Is the expenditure you incur on behalf of your employees for the Christmas event deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?
No. Question 2 Is the expenditure you incur on behalf of participants for the Christmas event deductible under section 8-1 of the ITAA 1997? Answer No. Question 3 Is the expenditure you incur on behalf of participant's families to attend the Christmas event deductible under section 8-1 of the ITAA 1997? Answer No. This ruling applies for the following periods : Year ended 30 June 20XX Year ended 30 June 20XX The scheme commenced on: 1 July 20XX
You are an Australian Private Company. You are a registered National Disability Insurance Scheme (NDIS) provider of in-home and community support. You provide support services to people of disabilities (NDIS participants). You provide the following support services: • In-home support • Community Access and Participation • Personal Care and Hygiene • Respite Care • Transport Assistance • Behaviour Support • Life Skills Development • Customised Services • Employment Services. To evaluate the needs of participants, you ensure regular and effective communication with participants and their families using several communication channels including a written feedback form, completed by participants and their family members. You concluded that if you facilitated a Christmas get-together where participants and their families could attend there was further opportunity for direct communication on participant needs with organisation managers and staff. The intent of the event was to provide an additional avenue for communication in a less formal context. You have facilitated 2 Christmas events as follows: Year 1
• Was held at private venue • A Soloist was engaged for music. • The event was attended by staff, NDIS participants and participant's families. • The event was catered with the following: Cheese Platters Antipasto platers Spring Roll platter. Arancini platter Fruit platter Roast Buffet Nuggets and Chips for children Dessert/Slice platter with macarons and lemon meringue pie platters • Drinks were not provided but were available to be purchased. Year 2 • Was held at a private venue. • Music was supplied via iPad through the venues audio system at no charge. • The event was attended by staff, NDIS participants and participant's families. • The event was catered with pre-dinner platters and a roast buffet • Alcohol was provided. • Taxis were supplied. In support of your private ruling application, you supplied copies of: • The event agendas for each event • A company statement of vision, mission and values • The invitations for each calendar year • Invoices for alcoholic beverage purchases • Venue invoices
• Catering invoices • Entertainment services invoice Invitations for each calendar year labels the event as a "Christmas Party" and both events had a Christmas theme. The agendas for each year were titled as: • Christmas Party Agenda 20XX • Christmas Party Agenda 20XX The invitations outlined the day and time of the events, which was in the evening on a weekend. Your staff were not paid to attend the event. They were invited rather than obligated to attend. In each calendar year events, every participant of the organisation attended with their family. Feedback provided at the event from participants and their families was reiterated to all staff at the following monthly house/team meeting. Participants and their families have highlighted the need for an event where they are able to gather together in a safe place where they do not feel judged or threatened (due to their disabilities). You consider the event partly promotional, in that participants and their families will promote the organisation in their communities.
You were delighted with the substantial improvement in communication between participants, their families, and the organisation and as a result, have planned future Christmas events.
Income Tax Assessment Act 1997 section 8-1 Income Tax Assessment Act 1997 Division 32 Income Tax Assessment Act 1997 section 32-5 Income Tax Assessment Act 1997 section 32-10 Income Tax Assessment Act 1997 section 32-20 Income Tax Assessment Act 1997 section 32-30 Income Tax Assessment Act 1997 section 995-1 Fringe Benefits Tax Assessment Act 1986 section 58P
Section 8-1 of the ITAA 1997 allows for a deduction for all losses and outgoings to the extent that they are incurred in gaining or producing your assessable income except where the outgoings are of a capital, private or domestic nature, or they relate to the earning of exempt income, or a provision of the ITAA 1997 prevents it. Section 32-5 of the ITAA 1997 prevents an income tax deduction to the extent that an entity incurs expenditure on entertainment unless that expenditure is related to any of the exceptions outlined in Subdivision 32-B of the ITAA 1997. Entertainment is defined in section 32-10 of the ITAA 1997 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. Subsection 32-10(2) outlines you are taken to provide entertainment even if business discussion or transactions occur. In the note to section 32-10 of the ITAA 1997, business lunches and social functions are given as examples of entertainment whilst the situation of a theatre critic or food writer are as examples of what is not entertainment. 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) provides: 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 Example 1
Costs incurred in the giving of items of property, such as bottled spirits, groceries, games, TV sets, VCRs, computers, crockery, swimming pools, gardening equipment, etc; have an enduring character, and only an indirect nexus to any immediate entertainment. Consumption is usually delayed. The items of property usually require further steps before they can be consumed, and consumption can occur over a long period. Hence, these items of property do not generally constitute provision of entertainment. Example 2 Costs incurred in providing glasses of champagne, hot meals, theatre tickets, holiday accommodation, hired entertainers, and hired sporting equipment, have a dynamic and immediate character. Consumption can usually occur immediately. These items of property do not last beyond initial consumption (or are to be returned at the end of the hire period). Hence, these items of property would generally constitute provision of entertainment. The term recreation is defined in subsection 995-1(1) of the ITAA 1997 to include amusements, sport, or similar leisure-time pursuits.
Under section 32-20 of the ITAA 1997, section 32-5 does not prevent a deduction for a loss or outgoing to the extent that it is incurred in respect of providing entertainment by way of providing a fringe benefit. However, the exemption does not apply to the amount where the fringe benefit is reduced for example: employee contributions, or where the fringe benefit is exempt for example: a minor benefit. Section 32-30 of the ITAA 1997, provides that employer expenses for entertainment are only deductible where the outgoing was not under an industrial instrument relating to overtime, but for providing food or drink: a. to employees in an in-house dining facility, or b. to non-employees in an in-house dining facility, or c. to employees who perform most of their duties in an in-house dining facility. Section 32-40 of the ITAA 1997, allows a deduction for entertainment expenses where the business is in the entertainment industry. For example: restaurants and theatres. Taxation Ruling TR 97/17 Income Tax and fringe benefits tax: entertainment by way of food or drink
(TR 97/17) considers entertainment as it relates to the provision of food and drink for fringe benefits and income tax purposes. Meal entertainment arises when the food or drink provided has the character of entertainment. The meal may be substantial, may be consumed as part of a social gathering, or may be consumed with other forms of entertainment. To determine whether the provision of food or drink constitutes entertainment, TR 97/17 provides four factors that need to be considered. Paragraph 23 of TR 97/17 provides the following relevant factors: (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. No one of the above factors will be determinative, however paragraphs (a) and (b) are considered more important.
Paragraph 18 of TR 97/17 takes the view that the mere provision of food or drink in any circumstance does not necessarily constitute 'entertainment'. The 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.' However, it was noted that, in most cases, the mere provision of food or drink will satisfy 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 the purposes of Division 32 of the ITAA 1997. Paragraph 16 of Taxation ruling IT 2675: Income tax and fringe benefits tax: entertainment - morning and afternoon teas; light meals; and in-house dining facilities (IT 2675) provides the following guidance:
16. The provision of biscuits and drinks such as tea, coffee, soft drinks and fruit juices to employees or their association on a working day for morning or afternoon tea cannot be said to provide amusement or even to be an agreeable occupation. It is merely the provision of refreshments to enable the employees or associates to complete the working day in comfort. The same may be said of light meals provided by a taxpayer to employees or their associates on a working day. Under Explanations, Part A, Paragraph 25 of TR 97/17 a table is provided to assist in determining whether food or drink provided in a given circumstance constitutes meal entertainment. The table below summarises the examples and answers given to questions on the taxation treatment of the provision of food or drink discussed in Part B of the Explanations section of TR 97/17. The table provides quick reference to the FBT and income tax treatment of a particular circumstance. The last column of the table provides a cross reference to paragraphs in the ruling that are relevant to the scenario. It is to be noted that the benefit may constitute a 'minor benefit' in terms of section 58P of the
Fringe Benefits Tax Assessment Act 1986 (FBTAA) which is exempt from FBT where it is both less than $300 in notional taxable value and unreasonable for it to be treated as a fringe benefit. Table 1: The table provides quick reference to the FBT and income tax treatment of a particular circumstance. The last column of the table provides a cross reference to paragraphs in the ruling that are relevant to the scenario. Taxable Employer Tax Exempt Body Ruling Paragraph Reference Circumstances In Which Food or Drink Provided Meal Entertainment Reportable Fringe Benefit Deduction Fringe Benefits Tax (for taxable employers) (b) Food or drink consumed off the employer's premises 1)....at a social function or business lunch * by employees Y N Y Y 57-62 * by associates Y N Y Y 57-58 * by clients Y N N N Application to your circumstances You incurred expenses in specified calendar years hosting a Christmas event attended by employees, your clients (who are NDIS participants) and their families. The events were held in private venues, and you provided all attendees with food, beverages, and in a specific calendar year, a soloist entertainer.
The timeliness and direct connection characteristics outlined in TD 94/55, and the similarity between the items of property outlined in example 2 such as a glass of champagne, a hot meal, and hired entertainment with the items of property you provided attendees, have been considered. The food, beverages and soloist entertainer you provided were consumed by employees immediately at the time of the event and did not last beyond the initial consumption. This generally indicates the provision of entertainment. As outlined in paragraph 23 of TR 97/17, an objective analysis of the of the listed four factors is also needed to determine whether the provision of food and drink constitutes entertainment. These factors are considered below: Why is the food or drink being provided? The provision of food and drink was offered as context or incentive for employees, participants and their families to attend. The copies of agendas provided in your application labelled the events as a "Christmas Party" and both events had a Christmas theme, indicating the event took on social characteristics, rather than a work meeting or seminar. What food or drink is being provided?
In this case, pre-dinner platters such as Cheese platters, Antipasto platters, Arancini Platters and Fruit platters were provided. The dinner meal provided was a roast buffet. Substantial meals are more elaborate than refreshments or light meals and are more likely to take on the characteristics of entertainment. In comparison to the biscuits, tea and coffee described as refreshments in paragraph 16 of IT 2675 or light meals such as sandwiches or finger food, the platters and roast buffet are considered a substantial meal. In a specific calendar year, alcohol was also provided at the event. Generally, the consumption of alcohol has social connotations and provides or affords diversion or amusement. When is the food or drink being provided? The Christmas Parties were held in both calendar years on a weekend evening for convenience of attendees. Employees were not on work duty for the event, were not rostered or paid to attend, and were invited rather than obligated to attend. Therefore, it is considered that the event was held outside ordinary business hours and the food and drink provided was for the purpose of entertainment, and not in course of fulfilling any employment duties.
Where is the food or drink being provided? In the 20XX calendar year, the Christmas Party was held at a specified venue and in the 20XX calendar year it was held at another specified venue These are private external venues, and not your business premises or usual place of work for employees. Paragraph 23 of TR 97/17 sets out that 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 because the provision of food or drink is less likely to have a work-related purpose. In this circumstance, consistent with paragraph 23 and the table in paragraph 25 of TR 97/17, the food or drink was consumed off your business premises at a social function by your employees, your participants and their families and is therefore considered meal entertainment and not a promotional event. Conclusion Question 1
The provision of food or drink to your employees at the Christmas Parties held by you is a provision of entertainment for the purposes of section 32-10 of the ITAA 1997. Consequently, the expenditure you incurred for the provision of food or drink to your employees at these Christmas Parties is not deductible under 8-1 of the ITAA 1997. Question 2 and Question 3 As outlined above, and consistent with the table in paragraph 25 of TR 97/17, the food or drink was consumed off your business premises at a social function by participants and their families and is considered meal entertainment. In accordance with the characteristics outlined in TD 94/55 and the four factors outlined in paragraph 23 of TR 97/17, it is concluded that the Christmas Party constitutes 'entertainment' under section 32-10 of the ITAA 1997 and is not a promotional event held for the primary purpose of earning assessable income. Consequently, the expenditure you incurred is not deductible under 8-1 of the ITAA 1997.