Explanatory Memorandum
(Circulated by authority of the Treasurer,the Hon. Peter Costello, MP)
Chapter 7 - Entertainment
This chapter explains the rewritten provisions about the income tax treatment of entertainment expenses.
These provisions are contained in the new Division 32 in Schedule 1 to the Tax Law Improvement Bill 1997.
Transitional and consequential amendments for the rewritten provisions are contained in Schedule 10 to the Bill.
This chapter covers:
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- the rewritten provisions in Division 32 (Entertainment) in Schedule 1 to the Tax Law Improvement Bill 1997; and
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- the transitional provisions and consequential amendments for those rewritten provisions contained in Schedule 10 to the Bill.
Division 32 contains the rewritten provisions of section 51AE and section 26AAAC of the 1936 Act which deal with the rules about entertainment.
Part A of this chapter summarises the entertainment rules contained in the new Division 32 of the 1997 Act. These provisions are located in Schedule 1 to the Bill.
Part B - there are no changes proposed to the content of the current provisions.
Part C explains why some provisions of the 1936 Act have not been rewritten.
Part D explains the transitional provisions which set out how and when the rewritten provisions will apply. These provisions are located in Part 1 of Schedule 10 to the Bill.
Part E explains the amendments that need to be made to the 1997 Act, the 1936 Act and other Commonwealth legislation, as a consequence of rewriting the provisions of the 1936 Assessment Act. These provisions are located in Parts 2 to 4 of Schedule 10 to the Bill.
A. Summary of the new law
Guide to Division 32: Entertainment
It will explain the income tax treatment of entertainment.
A loss or outgoing is not deductible under section 8-1, of the 1997 Act, to the extent it is incurred in providing entertainment. [section 32-5]
Entertainment by way of:
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- food, drink or recreation; or
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- accommodation or travel to do with providing entertainment by way of food, drink or recreation. [section 32-10]
Property used in providing entertainment
To the extent that property is used for providing non-deductible entertainment, that use is taken not to be for the purpose of producing assessable income. [section 32-15]
The general rule will not apply for these items of entertainment:
Meals in an in-house dining facility
Food and drink provided to an employee in an in-house dining facility. [section 32-30, item 1.1]
Food and drink supplied in an in-house dining facility to individuals who are not employees can be claimed if $30 for each meal is included in the taxpayers assessable income. [section 32-30, item 1.2, subsection 32-70(1)]
However, taxpayers can choose not to claim the deduction and not to have the $30 included in their assessable income. [section 32-30 item 1.2, subsection 32-70(2)]
Food or drink employees receive in a dining facility, if they work in that dining facility or in a facility for accommodation, recreation or travel (such as a motel or resort) that contains the dining facility. A dining facility is a canteen, dining room, cafe, restaurant or something similar. [section 32-30, item 1.3, section 32-60]
In-house recreation facilities
A recreation facility on property occupied by the taxpayer and mainly for use by its employees. [section 32-30, item 1.5]
Certain exempt fringe benefits
Food, drink or meals that are exempt benefits under the Fringe Benefits Tax Assessment Act 1986 (FBTAA). [section 32-30, items 1.6, 1.7]
Some food or drink supplied to employees under an industrial instrument relating to overtime. [section 32-30, item 1.4]
Entertainment allowances paid to employees, if they are included in their assessable income. [section 32-30, item 1.8]
Entertainment that is reasonably incidental to a persons attendance at a seminar that goes for at least 4 hours (certain qualifications apply). [section 32-35, item 2.1, section 32-65]
Expenses of an entertainment business
Entertainment supplied for payment in the ordinary course of a business (such as meals by a restaurateur or the catering for in flight meals by an airline). [section 32-40, item 3.1]
Expenses of employees in the entertainment industry
Entertainment paid for and provided as an employee of a business that charges for that entertainment. For example stage make-up purchased by an actress. [section 32-40, item 3.2]
Promotion and advertising expenses
Entertainment provided to publicly promote a business' goods or services if certain conditions are met. [section 32-45, items 4.1, 4.2, and 4.3]
Food and drink during overtime work and for which an allowance is paid under an industrial instrument. [section 32-50, item 5.1]
Free entertainment provided to disadvantaged members of the public. [section 32-50 item 5.2]
Arrangements where you pay for something such as advertising and you receive entertainment for less than it would otherwise cost can be affected by an anti-avoidance provision. The Commissioner can apportion a reasonable part of the amount paid to the entertainment provided. [section 32-75]
Special rules for companies and partnerships
Company directors [section 32-80] and partners [section 32-90] are treated as employees in some provisions. Employees, directors and property of a company in some provisions mean employees, directors and property of any company in the same wholly owned group [section 32-85] .
B. Discussion of changes
The exception in paragraph 51AE(5)(g) has not been rewritten. This does not change the existing law because it has very little or no operation (see Limited application below in Part C).
C. Provisions of the old law that have not been rewritten
Some provisions of the existing law are redundant and have not been included in the new law. They are summarised in the following table:
| Provision | Provision | Reason for omission |
|---|---|---|
| Subsection 51AE(5A) | Overrides the general rule that denies deductibility of entertainment expenses for:
|
Since the introduction of subsection 51AE(5AA) [section 32-20] in 1994, there has been a general exception for the cost of providing a fringe benefit. |
| Subsection 51AE(5B) | Extends the exceptions in subsection 51AE(5A) back to the commencement date of the general prohibition on deductions for entertainment expenses. | A transitional provision has no ongoing effect. |
| Subsection 51AE(11) | Defines deductible travel used in subsection 51AE(10). | That term is used only in subsection 51AE(10) which is not being rewritten. |
| Subsection 51AE(15) | Defines non-deductible entertainment used in subsections 51AE(13) and (14). | That term is no longer used. |
The exception in paragraph 51AE(5)(g) of the 1936 Act has not been rewritten. The exception excludes from non-deductibility expenditure:
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- that only involves the entertainment of the recipient; and
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- that would be deductible under the general deduction provision if the recipient had incurred it.
This provision has very limited if any application. Meals while travelling overnight on business are not excluded from deduction under section 32-5 because they are not entertainment. Similarly the meal of a restaurant reviewer or the ticket of a theatre critic would not constitute entertainment.
A note has been added at the end of the definition of entertainment to put beyond doubt that expenditure envisaged by paragraph 51AE(5)(g) is not entertainment.
Subsection 51AE(10) which prevents the existing exceptions in paragraphs 51AE(5)(g) self entertainment, and (h) employee of an entertainment business, from applying to an employee's overtime meals and most seminars, has not been reproduced in the rewritten law.
The limitations imposed by subsection 51AE(10) have very limited scope. Removal of this provision greatly simplifies the legislation.
Provisions not to be rewritten
The definitions of related companies [subsection 51AE(16)] , subsidiary companies [subsection 51AE(17)] , subsidiary of a subsidiary [subsection 51AE(18)] and person in a position to affect the rights of a company [subsection 51AE(19)] have not been rewritten.
These terms and concepts are dealt with in Division 975. Related company is covered by the concept of a member of the same wholly owned group of companies contained in section 975-500. Subsidiary and subsidiary of a subsidiary and holding company are covered within the concept of 100% subsidiary in section 975-505. A person in a position to affect the rights of a company is covered in section 975-150.
Subsection 51AE(6) is a safeguarding provision that allows the Commissioner of Taxation to ignore attempts to restructure business arrangements to bring them within the ambit of two exceptions:
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- charging for entertainment that it is reasonable to expect to be provided free of charge [paragraph 51AE(5)(b)] ; or
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- providing entertainment under a contract for the supply of goods or services in order to promote your business to the public that it is reasonable to expect to be provided separately from such a contract [paragraph 51AE(5)(b)] .
Cases that involve blatant arrangements would be caught by the general anti-avoidance provisions. In other cases the expenditure would not qualify for deduction under general principles.
Subsection 51AE(12) states that the classes of losses or outgoings that are deductible under the general deduction provision are not extended by any of the exceptions in subsection 51AE(5).
Subsection 51AE(12) has no practical effect other than to put beyond doubt what is already clear - that what is deductible under subsection 51(1) is not expanded by any of the exceptions in subsection 51AE(5).
D. Transitional arrangements
Part 1 of Schedule 10 of the Tax Law Improvement Bill 1997 will amend the Income Tax (Transitional Provisions) Act 1997 to insert the transitional provisions for the rewritten sections discussed earlier in this chapter.
Part 1 comprises only item 1, which will insert in Part 2-5 of Chapter 2 of the Income Tax (Transitional Provisions) Act 1997 the new Division 32. The new Division 32 will set out how and when the rewritten sections will apply.
The rewritten provisions will apply to assessments for the 1997-98 or later income years. [Schedule 10, Part 1: section 32-1, Income Tax( Transitional Provisions) Act 1997]
E. Consequential amendments
Amendments of the Income Tax Assessment Act 1997
Part 2 of Schedule 10 to the Bill will amend the 1997 Act to:
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- update references to provisions of the 1936 Act that have been rewritten in Division 32 in Schedule 1; and
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- insert additional definitions in the Dictionary in section 995-1 of terms that are used in the rewritten provisions contained in Division 32 in Schedule 1.
Section 10-5 of the 1997 Act lists all the provisions of both the 1936 and the 1997 Acts that deal with particular kinds of assessable income. Part 2 of Schedule 10 to the Bill will update the reference to the existing provision (26AAAC) that has been rewritten in Division 32 in Schedule 1, so that the lists refer to the rewritten provision. [Schedule 10, Part 2: item 2]
Section 12-5 of the 1997 Act lists all the provisions of both the 1936 and the 1997 Acts that deal with specific types of deductions. Part 2 of Schedule 10 to the Bill will update the reference to the existing provision (51AE) that has been rewritten in Division 32 in Schedule 1, so that the lists refer to the rewritten provision. [Schedule 10, Part 2: item 3]
The reference in the signpost in subsection 43-50(4) of the 1997 Act to subsection 51AE(14) has been replaced with a reference to section 32-15. [Schedule 10, Part 2: item 4]
Two notes have been added to the end of the definition of purpose of producing assessable income in subsection 995-1(1) to signpost provisions that affect whether use of property is for the purpose of producing assessable income. [Schedule 10, Part 2: item 10]
Part 2 of Schedule 1 to the Bill will insert into the Dictionary (section 995-1 of the 1997 Act) new definitions of terms used in the rewritten provisions in Division 32 in Schedule 1.
In some cases, the label used and the meaning of the definition have not changed from the existing law. The following definitions fall into this category:
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- In-house dining facility [Schedule 1, Part 2: item 9]
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- Seminar [Schedule 1, Part 2: item 11] .
The label used for some concepts has changed without any change in meaning from the existing law, and some rearrangement of concepts has resulted in new defined terms. These are explained below.
New Definition: Business meeting [Schedule 10, Part 2: item 5]
Commentary: This is the equivalent of paragraph (a) of the definition of eligible seminar in subsection 51AE(1). It covers the ordinary business meetings that relate to a particular business. It excludes from its meaning those items that were covered by the definition of exempt training seminar in subsection 51AE(1). This is merely a rearrangement and relabelling of the previous provisions.
New Definition: Dining facility [Schedule 10, Part 2: item 6]
Commentary: The new definition of dining facility is the same as the old definition of eligible dining facility in subsection 51AE(1) of the 1936 Act.
New Definition: Entertainment [Schedule 10, Part 2: item 7]
Commentary: The new definition of entertainment together with provide has the same effect as the old definition of provision of entertainment in subsection 51AE(3) of the 1936 Act. The word provide continues to take its ordinary meaning. The scope of the definition is the same, despite the omission of paragraphs 51AE(3)(d), (e) and (f). The omissions have no substantive effect on the definition, they were clearly within the definition's ordinary scope. Business lunches still constitute entertainment.
New Definition: Goes for at least 4 hours [Schedule 10, Part 2: item 8]
Commentary: This definition picks up the concepts in subsection 51AE(2), the continuity of an eligible seminar and the time period from the definition of eligible seminar . This is merely a rearrangement of the previous provisions.
The amendments made by Part 2 of Schedule 10 apply to assessments for the 1997-98 and later income years [clause 4 Tax Law Improvement Bill 1997] . This ensures that these consequential amendments take effect at the same time as the rest of the amendments relating to the entertainment provisions.
Amendments of the Income Tax Assessment Act 1936
Part 3 of Schedule 10 to the Bill will amend the 1936 Act to:
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- insert references to the rewritten provisions contained in Division 32 in Schedule 1, where the 1936 Act currently refers to the existing provisions; and
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- close off the application of provisions of the 1936 Act that have been rewritten in Division 32 in Schedule 1, so that the existing provisions apply only to the 1996-97 and earlier income years.
Inserting references to rewritten provisions
Part 3 of Schedule 10 will insert in the 1936 Act a reference to the rewritten provision section 32-5 where the 1936 Act currently refers to the existing provision section 51AE(4). The reference to section 51AE(4) will be omitted. This is necessary because section 21A has not yet been rewritten and closed off; and can apply to amounts that relate to only one income year at a time, being the 1997-98 or a later income year. [Schedule 10, Part 3: items 12, 13]
Closing off the application of existing provisions
Part 3 of Schedule 10 will insert new provisions into the 1936 Act that will close off the application of existing provisions that have been rewritten. [Schedule 10, Part 3: items 14, 15]
Sections 51AE and 26AAAC need to be closed off so that they only apply to the 1996-97 and earlier income years.
The amendments made by Part 3 of Schedule 10 apply to assessments for the 1997-98 and later income years The rewritten provisions will apply to assessments for the 1997-98 or later income years [clause 4 Tax Law Improvement Bill 1997] . This ensures that these consequential amendments take effect at the same time as the rest of the amendments relating to the entertainment provisions.
Amendments of other Commonwealth legislation
Part 4 of Schedule 10 to the Bill will amend the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to add references to rewritten provisions contained in Division 32 in Schedule 1, where the Act currently refers to the existing provisions. [Schedule 10, Part 4: items 17,19, 20 and 21]
Inserting references to rewritten provisions
Part 4 of Schedule 10 will insert into paragraph 37CE(1)(f) of the FBTAA a reference to the rewritten definition of in-house dining facility in section 32-55 of Schedule 1, where the FBTAA currently refers to the existing provision of section 51AE(1). The reference to section 51AE(1) will be omitted. [Schedule 10, Part 4: item 16]
Part 4 of Schedule 10 will insert into the definition of deductible expense in subsection 136(1) of the FBTAA a reference to Division 32. [Schedule 10, Part 4: item 19]
Part 4 of Schedule 10 will replace the definition of non-deductible entertainment expenditure in subsection 136(1) of the FBTAA with a rewritten definition which incorporates a reference to section 32-5 contained in Schedule 1 as well as a reference to the existing provision of subsection 51AE(4). [Schedule 10, Part 4: item 21]
Part 4 of Schedule 10 will insert a definition of entertainment into subsection 136(1). [Schedule 10, Part 4: item 20] This will replace the definition of providing entertainment in section 152 which has been deleted. [Schedule 10, Part 4: item 22] This also results in amendments to paragraph 63A(1)(b) and to the definition of business premises in subsection 136(1) to remove the reference to the definition of provision of entertainment in section 51AE of the 1936 Act. [Schedule 10, Part 4: item 17 and item 18]
The amendments made by Part 4 of Schedule 10 apply to the providing of entertainment on or after 1 July 1997. [Schedule 10, Part 4: item 23]