Australia: Tax-Exempt Bodies Providing Entertainment to Employees and Non-Employees – Are You FBT and GST Compliant?

Last Updated: 10 August 2010
Article by James Robson

The Fringe Benefits Tax (FBT) and Goods and Services Tax (GST) legislation outline specific rules for tax-exempt bodies that provide entertainment to employees. To ensure any FBT or GST liabilities reported to the Australian Taxation Office have not been understated, it is important tax-exempt bodies comply with these rules.

To assist tax-exempt bodies in reviewing their processes for correctly recording their FBT and GST liabilities, we have outlined the rules regarding entertainment provided by tax-exempt bodies below. We can also provide further information regarding these issues and how they apply to your particular situation if required.

What is entertainment?

Entertainment is defined as:

  • Entertainment by way of food, drink or recreation, or accommodation or travel to do with providing such entertainment
  • Recreation includes amusement, sport and similar leisure-time pursuits.

Obviously the above definition is very broad, and can include:

  • Christmas parties, business lunches and drinks, cocktail parties and other staff social functions
  • Providing entertainment to employees and others by providing access to sporting or theatrical events, sightseeing tours, holidays and so on
  • Accommodation and travel when it is provided in connection with, or to facilitate, activities such as entertaining employees over a weekend at a tourist resort, or providing them with a holiday

Entertainment is generally non-deductible for income tax purposes where an entity is an income tax paying entity. However some entertainment expenditure is deductible for income tax purposes, including:

  • Food and drink provided at eligible seminars (eg. training sessions)
  • Food and drink provided to employees as sustenance whilst travelling for business purposes

Whether entertainment expenditure is deductible or non-deductible in nature will depend on the circumstances surrounding the expenditure.

Tax-exempt entities will only be subject to FBT on entertainment benefits provided to employees where the entertainment is non-deductible for income tax purposes (if the tax-exempt body were a tax paying entity).

Therefore, it is important a tax-exempt entity considers the application of the income tax legislation to any entertainment benefits they provide to ensure all non-deductible entertainment expenditure is recorded when applying the FBT and GST rules.

FBT treatment of entertainment for tax-exempt bodies

Non-deductible entertainment benefits provided by tax-exempt bodies are classified as 'tax-exempt body entertainment' under the FBT legislation. The FBT legislation contains specific rules that apply to tax-exempt body entertainment that do not apply to other tax paying entities.

It is important to note the application of the FBT legislation can be subjective, and will depend on the particular situation it is being applied to. Outlined below is the FBT treatment of common entertainment benefits provided by tax-exempt bodies. However there may be situations that have specific rules that could change the outcome.

Exemptions

Public Benevolent Institutions, Health Promotion Charities, Non-profit Hospitals and Public Ambulance Services

If your entity is of a type mentioned above, any meal entertainment benefits you provide to employees are exempt from FBT. Meal entertainment includes entertainment by way of food or drink, or travel and accommodation associated with the provision of that entertainment.

Recreational entertainment benefits are not exempt from FBT for these entities

Minor benefits exemption

The minor benefits exemption, where benefits with a value less than $300 (GST inclusive) and provided to employees infrequently are treated as being exempt from FBT, is generally not available when providing tax-exempt body entertainment.

The minor benefits exemption can only be applied to tax-exempt body entertainment in the following specific circumstances:

  • The entertainment provided is incidental to the entertainment provided to outsiders and does not consist of a meal other than light refreshments, or
  • A function is held on your business premises solely as a means of recognising the special achievements of your employee in a matter relating to the employment of your employee

Therefore, any non-deductible entertainment benefits provided to employees by tax-exempt bodies will generally be subject to FBT (subject to the exemptions mentioned above).

How to value the entertainment

Meal entertainment

Meal entertainment (ie entertainment by way of food or drink) can be valued in three ways:

  • 'Actual' method – the taxable value for FBT purposes is taken to be the amount paid for the benefit provided to employees
  • 50/50 Split' method – the taxable value for FBT purposes is calculated by determining the total amount the entity has paid for meal entertainment, including meal entertainment provided to non-employees, multiplied by 50%
  • '12 week register' method – the entity keeps a record of all meal entertainment provided to employees and non-employees over a 12 week period. The register is used to determine what percentage of meal entertainment provided by the entity is provided to employees, and this percentage is applied to the total meal entertainment costs of the entity for the FBT year. The register will generally be valid for 5 years.

Please note, an 'employee' for these purposes includes associates of an employee (eg. spouse). Also, where the 50/50 split method is used, the entity cannot apply the minor benefits exemption to the meal entertainment benefits provided, even if they meet the specific criteria outlined in the minor benefits exemption section above.

Recreational entertainment

The taxable value for FBT purposes of recreational entertainment provided to employees will generally be the amount paid for the benefit. However, there are special valuation rules for entertainment leasing facility expenses (such as corporate boxes or function rooms).

GST treatment of entertainment for tax-exempt bodies

Where FBT is paid in relation to a tax-exempt body entertainment benefit, the entity may claim any GST input tax credits associated with the expense.

However, the GST input tax credits relating to tax-exempt body entertainment expenses that are not subject FBT cannot be claimed by the entity. For example, if an entity elected to use the 50/50 split or 12 week register methods for valuing their meal entertainment, they would not be able to claim the GST input tax credits on the portion of that meal entertainment not subject to FBT. Similarly, the entity cannot claim the GST input tax credits associated with expenses where tax-exempt body entertainment benefits are provided to non-employees.

This publication is issued by Moore Stephens Australia Pty Limited ACN 062 181 846 (Moore Stephens Australia) exclusively for the general information of clients and staff of Moore Stephens Australia and the clients and staff of all affiliated independent accounting firms (and their related service entities) licensed to operate under the name Moore Stephens within Australia (Australian Member). The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. Moore Stephens Australia, any Australian Member, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication. Copyright © 2009 Moore Stephens Australia Pty Limited. All rights reserved.

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