Class Ruling CR 2007/71
Date of effect: 1 July 2007

What this ruling is about: 1. This Ruling sets out the Commissioner's opinion on the way in which the relevant provision(s) identified below apply to the defined class of entities, who take part in the scheme to which this Ruling relates. Relevant provision(s) 2. The relevant provisions dealt with in this Ruling are: All legislative references are to the ITAA 1997 unless otherwise indicated. Class of entities 3. There are two classes of entity to which this Ruling applies. Qualifications 4. The Commissioner makes this Ruling based on the precise scheme identified in this Ruling. 5. The class of entities defined in this Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 13 to 21 of this Ruling. 6. If the scheme actually carried out is materially different from the scheme that is described in this Ruling, then: 7. This work is copyright. Apart from any use as permitted under the Copyright Act 1968 , no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to:

Class of entities or scheme: 3. There are two classes of entity to which this Ruling applies. | Qualifications: 4. The Commissioner makes this Ruling based on the precise scheme identified in this Ruling. 5. The class of entities defined in this Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 13 to 21 of this Ruling. 6. If the scheme actually carried out is materially different from the scheme that is described in this Ruling, then: 7. This work is copyright. Apart from any use as permitted under the Copyright Act 1968 , no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to: 8. This Ruling applies from the year commencing 1 July 2007. 9. The Ruling only applies to the extent that: 10. If this Ruling is inconsistent with a later public or private ruling, the relevant class of entities may rely on either ruling which applies to them (item 1 of subsection 357-75(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA)). 11. If this Ruling is inconsistent with an earlier private ruling, the private ruling is taken not to have been made if, when the Ruling is made, the following two conditions are met: 12. If the above two conditions do not apply, the relevant class of entities may rely on either ruling which applies to them (item 3 of subsection 357-75(1) of Schedule 1 to the TAA). 13. The following description of the scheme is based on information provided by the applicant. 14. The purpose of the HBC is to act as an independent representative organisation for the regional business community in the Hunter region. The HBC acts as an advisor, a forum, a source of information and a point of access for its members, providing a comprehensive range of services including lobbying, advocacy, networking and advice regarding workplace relations, business advice and training. 15. The HBC is offering a new Special Category Membership which will be a business membership. The concept is to utilise a premium corporate function room facility that is available in a new stadium at a local football club and the positive image and profile of the football team to provide a unique networking and marketing opportunity for new members in the local business community. The HBC states that the primary purpose of obtaining the membership is to meet business contacts in a controlled environment at a time which allows the cross selling of services. The membership will entitle the entity to attend functions at the stadium which are held to coincide with the home games of the local football club. The attendee at the function will be at the discretion of the entity. 16. The football club's home games will be used as a platform to conduct the functions which will operate for a minimum of 4 hours and up to 6 hours, including the game time of 1.5 hours. 17. It is anticipated that the split up of time between promotional and entertainment activities will be as follows: 18. The HBC estimates that there will be an average of 3 hours per function spent on promotional activities. 19. The entity will receive as part of their attendance at the function an undercover seat to view the game. They will be provided with food and drinks. The function will also include presentations of entity businesses and a guest speaker relevant to the focus of the HBC. The entity will also receive a copy of the HBCs magazine and an HBC badge. The entity will also have the opportunity to advertise their business by way of signage. 20. The Special Category Membership also provides the entity with full access to all services provided by the general membership of HBC, as detailed in paragraph 14 of this Ruling, including voting rights. If an existing member takes up a Special Category Membership they would not need to renew their general membership. 21. The cost of the membership comprises the following items, and for the year ended 30 June 2006 amounts to $2411: 22. For the first class of entities described in this Ruling that part of the subscription for the Special Category Membership of the HBC that comprises the following items is deductible under section 8-1: 23. The remaining part of the subscription for the Special Category Membership, consisting of premium undercover seating and allowance for other food and drinks is not considered to be incurred in the gaining or producing of assessable income or in carrying on a business for the purpose of gaining or producing assessable income and is not deductible under section 8-1. In any event, this expenditure is of a private nature and as it is an entertainment expense is specifically denied as a deduction by section 32-5. 24. For the second class of entities described in this Ruling that part of the subscription for the Special Category Membership of the HBC that comprises the following items is deductible under section 8-1: 25. The remaining part of the subscription for the Special Category Membership that comprises the premium undercover seating and allowance for other food and drinks is deductible under section 8-1 to the extent that the expenditure is incurred in providing a fringe benefit to an employee (or an associate of the employee) of the entity in respect of the employment of the employee. Commissioner of Taxation 1 August 2007 26. Paragraph 8-1(1)(b) states that an entity can deduct any loss or outgoing to the extent that it is necessarily incurred in carrying on a business for the purpose of gaining or producing the entity's assessable income. However, an entity cannot deduct a loss or outgoing if it is capital or private or domestic in nature (subsection 8-1(2)). 27. Several significant court decisions have established that, for an expense to be an allowable deduction, there must be a sufficient connection between the outgoing and the assessable income such that the expenditure is incidental and relevant to the taxpayer's income-producing activities ( Ronpibon Tin NL and Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 4 AITR 236; (1949) 8 ATD 431) and it must have the essential character of an outgoing incurred in gaining assessable income ( Lunney & Haley v. Federal Commissioner of Taxation (1958) 100 CLR 478; (1958) 7AITR 166; (1958) 11 ATD 404). 28. Periodic subscriptions paid by a person or business for a membership of a trade, business or professional association are deductible under section 8-1 where the principal activities of the trade, business or professional association are relevant to the gaining or producing of assessable income by the member, or the carrying on of a business by the member for the purpose of gaining or producing assessable income. 29. Membership of HBC gives entities access to the services and benefits as described in paragraph 14 of this Ruling and they are accepted as being sufficiently connected to the carrying on of the entities business to meet the requirements for deductibility under section 8-1. 30. In the circumstances here however, the subscription is also incurred to allow entities to attend functions at all home games of the football team. 31. The subscription for HBC membership includes the provision of meals and drinks and premium undercover seating for the home games. This part of the subscription is considered to be entertainment expenses which, for the first class of entities described in this Ruling, are not incurred in the gaining or producing of assessable income or in carrying on a business for the purpose of gaining or producing assessable income and, in any event, are of a private nature. This part of the subscription is also specifically excluded from deductibility by section 32-5. | Seminars: 32. In the event that this part of the subscription had been deductible under section 8-1 it would be necessary to consider whether any of the exceptions to the exclusion under section 32-5 would apply. 33. Section 32-35 provides that section 32-5 does not stop an entity deducting a loss or outgoing for providing food, drink, accommodation or travel to an individual (including the entity) that is reasonably incidental to the individual attending a seminar that goes for at least 4 hours. But this exception does not apply if: 34. Subsection 32-65(1) defines seminar as 'includes a conference, convention, lecture, meeting (including a meeting for the presentation of awards), speech, 'question and answer session', training session or educational course'. 35. A seminar must go for at least 4 hours (breaks for recreation and meals do not form part of the 4 hours (subsection 32-65(2)). HBC has been able to provide estimates of the time to be allocated to the various activities which form part of the football functions. The time spent watching the football game, other match related activities and consuming a meal are not counted towards the 4 hours. When the time reasonably attributed to these activities is deducted from even the maximum function time of 6 hours the time remaining is less than the required 4 hours. 36. In the event however that the function did go for at least 4 hours it is considered that the exclusions contained in paragraphs 32-35(b) and 32-35(c) would apply. | Fringe benefits: 37. As stated at paragraph 31 the cost of premium undercover seating and food and drinks are considered to be entertainment expenses falling for consideration under section 32-5. Section 32-20 provides that section 32-5 does not apply to deny a deduction for entertainment expenses to the extent that the expenditure is incurred in respect of providing entertainment by way of providing a fringe benefit. Where the second class of entity chooses to send an employee to the HBC function and it can be concluded that the benefit is being provided in respect of the employment of the employee then the cost is one that is incurred in relation to the carrying on of the entities business. In these circumstances the provision of a fringe benefit changes the character of the expenditure into one that is an allowable deduction under section 8-1. 38. Where a member of HBC allows an employee (or an associate of an employee) to attend the football related functions in respect of the employee's employment the member will be taken to have provided entertainment by way of providing fringe benefits to the employee (or associate of the employee). 39. In these circumstances the employer may deduct the cost of providing the fringe benefit which for the year ended 30 June 2006 would be a cost of $888, being $360 for premium undercover seating and $528 allowance for other food and drinks under section 8-1. 40. Alternatively, the employer may make an election under Division 9A of the FBTAA which permits the employer to use a 50/50 split method or a 12 week register method to determine the fringe benefits taxable value of meal entertainment provided to employees or associates of employees. The taxable value of the fringe benefit, and accordingly the amount which is an allowable deduction under section 8-1 will vary according to the circumstances of the employer. 41. The following is a detailed contents list for this Ruling: Not previously issued as a draft

Ruling: 22. For the first class of entities described in this Ruling that part of the subscription for the Special Category Membership of the HBC that comprises the following items is deductible under section 8-1: 23. The remaining part of the subscription for the Special Category Membership, consisting of premium undercover seating and allowance for other food and drinks is not considered to be incurred in the gaining or producing of assessable income or in carrying on a business for the purpose of gaining or producing assessable income and is not deductible under section 8-1. In any event, this expenditure is of a private nature and as it is an entertainment expense is specifically denied as a deduction by section 32-5. 24. For the second class of entities described in this Ruling that part of the subscription for the Special Category Membership of the HBC that comprises the following items is deductible under section 8-1: 25. The remaining part of the subscription for the Special Category Membership that comprises the premium undercover seating and allowance for other food and drinks is deductible under section 8-1 to the extent that the expenditure is incurred in providing a fringe benefit to an employee (or an associate of the employee) of the entity in respect of the employment of the employee. Commissioner of Taxation 1 August 2007


Appendix: 26. Paragraph 8-1(1)(b) states that an entity can deduct any loss or outgoing to the extent that it is necessarily incurred in carrying on a business for the purpose of gaining or producing the entity's assessable income. However, an entity cannot deduct a loss or outgoing if it is capital or private or domestic in nature (subsection 8-1(2)). 27. Several significant court decisions have established that, for an expense to be an allowable deduction, there must be a sufficient connection between the outgoing and the assessable income such that the expenditure is incidental and relevant to the taxpayer's income-producing activities ( Ronpibon Tin NL and Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 4 AITR 236; (1949) 8 ATD 431) and it must have the essential character of an outgoing incurred in gaining assessable income ( Lunney & Haley v. Federal Commissioner of Taxation (1958) 100 CLR 478; (1958) 7AITR 166; (1958) 11 ATD 404). 28. Periodic subscriptions paid by a person or business for a membership of a trade, business or professional association are deductible under section 8-1 where the principal activities of the trade, business or professional association are relevant to the gaining or producing of assessable income by the member, or the carrying on of a business by the member for the purpose of gaining or producing assessable income. 29. Membership of HBC gives entities access to the services and benefits as described in paragraph 14 of this Ruling and they are accepted as being sufficiently connected to the carrying on of the entities business to meet the requirements for deductibility under section 8-1. 30. In the circumstances here however, the subscription is also incurred to allow entities to attend functions at all home games of the football team. 31. The subscription for HBC membership includes the provision of meals and drinks and premium undercover seating for the home games. This part of the subscription is considered to be entertainment expenses which, for the first class of entities described in this Ruling, are not incurred in the gaining or producing of assessable income or in carrying on a business for the purpose of gaining or producing assessable income and, in any event, are of a private nature. This part of the subscription is also specifically excluded from deductibility by section 32-5. | Seminars: 32. In the event that this part of the subscription had been deductible under section 8-1 it would be necessary to consider whether any of the exceptions to the exclusion under section 32-5 would apply. 33. Section 32-35 provides that section 32-5 does not stop an entity deducting a loss or outgoing for providing food, drink, accommodation or travel to an individual (including the entity) that is reasonably incidental to the individual attending a seminar that goes for at least 4 hours. But this exception does not apply if: 34. Subsection 32-65(1) defines seminar as 'includes a conference, convention, lecture, meeting (including a meeting for the presentation of awards), speech, 'question and answer session', training session or educational course'. 35. A seminar must go for at least 4 hours (breaks for recreation and meals do not form part of the 4 hours (subsection 32-65(2)). HBC has been able to provide estimates of the time to be allocated to the various activities which form part of the football functions. The time spent watching the football game, other match related activities and consuming a meal are not counted towards the 4 hours. When the time reasonably attributed to these activities is deducted from even the maximum function time of 6 hours the time remaining is less than the required 4 hours. 36. In the event however that the function did go for at least 4 hours it is considered that the exclusions contained in paragraphs 32-35(b) and 32-35(c) would apply. | Fringe benefits: 37. As stated at paragraph 31 the cost of premium undercover seating and food and drinks are considered to be entertainment expenses falling for consideration under section 32-5. Section 32-20 provides that section 32-5 does not apply to deny a deduction for entertainment expenses to the extent that the expenditure is incurred in respect of providing entertainment by way of providing a fringe benefit. Where the second class of entity chooses to send an employee to the HBC function and it can be concluded that the benefit is being provided in respect of the employment of the employee then the cost is one that is incurred in relation to the carrying on of the entities business. In these circumstances the provision of a fringe benefit changes the character of the expenditure into one that is an allowable deduction under section 8-1. 38. Where a member of HBC allows an employee (or an associate of an employee) to attend the football related functions in respect of the employee's employment the member will be taken to have provided entertainment by way of providing fringe benefits to the employee (or associate of the employee). 39. In these circumstances the employer may deduct the cost of providing the fringe benefit which for the year ended 30 June 2006 would be a cost of $888, being $360 for premium undercover seating and $528 allowance for other food and drinks under section 8-1. 40. Alternatively, the employer may make an election under Division 9A of the FBTAA which permits the employer to use a 50/50 split method or a 12 week register method to determine the fringe benefits taxable value of meal entertainment provided to employees or associates of employees. The taxable value of the fringe benefit, and accordingly the amount which is an allowable deduction under section 8-1 will vary according to the circumstances of the employer.


What this Ruling is about | NOT LEGALLY BINDING SECTION: | A public ruling is an expression of the Commissioner's opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. | If you rely on this ruling, we must apply the law to you in the way set out in the ruling (or in a way that is more favourable for you if we are satisfied that the ruling is incorrect and disadvantages you, and we are not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any underpaid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you. | Light meal with tea and coffee | Allowance for other food & drinks | Appendix 2 - Detailed contents list


Legislative references: ITAA 1997 8-1 ITAA 1997 8-1(1)(b) ITAA 1997 8-1(2) ITAA 1997 32-5 ITAA 1997 32-20 ITAA 1997 32-35 ITAA 1997 32-35(b) ITAA 1997 32-35(c) ITAA 1997 32-65 ITAA 1997 32-65(1) ITAA 1997 32-65(2) FBTAA 1986 Div 9A TAA 1953 TAA 1953 Sch 1 357-75(1) Copyright Act 1968
Case references: Lunney & Haley v. Federal Commissioner of Taxation (1958) 100 CLR 478 (1958) 7 AITR 166 (1958) 11 ATD 404
Subject references: conference & seminar expenses deductions & expenses entertainment expense FBT deductible entertainment expenditure FBT entertainment FBT meal entertainment FBT non deductible entertainment expenditure seminar food & drink expenses