When it comes to entertainment type expenditures the rules for income tax-exempt employers are different to those faced by for-profit or non-income tax exempt employers. As a result, it is critical that the rules are understood and applied correctly.
The key rules concern:
- the concept of a Tax Exempt Body Entertainment fringe benefit – it is necessary to understand what it is and how is it treated, and
- where something is not a Tax Exempt Body Entertainment fringe benefit, the FBT treatment which might apply.
Tax Exempt Body Entertainment Fringe Benefits
A tax exempt body entertainment fringe benefit arises where:
- a person incurs non-deductible exempt entertainment expenditure;
- the expenditure is in respect of the provision of entertainment to an employee or associate; and
- the entertainment is in respect of the employment of the employee
The key issues for an income tax exempt employer to identify are:
- what is ‘entertainment’
- whether the entertainment deductible or would it be if the employer was not income tax exempt.
What is entertainment?
For fringe benefits tax purposes ‘entertainment’ means the provision of entertainment by way of food or drink or recreation and accommodation or travel in connection with or to facilitate the provision of the entertainment
Recreation includes amusement, sport and similar leisure time pursuits
It is generally fairly simple to tell whether something is entertainment in nature. In Taxation Ruling TR 97/17, the ATO suggest taxpayers apply the four part test:
- Why – why is the food being provided?
- What – what type of food or drink is being provided?
- Where – where is the food or drink provided?
- When – when is the food being provided?
Common examples of entertainment include:
- business lunches and drinks, cocktail parties and staff social functions;
- providing entertainment to staff, clients, etc., by way of access to sporting or theatrical events, sightseeing tours, holidays and so on; and
- accommodation and travel when it is provided in connection with or to facilitate activities such as entertaining clients, staff, etc., over a weekend at a tourist resort, or providing them with a holiday.
An end of year staff function would, in virtually all situations, fall within the concept of entertainment and so finance staff responsible for preparing the annual FBT return need to be aware of the implications. Where entertainment is being provided as part of the function, a tax-exempt body entertainment fringe benefit will arise and rarely will an exemption or reduction in taxable value be available.
Income tax paying employers have the benefit of two common exemptions in regards to end of year financial functions cost where they are not using the 50/50 or 12 week register method to value their entertainment costs. These are the: (i) minor benefit exemption; and ( ii) the business premises property exemption. Unfortunately, these are not available to income tax-exempt employers.
The minor benefits exemption as it applies to entertainment
Only in two situations can tax exempt body entertainment fringe benefits be exempt under the minor benefits rule in relation to a tax-exempt employer.
Firstly – where the provision of entertainment to employees is incidental to the provision of entertainment to outsiders and, if a meal is provided, it can only consist of light refreshments (Alcohol can be provided without jeopardising the exemption). This could apply, for example, where a community event consisting of some finger food and drinks are provided by the employer and some employees attended as well.
Secondly – where entertainment is provided to an employee (or an associate of the employee) on the employer’s premises at an event undertaken to acknowledge the special achievement of the employee, the entertainment may also qualify for the minor benefits exemption. For example a drinks function conducted on the employer’s premises to acknowledge a special achievement by an employee may benefit from this exemption. Please note though that if the entertainment is also provided to other employees who attend the event that entertainment would not qualify for the exemption.
The minor benefits rule as it applies to benefits other than entertainment
Where the benefit does not consist of entertainment it is possible the minor benefits rule applies to exempt the benefit subject to consideration of the minor benefit criteria.
If gifts are provided by an income tax-exempt employer to employees and/or their associates at the end of year function, it is possible for the value of the gift to be an exempt minor benefit – refer Example 4, paragraph 52 of Taxation Ruling TR 2017/7.
Property consumed on employer premises on a working day exemption
Where expenditure does not amount to entertainment but nevertheless results in the employee getting a benefit, the ‘property consumed on employer premises on a working day’ exemption may be available.
The exemption applies where property (food and drink) is provided to and consumed by an employee on the employer premises on a working day.
The exemption only applies to benefits received by employees and therefore where an employee’s family members also received this type of benefit FBT may still be payable on that part of the benefit. However it is possible the minor benefits exemption could apply.
This exemption would cover benefits such as morning and afternoon teas and light lunches for example provided during a lunch meeting.
However, where the property provided amounts to meal entertainment then the benefit will be a Tax Exempt Body Entertainment fringe benefit and will be ineligible for the exemption.
As can be seen, the opportunity for an income tax-exempt employer to be able to provide the end of year function on an FBT free basis is extremely limited.
It should be noted, however, that the provision of non-salary packaged meal entertainment is exempt from FBT when provided by public benevolent institutions, health promotion charities, public hospitals, non-profit hospitals and public ambulance services.