relation to the portion of the travel that is for a work related purpose. As with the first two categories a fringe benefits tax liability will not arise from the expense payment or residual benefits as the taxable value will be nil as a result of the application of the otherwise deductible rule. However, a fringe benefits tax liability will arise in relation to the tax-exempt body entertainment fringe benefit as the otherwise deductible rule does not apply to tax-exempt body entertainment fringe benefits. Your travel policy indicates that in determining whether a fringe benefit will arise from the travel you look to the dominant purpose which is determined on the basis of the number of days travel that were private as compared to the total number of days spent travelling. We do not accept this method of apportionment. Rather than relying on the relative number of private days it is necessary to consider the individual circumstances of the travel to determine whether the private purpose truly is incidental to the work-related purpose as it is possible for a private purpose and work-related purpose to exist equally for travel of less than seven days. Similarly, it is possible for a private portion of four days to be as significant as the work-related portion for travel between seven and 12 days. | Detailed Reasoning - Detailed reasoning: Under the arrangement you will either provide the employee with plane fights, or will reimburse the employee for the cost of their flights. In your application you accepted that this will be a 'fringe benefit'. The issue to be considered is the valuation of the 'fringe benefit'. To determine the taxable value of the fringe benefit that will arise from the provision of the flights it is necessary to initially consider the type of benefit that is being provided. The FBTAA is divided into 13 types of benefits. Each type has its own valuation rules. For the purpose of this ruling, the relevant types to consider are: · expense payment benefits as defined in section 20 where the cost of the airfares is reimbursed; · tax-exempt body entertainment benefits as defined in section 38; and · residual benefits as defined in section 45 where you pay for the cost of the airfares. If the benefit is either an expense payment benefit or a residual benefit the taxable value of the benefit is able to be reduced using the 'otherwise deductible rule'. In general terms, this rule enables the taxable value of the fringe benefit to be reduced by the amount the employee would have been entitled to claim as an income tax deduction if the benefit had not been provided as a fringe benefit. However, the 'otherwise deductible rule' does not apply to a tax-exempt body entertainment benefit. Therefore, in determining the taxable value of the fringe benefit it is necessary to initially determine the type of benefit that is being provided. Guidance for doing this is provided in part 15.7 of Fringe benefits tax: a guide for employers which states: Two employees of a tax-exempt body have dinner together while travelling on business overnight. They see a show at the casino in the city they are staying, and the fee to the show includes dinner. Their employer reimburses them for the cost of the show entry (which includes meals). This expenditure is entertainment, and is therefore tax-exempt body entertainment. The expense payment fringe benefit valuation rules could not apply in this circumstance as this is a tax-exempt body entertainment fringe benefit. In applying this example, it is necessary to consider the specific provision (tax-exempt body entertainment) before the general provisions (expense payment and residual). This is further supported by paragraph 9 in Taxation Ruling TR 97/17 Income tax and fringe benefits tax; entertainment by way of food or drink (TR 97/17). Paragraph 9 of TR 97/17 states: Where a meal falls within a specific FBT provision (e.g., as a board fringe benefit or a tax-exempt body entertainment fringe benefit) then, in absence of an election made under Division 9A, the taxable value of the benefit is determined under that specific provision rather than the more general sections dealing with expense payment and property fringe benefits…. Does a tax-exempt body entertainment benefit arise from the provision of the flights? Tax-exempt body entertainment benefits are defined in section 38 of the FBTAA, which 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. The term 'non-deductible exempt entertainment expenditure' is defined in subsection 136(1) of the FBTAA to mean: · non-deductible entertainment expenditure to the extent to which it is not incurred in producing assessable income. Non-deductible entertainment expenditure is also defined in subsection 136(1) of the FBTAA as: 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; Section 32-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states: 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. Therefore, a tax-exempt body entertainment benefit will arise where the following conditions are satisfied: · entertainment is provided to an employee (or an associate of an employee), · the expenditure incurred in providing the entertainment was not incurred in producing assessable income, and · section 32-5 of the ITAA 1997 would have prevented the person who incurred the expenditure from claiming an income tax deduction for the expenditure under section 8-1 of the ITAA 1997 if it had been incurred in producing assessable income. Each of these requirements are considered below. | Detailed Reasoning - (i) Do the flights constitute the provision of entertainment?: Subsection 136(1) of the FBTAA states that 'entertainment has the meaning given by section 32-10 of the Income Tax Assessment Act 1997' (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 136(1) of the FBTAA as: (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 Macquarie Dictionary provides the following meaning of recreation: · refreshment by means of some pastime, agreeable exercise, or the like. · a pastime, diversion, exercise, or other resource affording relaxation and enjoyment. · the act of recreating. · the state of being recreated. The Macquarie Dictionary provides the following definition of amusement: · the state of being amused; enjoyment. · that which amuses; pastime; entertainment. · a mechanical entertainment, as a merry-go-round at a fair. In interpreting the entertainment provisions contained in Division 32 of the ITAA 1997, it is also relevant to refer to the previous entertainment provisions that were contained within section 51AE of the Income Tax Assessment Act 1936 (ITAA 1936). The term 'provision of entertainment' was defined in subsection 51AE(3) to mean: the provision (whether to the taxpayer or to another person and whether gratuitously, pursuant to an agreement or otherwise) of: (a) entertainment by way of food, drink or recreation; or (b) accommodation or travel in connection with, or for the purpose of facilitating, entertainment to which paragraph (a) applies (whether or not the accommodation or travel is also in connection with something else or for another purpose), whether or not- (c) business discussions or business transactions occur; (d) in connection with the working of overtime or otherwise in connection with the performance of the duties of any office or employment; (e) for the purposes of promotion or advertising; or (f) at or in connection with a seminar. The Explanatory Memorandum to Taxation Laws Amendment Bill (No. 4) 1985, which introduced section 51AE included the following: Clause 9 proposes to insert new section 51AE in the Principal Act to introduce a general prohibition on the deduction of entertainment expenses. Typical kinds of entertainment that will no longer attract deductibility include business lunches and drinks, dinners, cocktail parties, and staff social functions. Similarly, expenditure incurred in entertainment of staff, business associates, clients, etc., by way of sightseeing tours, access to sporting or theatrical events and hospitality provided to invited guests at such events as product launches or film premieres will not be deductible. "recreation" is defined to include amusement, sport or similar leisure-time pursuits, and recreation or amusement provided on, or by means of, vehicles, vessels or aircraft, e.g., joy flights or sightseeing tours. By paragraph (3)(b) accommodation or travel is to be treated as entertainment to the extent to which it is incidental to the provision of entertainment. As such the cost of travel and accommodation associated with, for example, entertaining a client over a weekend at a tourist resort would be subject to the operation of the entertainment expense prohibition. Costs associated with the use of aircraft, boats or vehicles directly in providing entertainment (e.g., by way of joy flights or sightseeing tours) are brought within the meaning of entertainment through the definition of recreation. The Full Federal Court in FC of T v Amway of Australia Ltd FCFCA 273; 2004 ATC 4893, in discussing the meaning of 'provision of entertainment' in relation to amounts spent for accommodation, travel and other incidental expenditure incurred in relation to the holding of certain seminars, said at ATC 4909: 60. In modern Australian usage it may be said that the concept of ``to give pleasure'' and ``hospitality'' underlie the meaning of the word ``entertainment'' when used in connection with matters such as food or drink. Whether the provision of food or drink falls within the definition of the ``provision of entertainment'' is not, in our view, to be determined by reference to subjective matters such as the purpose of some person. Rather, it involves a matter of characterisation. What is required is that regard be had to the essential character of what is provided. Regard will need to be had to all the relevant circumstances such as the locale where the food or drink is provided, the quality of the food or drink, the occasion for its provision, its cost and its nature. Clearly expenditure on the gala dinner would be entertainment. Indeed counsel for Amway did not suggest otherwise. By contrast the provision during a working session by an employer of sandwiches or coffee and tea to an employee would not be. Each item of expenditure would need to be considered having regard to all the circumstances. … 61. The question of deductibility of accommodation and travel expenses is perhaps more difficult. 62. Clause (b) of s 51AE(3) has two limbs. The first requires consideration of whether the provision of accommodation or travel is ``in connection with'' the entertainment or perhaps the provision of entertainment by way of food, drink or recreation. Only the second limb requires consideration of purpose. The relevant purpose is the facilitation of such entertainment. 63. The first limb requires, as already noted, a connection. The Commissioner submits that the word ``connection'' requires merely that there be a relationship of some sort between the provision of the accommodation or travel and the relevant entertainment. For Amway, it is submitted that the connection must be one which is substantial and not remote. 64. As the learned Primary Judge pointed out, the meaning of the word ``connection'' will always depend upon the context in which it appears. His Honour referred to Workers Compensation Board of Queensland v Technical Products Pty Ltd (1988) 165 CLR 642 at 653-654, FC of T v Scully 2000 ATC 4111 at 4121; (2000) 201 CLR 148 at 171 and Minister for Immigration and Multicultural Affairs v Singh (2000) 98 FCR 469 at 477. We agree. 65. In its broadest sense connection signifies any relationship between two subject matters no matter how remote. If the word connection is used in a very broad sense there would seem little point in the alternative limb of paragraph (b) as accommodation or travel for the purpose of facilitating the entertainment, could be seen to have at least a remote connection with that entertainment. It may be accepted, as the Commissioner submits, that the connection must be proximate. A remote connection will not suffice. Rather what is required is a substantial connection between the provision of accommodation or travel on the one hand and entertainment on the other. 66. It may be noted here that the legislature has made it clear that the provision of accommodation or travel may fall within the definition whether or not the travel is at or in connection with a seminar. Clearly, however, not all travel or accommodation which is at or in connection with a seminar was intended to be excluded from deductibility. Were it otherwise the subsection would be differently drafted. What is required is that there be a real relationship between the provision of accommodation or travel on the one hand, and the entertainment by way of food, drink or recreation which is provided to the recipient of the accommodation or travel to a seminar on the other hand. It is arguable that that connection exists in the present case. However, as will be seen, we do not find it necessary to decide the question. 67. The second limb is concerned with the purpose of the provision of accommodation or travel. With respect to the learned Primary Judge, we do not see that purpose is relevant to the first limb. It is only relevant to the second limb. We think the better view is that the purpose referred to in paragraph (b) is to be ascribed objectively rather than subjectively, that is to say that the relevant purpose is to be inferred from the objective circumstances. It is not necessary for the Commissioner to reach into the mind of the provider to ascertain purpose. 68. Prima facie, a reading of paragraph (b) suggests that the enquiry is to be directed at ascertaining the sole purpose of the provision of accommodation or travel. However, the fact that the subsection continues to provide that expenditure may fall within the definition whether or not it is ``for the purposes of promotion or advertising'' would suggest that the words ``the purpose'' do not signify sole purpose but rather something less than that, unless paragraph (e) was not intended to apply to a case falling within paragraph (b). Further guidance is provided by paragraphs 2 and 3 of Taxation Determination TD 94/55 Income tax: when does providing an item of property constitute the provision of entertainment within the meaning of subsection 32-10(1) of the Income Tax Assessment Act 1997? (TD 94/55), which state: 2. In determining whether providing an item of property constitutes the provision of entertainment, regard should be had to all the circumstances of the case. In particular, regard should be given to the character of the entertainment to be derived from the item of property provided. This character is distinct from the property itself and relates to the immediate and active use of the property. 3. In practice, the provision of entertainment can be determined by reference to the following characteristics: · timeliness · entertainment occurs soon after provision of the item of property; · the usefulness of the item of property expires after consumption; or · the item of property is returned at the completion of use. · direct Connection There should be a direct connection between the item of property and the entertainment: · the entertainment should arise from the use of the item of property; · the entertainment is the expected outcome of the provision of the property. TD 94/55 also provides examples of costs which generally will not constitute the provision of entertainment and costs that generally will constitute the provision of entertainment. The example of costs that generally will constitute the provision of entertainment includes costs incurred in providing holiday accommodation. Further guidance for determining whether a flight constitutes the provision of entertainment can be obtained from paragraphs 15 to 18 of TR 97/17 which state: 15. The suggested interpretation that the provision of food or drink in any circumstance constitutes entertainment for purposes of Division 32 is based on the premise that the diversion or amusement required occurs merely by the provision of food or drink. In other words 'entertainment by way of food [or] drink' as used in paragraph 32-10(1)(a) of the ITAA must be construed to refer to bodily not mental gratification. 16. Support for this interpretation is found in the approach taken by the English courts in the construction of similar kinds of words used in regulating refreshment houses (see Taylor v. Oram and Another (1862) 1 H & C 370). In that case, Pollock CB at 376 took the view that in the context of the relevant English legislation the word 'entertainment' is only another expression for 'refreshment'. In addition, it can be argued that as it was necessary to extend the meaning of the word 'recreation' found in paragraph 32-10(1)(a) of the ITAA to include 'amusement', no independent element of either amusement or diversion is required where what occurs is the mere provision of food or drink. 17. The other view that an element of entertainment is required before the provision of food or drink becomes meal entertainment is based on the ordinary meaning of the word 'entertainment' by itself. As was suggested by the Lord Justice-Clerk (Lord Thomson) in Bow and Others v. Heatly (1960) SLT 311 at 313: '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.' In the same case, Lord Patrick at 313 made the following relevant observation: 'Parliament ... left the term "entertainment" to receive its meaning in ordinary language, and that meaning in this connection is "amusement".' 18. We take the view that the above latter interpretation represents the better view of the law. … In applying these guidelines to the provision of a flight in an aircraft, it can be concluded that entertainment will not arise from any flight. However, a flight will constitute the provision of entertainment where: · it is something affording diversion, amusement or is a leisure-time pursuit (paragraph 32-10(1)(a) of the ITAA 1997); or · has the necessary connection with the provision of entertainment (paragraph 32-10(1)(b) of the ITAA 1997). A flight provided to an employee whilst on holidays will come within both of these paragraphs as it is something affording diversion or amusement and it is to do with providing entertainment by way of recreation. By contrast, a flight undertaken solely for work related purposes will not come within either paragraph. Support for this approach is provided in part 14.12 of Fringe benefits tax: a guide for employers which states: When you give an employee a plane ticket for travel to a holiday destination … this will be entertainment … Therefore, a flight that is for a private purpose will involve the provision of entertainment. By contrast, if the flight is solely for a work-related purpose the flight will not involve the provision of entertainment. Guidance for determining the outcome where the flights have two purposes (namely a work-related purpose and a private purpose) is provided by the guidelines provided in relation to the deductibility of self-education expenses in paragraphs 64 to 70 of Taxation Ruling TR 98/9 Income tax: deductibility of self-education expenses incurred by an employee or a person in business (TR 98/9). Paragraphs 64 to 70 of TR 98/9 state: 64. If the purpose of a study tour or attendance at a work-related conference or seminar is the gaining or producing of income, the existence of an incidental private purpose does not affect the characterisation of the related expenses as wholly incurred in gaining assessable income. 65. Both Ronpibon Tin NL (78 CLR at 59; 8 ATD at 437) and Fletcher & Ors (173 CLR at 16; 91 ATC at 4957; 22 ATR at 621) recognise there are at least two kinds of expenditure that require apportionment under section 8-1. The first is expenditure in respect of a matter where distinct and severable parts are devoted to gaining income and other parts are devoted to some other end. If a study tour or work-related conference or seminar was mainly devoted to a private purpose, such as having a holiday, and the gaining or producing of income was merely incidental to the private purpose, only those expenses directly attributable to the income-earning purpose would be allowable. 66. The second kind of apportionable expenditure is a single outlay that serves both an income-earning purpose and some other purpose indifferently. While the High Court recognised that there can be no precise arithmetical division in such cases, it said there must be some fair and reasonable division on the facts of each case. For example, if a study tour or work-related conference or seminar is undertaken equally for income-earning purposes and private purposes, it would be appropriate to apportion the expenses equally between the purposes. 67. Example: Glenn, a qualified architect, attends an eight-day work-related conference in Hawaii on trends in modern architecture. One day of the conference involves a sight-seeing tour of the island and a game of golf is held on the final afternoon of the conference. As the main purpose of attending the conference is the gaining or producing of income, the total cost of the conference (air fares, accommodation and meals) is allowable. 68. The existence of private pursuits, such as the island tour and the game of golf, is purely incidental to the main purpose and does not affect the characterisation of the conference expenses as wholly incurred in gaining assessable income. 69. Example: Jenny, a doctor, was holidaying in Cairns when she became aware of a work-related seminar on the current treatment of cancer patients. The cost of the half-day seminar was $200. Jenny is able to claim a deduction for the cost of the seminar because it is directly attributable to an income-earning purpose. However, no part of her air fare to Cairns or her holiday accommodation is an allowable deduction. 70. Example: Francesco, a paediatrician, has 2 equal purposes when he decides to attend a five-day international conference on paediatrics in Singapore to be followed by a seven-day holiday in Thailand. The conference package is $2,500 ($1,000 return air fare, $500 for the cost of the conference and $1,000 for accommodation and meals at the conference venue). Francesco paid another $2,000 for accommodation, meals and car hire for the 7 day holiday in Thailand. Francesco is allowed a deduction of $1,500 for the conference cost and the accommodation and meals expenses at the conference. Only half of the return air fare ($500) is allowed as the expense was incurred for two equal purposes, one income-earning and the other private. The other expenditure of $2,000 relating to the holiday in Thailand is private in nature and not allowable as a deduction. Paragraph 64 of TR 98/9 provides that the existence of an incidental private purpose will not affect the characterisation of the related expenses as wholly incurred in gaining assessable income. In applying this guidance, the existence of an incidental private purpose will not cause part of the airfare to be attributable to the provision of entertainment. However, in accordance with paragraph 66, if the private purpose is more than incidental to the work related purpose, part of the airfare will be attributable to the provision of entertainment. Where the flight is undertaken equally for work related purposes and private purposes, it is considered appropriate to apportion the expenses equally between the work-related and private purposes. In applying this principle, where the airfares equally serve a private purpose and a work-related purpose half of the expenses can be said to relate to the provision of entertainment. In your travel policy you use the number of private days as compared to the duration of the trip to determine whether the private purpose is incidental to the work related purpose. The policy deems the private purpose to be incidental where: · the duration of the travel is between one and six days; or · the private portion is less than five days (where the travel is between seven and twelve days); or · the private portion is less than seven days (where the travel is between 13 and 30 days); or · the private portion is not more than 20% of total days away (where the travel is for more than 30 days). In applying this policy, the private portion would be deemed to be incidental where: · five days of a six day trip were private; or · four days of a seven day trip were private; or · six days of a 13 day trip were private; or · seven days of a 35 day trip were private. We do not accept this method of apportionment and do not agree that the private portion can be said to be incidental in any of these situations without a more detailed consideration of the facts. In this regard, we refer to the decision in Case R13 84ATC 168; 27 CTBR (NS) Case 64 (Case R13) where a dentist spent six weeks overseas, five days of which were spent at a Dental Congress in Paris, and the rest of the time was spent sightseeing. The Commissioner apportioned the expenditure on the airfares on a time basis, and allowed the taxpayer a deduction of 5/40ths of the air fare, which represented the five days spent at the Congress. However, the AAT held that the proper method of apportioning the expenses was to define the degree of predominance attached to each object. In this case, each object was of equal weight, and therefore, one-half of the airfare was allowable as a deduction. Similarly, paragraph 327 of Taxation Ruling TR 1999/ 10 Income tax and fringe benefits tax: Members of Parliament - allowances, reimbursements, donations and gifts, benefits, deductions and recoupments (TR 1999/10) states: For section 26-30 purposes, if a Member makes a single outgoing , an apportionment may be necessary to determine the amount attributable to the accompanying relative. The method of determining that amount depends on the individual circumstances of the case (see Case R2 84 ATC 106; 27 CTBR (NS) Case 53; Case S80 85 ATC 589; 28 CTBR (NS) Case 88 and Case V39 88 ATC 335; AAT Case 4,157 (1988) 19 ATR 3292). The application of this principle is illustrated in the example at paragraph 312 of TR 1999/10 which states: A Member flies from her New South Wales country electorate to Sydney to attend Parliamentary sittings for five days. On the conclusion of those sittings, she is joined by her family for a holiday in Sydney that extends for two days. Although she incurs accommodation and other expenses in Sydney for seven days, no part of the expenses incurred in respect of the two day holiday period is allowable as a deduction. However, she would be entitled to claim the full cost of her return fare because the main purpose of the travel was work-related. As set out in this example, the apportionment is determined by the purpose(s) of the travel, rather than the number of days spent on each activity. Therefore, it is possible that a 50/50 apportionment will apply regardless of whether the total travel time is three days or thirty days. Therefore, we consider that at least part of the cost of the airfares will be attributable to the provision of entertainment where the private purpose is more than incidental to the work-related purpose. | Detailed Reasoning - (ii) Is the entertainment expenditure incurred in producing assessable income?: As you are an income tax exempt body, the expenditure will not be incurred in producing assessable income. (iii) If the expenditure had been incurred in producing assessable income would section 32-5 of the ITAA 1997 have prevented an income tax deduction being claimed for the expenditure? The tables in sections 32-30 to 32-50 of the ITAA 1997 sets out the situations in which section 32-5 does not prevent a deduction being claimed for entertainment expenses. From the information provided, none of these exceptions appear to apply to the private portion of the travel. | Detailed Reasoning - Conclusion: A tax-exempt body entertainment fringe benefit will not arise from the provision of the flights where either: · the flights are solely for work related purposes; or · the private purpose is incidental to the work related purpose · as none of the expenditure will be in respect of the provision of entertainment. However, where the private purpose is more than incidental to the work related purpose, a tax-exempt body entertainment benefit will arise in relation to the private portion as: · the private portion of the expenditure will be in respect to the provision of entertainment; · the entertainment expenditure will not be incurred in producing assessable income; and · if the expenditure had been incurred in producing assessable income section 32-5 would have prevented an income tax deduction being claimed for the expenditure. Can an expense payment benefit (or a residual benefit) arise from the provision of a flight if a tax-exempt body entertainment benefit arises from the flight? As discussed above, a tax-exempt body entertainment benefit will arise where the private purpose of travel is more than incidental to the work related purpose as: · the private portion of the expenditure will be in respect to the provision of entertainment; · the entertainment expenditure will not be incurred in producing assessable income; and · if the expenditure had been incurred in producing assessable income section 32-5 would have prevented an income tax deduction being claimed for the expenditure. Section 39 of the FBTAA provides that the taxable value of a tax-exempt body entertainment fringe benefit is: So much of the expenditure referred to in section 38 as is attributable to the provision of the entertainment referred to in that section. This indicates the expenditure can be apportioned with the portion that relates to the private travel being the value of the tax-exempt body entertainment fringe benefit and the balance of the payment being the expense payment or residual benefit. Further support for this approach is provided by section 32-5 of the ITAA 1997 and the definition of 'non-deductible entertainment expenditure' in subsection 136(1) of the FBTAA. Section 32-5 of the ITAA 1997, which restricts deductions that can be claimed for entertainment expenses, begins with the phrase 'To the extent'. This indicates that the expenditure can be apportioned, and that section 32-5 does not prevent an income tax deduction being claimed for the portion that is not in respect of the provision of entertainment. Similarly, the definition of 'non-deductible entertainment expenditure' in subsection 136(1) of the FBTAA refers to a loss or outgoing 'to the extent' to which section 32-5 of the ITAA applies to it. Therefore, the entertainment portion of the flights expenditure will be the portion that relates to private activities undertaken by the employee whether it is prior, between or after the business related activities. | Detailed Reasoning - The valuation of the tax-exempt body entertainment benefits: As discussed above, the taxable value of a tax-exempt body entertainment benefit is so much of the expenditure referred to in section 38 as is attributable to the provision of entertainment. This will be the portion of the cost that relates to the private purpose. Unlike other divisions of the FBTAA, division 10, which considers tax-exempt body entertainment fringe benefits, does not provide for the reduction of taxable value under the otherwise deductible rule. Therefore it is not possible to use the otherwise deductible rule to reduce the taxable value of the tax-exempt body entertainment fringe benefit that arises from the payment of the airfares. | Detailed Reasoning - The value of the expense payment benefit: Under section 23 the taxable value of the expense payment fringe benefit that arises from the reimbursement of the portion of the flights that relates to work purposes will be the amount of expenditure that relates to the work related purpose. This value will be able to be reduced using the otherwise deductible rule in section 24 of the FBTAA if the relevant documentation is provided. In general terms, the otherwise deductible rule enables the taxable value of the fringe benefit to be reduced by the amount the employee would have been entitled to claim as an income tax deduction if you had not reimbursed the expenditure. The use of the otherwise deductible rule must be supported by documentation needed to substantiate the extent to which the cost of the expense payment benefit would have been deductible to the employee. This will generally be a "travel diary" or similar documentation where the travel is outside Australia for a period of more than five nights. A travel diary shows for each work or business activity the nature of the work activity, where and when it took place, the duration of the activity and the date the entry was made. However, in certain circumstances it may be necessary to obtain an employee declaration in relation to the reimbursement. For example, where the expense payment is not an 'extended travel expense payment benefit'. As the expense payment benefit will just relate to the work related purpose of the travel, the taxable value of the expense payment benefit will be reduced to nil. | Detailed Reasoning - The value of the residual benefit: Under paragraph 50(a) of the FBTAA the taxable value of the residual fringe benefit that arises from the portion of the flights that relates to work purposes will be the amount of expenditure that relates to the work related purpose. As with the expense payment fringe benefit this value will be able to be reduced using the otherwise deductible rule in section 24 of the FBTAA if the relevant documentation is provided. This will generally a "travel diary" or similar documentation where the travel is outside Australia for a period of more than five nights. A travel diary shows for each work or business activity the nature of the work activity, where and when it took place, the duration of the activity and the date the entry was made. However, in certain circumstances it may be necessary to obtain an employee declaration in relation to the reimbursement. For example, where the residual benefit is not an 'extended travel residual benefit'. As the residual benefit will just relate to the work related purpose of the travel, the taxable value of the residual benefit will be reduced to nil.

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