Private ruling: Fringe benefits tax: use of a performance vehicle
Date of advice: 8 December 2015
Published: February 2016
Ruling period: 1 April 2015 to 31 March 2016 | 1 April 2016 to 31 March 2017 | 1 April 2017 to 31 March 2018
Date scheme commenced: 1 April 2015

Ruling: Q1: Will a fringe benefit arise when an employee drives the vehicle in a competition? | A1: Yes. A residual fringe benefit will arise when the employee drives the vehicle in a competition. | Q2: Will a fringe benefit arise if a person who is not an employee drives the vehicle in a competition? | A2: No provided the driver is not an associate of an employee. | Q3: Will the answer to either question 1 or 2 change if: (a) the vehicle is not registered for road use; or (b) the vehicle is not garaged at the director's residence? | A3: (a) No (b) No These factors are not relevant where the benefit is a residual benefit. | Q4: Is the vehicle used for 'private use' by the director when he/she drives the vehicle in a competition? | A4: A ruling will not be given for this question as the question is only relevant if the benefit is a car benefit. Although a ruling will not be given for this question, the attached explanation includes a discussion as to whether the taxable value of the residual fringe benefit can be reduced using the otherwise deductible rule.

Relevant facts and circumstances: You own a car. The car is registered for road use. Although the vehicle is registered, it is not able to be driven on the road as it has had various modifications making the vehicle overtly non-road legal: The car is parked in a lock-up garage at the director's home. Records show the director's residential address as the garaging address. The car is used solely by the director in competition events in the 'road registered' classification. You pay the fees for entering the car into the competitions. The car is taken to the track on a trailer owned by the director. The car is used between eight to twelve times per year. The director hands out business cards at the race meetings and has a general 'meet and greet' with other participants.

Relevant legislative provisions: Fringe Benefit Tax Assessment Act 1986 Subsection 7(1) | Fringe Benefit Tax Assessment Act 1986 Subsection 8(2) | Fringe Benefit Tax Assessment Act 1986 Subsection 8(3) | Fringe Benefit Tax Assessment Act 1986 Section 45 | Fringe Benefit Tax Assessment Act 1986 Subsection 47(6) | Fringe Benefit Tax Assessment Act 1986 Paragraph 50(c) | Fringe Benefit Tax Assessment Act 1986 Section 52 | Fringe Benefit Tax Assessment Act 1986 Subsection 136(1) | Fringe Benefit Tax Assessment Act 1986 Subsection 148(2) | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 32-5 | Income Tax Assessment Act 1997 Section 32-10 | Income Tax Assessment Act 1997 Section 32-40 | Income Tax Assessment Act 1997 Subsection 995-1(1) | Taxation Administration Act 1953 Section 12-40 of Schedule 1

Reasons for decision: Detailed Reasoning - Will a fringe benefit arise from the garaging of the vehicle at the employee's residence or when the vehicle is driven in a competition?: In general terms the definition of 'fringe benefit' in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) provides that a fringe benefit will arise when: (i) a benefit is provided; (ii) to an employee (or an associate of an employee); (iii) by the employer (or an associate of the employer) or another person under an arrangement with the employer (or an associate); (iv) if the benefit is 'in respect of the employment of the employee'; and (v) is not excluded from being a fringe benefit by paragraphs (f) to (s) of the fringe benefit definition. Under the arrangement the vehicle is garaged at the residence of your director. You allow the director to drive the vehicle in relevant events and pay for the costs of entering the events. In considering whether a fringe benefit arises from this arrangement it is necessary to consider whether the above requirements are met. | Detailed Reasoning - (i) Is a benefit provided under the arrangement?: Subsection 136(1) of the FBTAA defines 'benefit' to include: 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 form of a royalty, tribute, levy or similar exaction; (b) a contract of insurance; or (c) an arrangement for or in relation to the lending of money. The right to drive the vehicle in an event comes within this definition as it involves the use of a facility for recreation. In addition to the definition of benefit in subsection 136(1), Subdivision A of Divisions 2 to 11 of Part III of the FBTAA specify circumstances in which a benefit will be provided. For the purposes of this ruling, the relevant Division is Division 2 which deals with car benefits. Does the arrangement involve the provision of a car benefit? Subsection 7(1) of the FBTAA provides that a benefit shall be taken to be provided on a day in which a car held by the employer is: • applied to a private use by an employee (or an associate); or • is taken to be available for the private use of an employee (or an associate). In your application, you contend a car benefit is not provided as the vehicle is not a car. In support of this contention you used the definitions of 'car' and 'motor vehicle' to contend that the vehicle is not a car as it is not capable of being driven on the roads legally, due to the extent of its modifications. Subsection 136(1) of the FBTAA provides that 'car' has the meaning given by subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997). Subsection 995-1(1) of the ITAA 1997 defines 'car' to mean: a * motor vehicle (except a motor cycle or similar vehicle) designed to carry a load of less than 1 tonne and fewer than 9 passengers. Motor vehicle is defined to mean: any motor-powered road vehicle (including a 4 wheel drive vehicle). The term 'motor vehicle' is not defined. However, the meaning was discussed in ATO Interpretative Decision ATO ID 2010/163 Fringe benefits tax: Exempt benefits: motor vehicle not for private use-tram . ATO ID 2010/163 states: In DFC of T v. ICI Australia Operations Pty Ltd 87 ATC 4069; (1987) 18 ATR 313 Murray J considered whether a vehicle was a 'road vehicle' under the former Sales Tax (Exemptions and Classifications Act) 1935 (at ATC 4076; ATR 320): A vehicle may be a road vehicle and yet be exclusively used on roads within private property. The manager of a large cattle station may purchase a utility for use exclusively for travel on the property whether over rough country or on bush tracks but nevertheless the utility is still a road vehicle. Further at ATC 4077; ATR 321 It is fundamentally a vehicle and a vehicle of a kind which is designed for use on roads be they public roads or private roads. This position was also taken in the more recent Administrative Appeals Tribunal (AAT) decision in Dreamtech International Pty Ltd v. Federal Commissioner of Taxation [2009] AATA 365; 2009 ATC 10-091; (2009) 72 ATR 822. One of the questions before the AAT was whether a Hummer was a road vehicle as the term was used in A New Tax System (Luxury Car Tax) Act 1999 . In making its decision the AAT examined the use for which it was designed and concluded that it was designed as a civilian vehicle for on road and off road use. It therefore fell within the description of a motor powered road vehicle. That decision and reasoning has not been overturned in subsequent Federal Court appeals. For the purposes of the FBTAA, the question of whether a vehicle is a 'road vehicle' should also be determined by its inherent design characteristics rather than the use to which the vehicle is put. The meaning was also discussed in Sales Tax Ruling SST 13 Sales tax: general-purpose road vehicles for use in mining or prospecting operations . Paragraphs 3.2 to 3.4 of SST 13 state: 3.2 The term 'road vehicle' refers to the class of vehicle, not to the actual use to which a particular vehicle may be put. It is a road vehicle if it is of a class of vehicle that is designed for use on public roads and it would be a road vehicle even though it may never be used or registered for use on public roads. 3.3 A common example of a road vehicle is the class of vehicles described as four-wheel drives (4WD). This class of vehicle is ordinarily designed to be used both on public roads and in off-road situations. Because this class of vehicle is designed to be used on public roads, it is a road vehicle even though such a vehicle used in a mining operation may be unregistered or, if registered, may never leave the mining site. F6 3.4 By way of contrast, a vehicle in a class that can clearly be seen to have been designed for use off-road, with only limited design features enabling its use on public roads, is not a road vehicle. This is so even though, with significant restrictions in relation to matters such as speed and load, the vehicle may be used on public roads in particular and limited circumstances, or may be required to be registered for use on public roads in particular circumstances. These paragraphs were referred to in Goods and Services Tax Advice GSTA TPP 077 Goods and services tax: can an entity that purchases a rally car with a market value that exceeds the car limit claim input tax credits in excess of 1/11 th of the car limit? After quoting paragraph 3.2 of SST 13, GSTA TPP 077 states: If the nature and fundamental design of a vehicle used as a rally or racing car, including any modifications or add-ons, makes it of a class of vehicle suitable and capable of being registered for use on public roads, anywhere in the world, it is a 'car' as defined. Section 69-10 applies to restrict any input tax credits if the value exceeds the car limit. For example, where a standard passenger car is modified for rallying or racing and the modifications do not extend to changing its fundamental design, it will remain a car. If the rally car or racing car, including any modifications or add-ons, is of a class of vehicle designed to be used only on racing or rally circuits or off-road, and is not capable of being registered for use on public roads, it is not a 'car' as defined. Section 69-10 will not apply to restrict input tax credits. If the car is used 100% for business use, the full amount of GST paid can be claimed as input tax credits. For example, where a racing car is designed and built from the ground up, or a standard passenger car is redesigned, stripped and rebuilt so that nature and fundamental design of the vehicle makes it incapable of being registered for use on public roads, it is not a 'car' as defined. In conclusion, it is the Tax Office view that a 'car', that is modified for rally racing remains a car, subject to the extent of modifications that remove it from the classification of cars. In your application you advised the car had various modifications made to the vehicle. As a result of these modifications you advised the vehicle is not able to be driven on a public road. On the basis of this advice, we agree with your contention that the vehicle is not a road vehicle and therefore a car benefit will not arise in relation to the vehicle. However, this does not mean another type of benefit will not arise from the arrangement. Does the arrangement involve the provision of a residual benefit? Under section 45 of the FBTAA, a benefit will be a residual benefit if the benefit is not a benefit by virtue of a provision of Subdivision A of Divisions 2 to 11 (inclusive). As set out above, the right to drive the vehicle in a competition is a benefit. This benefit will be a residual benefit as it does not come within Subdivision A of Divisions 2 to 11 (inclusive). | Detailed Reasoning - (ii) Is a benefit provided to an employee (or an associate of an employee)?: The definition of 'employee' in subsection 136(1) of the FBTAA provides that an employee is a person entitled to receive salary or wages. The definition of 'salary or wages' in subsection 136(1) of the FBTAA defines salary or wages as being a payment from which an amount must be withheld (even if the amount is not withheld) under the listed provisions of Schedule 1 to the Taxation Administration Act 1953 (TAA). As the listed provisions include section 12-40 which applies to payments made to a company director, the benefit will be provided to an employee when it is provided to the director. In your application, you raised the possibility that the benefit may be provided to a person who is not an employee. A benefit will not be a fringe benefit if it is not provided to an employee or an associate of an employee. In determining whether a person is an associate, it should be noted that subsection 148(2) of the FBTAA extends the definition of associate in certain situations to include a person who otherwise would not be an associate of the employee. Subsection 148(2) of the FBTAA states: Where, in respect of the employment of an employee, a benefit is provided by a person (in this subsection referred to as the provider ) to a person other than: (a) the employee; or (b) a person who, but for this subsection, is an associate of the employee; under an arrangement between: (c) the provider, the employer or an associate of the employer; and (d) the employee or a person who, but for this subsection, is an associate of the employee; the recipient of the benefit shall be deemed to be an associate of the employee for the purposes of the application of this Act in relation to the provision of that benefit. (iii) Is the benefit provided by the employer (or an associate of the employer) or another person under an arrangement with the employer (or an associate)? The benefit is provided by the employer. | Detailed Reasoning - (iv) Is the benefit provided 'in respect of the employment of the employee?: Subsection 136(1) provides that 'in respect of' includes: by reason of, by virtue of, or for or in relation directly or indirectly to, that employment This condition was not addressed in your application. However, in your application you stated that the director drives the car as he/she is the face of the business. You also noted that the director promotes your business by handing out business cards and meeting and greeting other race participants. As this is part of the director's duties, the benefit is considered to be provided in respect of the director's employment. | Detailed Reasoning - (v) Does the benefit come within paragraphs (f) to (s) of the fringe benefit definition?: A benefit that comes within paragraphs (f) to (s) of the fringe benefit definition will not be a fringe benefit. For the purposes of this ruling, the relevant paragraph is paragraph (g) which provides that a benefit that is an exempt benefit will not be a fringe benefit. In your application you contended the benefit would be an exempt benefit under either subsection 8(2) or 8(3) of the FBTAA. We do not accept this contention as for either of these exemptions to apply; the benefit has to be a car benefit. As discussed above, the benefit is a residual benefit. In considering the possible exempt benefits listed in Division 12 the only exemption that may be relevant is the exemption provided by subsection 47(6). Subsection 47(6) provides a similar exemption to that provided in subsection 8(2) for vehicles that are cars. However, for subsection 47(6) to apply, paragraph 47(6)(a) requires the residual benefit to consist of the provision or use of a motor vehicle. Subsection 136(1) of the FBTAA provides that the definition of 'motor vehicle' in subsection 995-1(1) of the ITAA 1997 applies to the FBTAA. As discussed above, the vehicle does not come within the definition of 'motor vehicle' in subsection 995-1(1) of the ITAA 1997 as it is not a road vehicle. Therefore, the residual benefit that arises from the right to drive the vehicle in a competition will not be an exempt benefit under subsection 47(6) of the FBTAA. Further, it will not be an exempt benefit under any of the other provisions that relate to residual benefits. | Detailed Reasoning - Conclusion: The residual benefit that arises from the right to drive the vehicle in a competition will be a fringe benefit as: • it is a benefit; • provided to an employee; • by the employer; • in respect of the employee's employment; • that is not excluded from being a fringe benefit by paragraphs (f) to (s) of the fringe benefit definition. | Detailed Reasoning - The valuation of the residual fringe benefit: Subdivision B of Division 12 of Part III of the FBTAA provides a number of alternative valuation methods for determining the taxable value of a residual fringe benefit. In general terms, the relevant method depends upon whether: • the benefit is provided over a period (more than one day); • the employer (or an associate) is in the business of providing the benefit to members of the public; and • whether the benefit was purchased by the employer under an arm's length transaction. In the circumstances described in your application, the taxable value will be determined under paragraph 50(c) of the FBTAA as: • the benefit is not provided over a period; • neither the employer, nor an associate is in the business of providing car racing to members of the public; and • the benefit was not purchased by the provider (the employer) under an arm's length transaction. The taxable value under paragraph 50(c) is the notional value of the benefit at the comparison time less the amount (if any) of the recipients contribution. If the employee could have claimed an income tax deduction for the cost of the benefit if it had not been provided by the employer, the taxable value can be reduced under section 52 of the FBTAA by the amount the employee could have claimed as an income tax deduction. This is referred to as the otherwise deductible rule. | Detailed Reasoning - The notional value: Notional value is defined in subsection 136(1) of the FBTAA to mean: the amount that the person could reasonably be expected to have been required to pay to obtain the property or other benefit from the provider under an arm's length transaction. That is, the taxable value will be determined by the amount that the director would have been required to pay to drive the vehicle in the competition under an arm's length transaction. | Detailed Reasoning - The otherwise deductible rule: In your application you contend that the vehicle is only used for business purposes as the vehicle is only used for the promotion of your business. In considering this contention, for the otherwise deductible rule to apply it is necessary for the employee to have been able to claim an income tax deduction under section 8-1 of the ITAA 1997 (assuming the benefit had not been provided by the employer). In addition, the application of the otherwise deductible rule will need to be supported by an employee declaration. Section 8-1 of the ITAA 1997 In general terms, section 8-1 of the ITAA 1997 enables an employee to claim an income tax deduction for a loss or outgoing that is incurred in gaining or producing assessable income. However, this is subject to subsection 8-1(2) of the ITAA 1997 which prevents a deduction being claimed if: • the loss or outgoing is of a capital nature; • the loss or outgoing is of a private or domestic nature; • the loss or outgoing is incurred in relation to gaining or producing exempt income or non-assessable non-exempt income; or • a provision of the ITAA prevents a deduction being claimed. For the purposes of this ruling the relevant provision is Division 32 of the ITAA 1997 which applies to entertainment expenses. In your application you contend that the car racing activities are part of the employee's duties. From the information provided we are not able to consider this contention. However, it is noted that even if the car racing activities are part of the employee's duties, the otherwise deductible rule will not apply if Division 32 of the ITAA 1997 would prevent an income tax deduction from being claimed. Division 32 of the ITAA 1997 In general terms, section 32-5 of the ITAA 1997 prevents an income tax deduction being claimed for a loss or outgoing that is in respect of providing entertainment unless the circumstances in which the expenditure was incurred come within the tables listed in sections 32-30 to 32-50 of the ITAA 1997. Entertainment is defined in subsection 32-10(1) of the ITAA 1997 to mean: (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. Subsection 32-10(2) provides that entertainment will be taken to have been provided even if business discussions or transactions occur. Subsection 995-1(1) of the ITAA 1997 defines 'recreation' to include: amusement, sport or similar leisure-time pursuits Taxation Ruling TR 97/22 Income tax: exempt sporting clubs in paragraph 38 provides examples of games and sports. The list includes motor-car racing (circuit, rally). Therefore, the participation in the competition will come within the definition of recreation as it is a sport or similar leisure-time pursuit. Guidance for determining whether the participation in the competition constitutes entertainment is provided by the discussion of the meaning of entertainment in the context of the provision of food or drink in paragraphs 10 to 24 of Taxation Ruling TR 97/17 Income tax and fringe benefits tax: entertainment by way of food or drink . Paragraphs 12 to 24 of TR 97/17 state: 12. Two alternative views have been suggested in interpreting what is entertainment by way of food or drink. They are: (1) that the provision of all food or drink in any circumstance will constitute entertainment; or (2) that only the provision of food or drink that has an element of entertainment satisfies the definition, i.e., the provision of food or drink must confer entertainment on the recipient. 13. The relevant question for the purpose of this Ruling is, therefore, the meaning of the words 'entertainment by way of food, drink' found in paragraph 32-10(1)(a) of the ITAA. As these words are not defined in the ITAA, they have their natural meaning, taken in the context that they appear in Division 32 of the ITAA. 14. The word 'entertainment', which is key to the operation of the relevant words, is defined in the Macquarie Dictionary to mean: (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. 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. However, we add that in most cases the mere provision of food or drink satisfies the 'entertainment' test. It is only in a narrow category of cases where the mere provision of food or drink does not amount to 'entertainment' for purposes of Division 32 of the ITAA. 19. We have expressed this view previously, for example, in Taxation Ruling IT 2675. That Ruling considers that the provision of morning and afternoon tea to employees (and associates of employees) on a working day, either on the employer's premises or at a worksite of the employer, is not entertainment. 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. 20. The provision of light meals can be contrasted with the examples of non-deductible entertainment given in the explanatory memorandum to Taxation Laws Amendment Bill (No 4) 1985, i.e., business lunches and drinks, dinners, cocktail parties and staff social functions. In these examples the provision of the food or drink confers entertainment on the recipient. The wording of section 32-10 of the ITAA shows a clear intention to treat food or drink consumed in these situations as entertainment, whether or not business discussions or business transactions occur at the same time. 21. Where an employee is travelling in the course of performing their employment duties, the food or drink provided is consumed as a result of that work-related travel. In the absence of supplementary entertainment, the food or drink is not provided by the employer in order to confer entertainment on that employee. Therefore, the meal does not have the character of entertainment. 22. Taxation Determination TD 94/55 states that in determining whether providing an item of property constitutes 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. The provision of food or drink is the provision of property. However, an objective consideration of the circumstances in which that food or drink is provided is necessary to determine whether it constitutes entertainment. 23. It can be seen 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. We are of the view that the following are 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. The reason for this is that the more elaborate a meal, the greater the likelihood that entertainment arises from the consumption of the meal. For example, when an employer provides morning or afternoon teas or light meals, that food or drink does not usually confer entertainment on the employee. By contrast, a three course meal provided to an employee during a working lunch has the characteristics of entertainment. The nature of the food itself confers entertainment on the employee. (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. This, however, depends upon whether the entertainment of the recipient is the expected outcome of the provision of the food or drink. For example, a staff social function held during work time still has the character of entertainment. (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. 24. No one of the above factors will be determinative; however, paragraphs (a) and (b) are considered the more important. The application of the above factors results in the determination of whether the food or drink amounts to meal entertainment. Once this determination is made, the employer must then decide whether each item of actual expenditure on meal entertainment is to be treated individually under the ITAA and FBTAA or whether to elect that one of the methods contained in Division 9A of the FBTAA is to apply. If the election is made then the taxation outcome for the individual meal is no longer relevant. The fringe benefits tax and income tax consequences are discussed at paragraphs 29 to 32 and 37 of this Ruling. In applying this guidance it is accepted that there may be a narrow category of cases where entertainment is not provided to the driver in a competition. For example, a professional driver who provides entertainment to spectators watching the competition. The situation described in the ruling does not come within this category as: • the driver is not a professional driver; • the purpose of the competitions is to provide enjoyment to the drivers; • the recreation is participation in a car competition which is likely to constitute entertainment for the participants; • the competitions are held on weekends; and • the competitions are conducted at race tracks. Therefore, the participation in the car competitions is considered to be entertainment by way of recreation. The fact that business cards may be handed out at the events and contacts are established with potential customers will not alter this conclusion. As set out in paragraph 20 of TR 97/17, the wording of subsection 32-10(2) of the ITAA 1997 shows a clear intention for recreation provided in these circumstances to be treated as entertainment, even if business discussions or transactions occur. As the participation in the competition is entertainment, section 32-5 of the ITAA 1997 would prevent the employee from claiming an income tax deduction for the costs incurred in participating in the competition unless one of the exceptions in sections 32-30 to 32-50 apply. In this regard, it should be noted that this consideration is different to the consideration that applies to the employer as section 32-20 provides an exception for a loss or outgoing incurred in respect of providing entertainment by way of a fringe benefit. In considering the exceptions that may apply to the employee, the only possible item that could apply is item 3.2 of section 32-40. This item provides that section 32-5 does not stop a deduction from being claimed for providing entertainment in performing your duties to your employer who carries on a business that includes providing that entertainment for payment. This item will not apply as the employee in driving the car receives entertainment (rather than providing it) and you do not carry on a business that includes providing drives in a car competition for payment. Therefore, none of the possible exceptions apply to the employee and the otherwise deductible rule will not apply to the residual fringe benefit as section 32-5 of the ITAA 1997 would prevent the employee from claiming an income tax deduction for the expenses incurred in participating in the competitions (if the expenses had been incurred by the employee).