House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Minister for Small Business and Assistant Treasurer, the Hon Kelly O'Dwyer MP)

Chapter 3 - Limiting fringe benefits tax concessions on salary packaged entertainment benefits

Outline of chapter

3.1 Schedule 3 to this Bill amends the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to limit the concessional treatment of salary packaged entertainment benefits by:

•

removing the reporting exclusion in respect of salary packaged entertainment benefits;

•

removing access to elective valuation rules when valuing salary packaged entertainment benefits to prevent unintended and excessively concessional values being applied to those benefits; and

•

introducing a cap on the total amount of salary packaged entertainment benefits that certain employees can be provided that are exempt from or subject to fringe benefits tax at concessional rates.

3.2 All references are to the FBTAA unless otherwise stated.

Context of amendments

Budget announcement

3.3 The Government announced in the 2015-16 Budget that it would improve fairness in the tax system by introducing a limit on the use of salary packaged meal entertainment and entertainment facility leasing expense benefits.

3.4 All salary packaged meal entertainment and entertainment facility leasing expense benefits will become reportable and included on an employee's payment summary.

3.5 The announced changes also involve introducing a separate single grossed-up cap of $5,000 for salary packaged meal entertainment and entertainment facility leasing expense benefits for employees of employers able to access a general fringe benefits tax (FBT) exemption or rebate. Affected benefits exceeding the separate grossed-up cap of $5,000 would then be counted in calculating whether an employee exceeds their existing FBT exemption or rebate cap.

Previous reviews and inquiries

3.6 The FBT treatment of meal entertainment and entertainment facility leasing expense benefits has been reviewed by a number of different inquiries.

3.7 Most recently, the Final Report of the Not-for-profit Sector Tax Concession Working Group ^[1] included the following recommendation:

Recommendation 13: Include uncapped meal entertainment and entertainment facility leasing benefits in existing caps

As soon as practicable and independently of the implementation of Recommendation 12 [about broader reform of FBT], the uncapped concessions in relation to salary sacrificed meal entertainment and entertainment facility leasing fringe benefits should be removed. These benefits should be treated consistently with other fringe benefits, that is, included within existing caps.

3.8 The Not-for-profit Sector Tax Concession Working Group summarised that:

Uncapped access to meal entertainment and entertainment facility leasing benefits has raised concerns about the legitimacy of such concessions, especially since the rest of the community are not able to access such concessions or claim a deduction for such expenses. The benefit of this concession is also not evenly spread among [not-for-profit (NFP)] employees, tending to be more highly utilised by eligible employees on higher salaries.

3.9 The Productivity Commission in a Report in 2010 noted that the 'meal entertainment benefit is particularly inequitable, with greater benefits flowing to employees with higher salaries, and those who have greater financial freedom to spend their salaries on eligible items. Similarly, those employees with large one-off entertainment expenses benefit relatively more in that year.' ^[2]

3.10 The Productivity Commission also observed that:

The meal entertainment exemption for public and NFP hospitals was originally introduced because of the difficulty of accounting for the provision of meals to hospital employees when most hospitals had a subsidised staff canteen. However, in recent years it appears that the use of these concessions has grown much wider than the original intent. The salary packaging providers are actively promoting the use of meal entertainment cards for dining and holidays - domestic and overseas

There appears to be a strong case to limit or eliminate the meal entertainment benefit.

3.11 Similar concerns have also been raised in other reports including in Australia's Future Tax System Review, released in 2010.

Operation of existing law

3.12 FBT is a tax that employers pay on certain benefits they provide to their employees, including their employees' family or other associates. The benefit may be in addition to, or part of, their salary or wages package. Benefits provided to some other individuals who are not employees may also be subject to FBT, such as directors of a company or statutory officeholders. FBT is imposed by the Fringe Benefits Tax Act 1986 and assessed under the FBTAA.

3.13 FBT is separate to income tax and is calculated on the grossed-up taxable value of the fringe benefits provided. The FBT year runs from 1 April to 31 March.

3.14 The FBTAA satisfies a number of policy objectives. It reports the grossed-up taxable value of benefits on an employee's payment summary (which affects various entitlements and surcharges); it grosses-up taxable values using a higher goods and services tax (GST) inclusive formula where there are entitlements to GST credits but no GST collection point; and it applies FBT on the resultant sum of the grossed-up taxable values.

3.15 It also assists entities such as registered charities and public hospitals to attract staff and reduce their costs of employment.

3.16 In order to achieve these policy objectives, the following method applies to calculate FBT under the FBTAA. The employer:

•

determines the taxable value of a benefit (Divisions 1 to 13 of Part III);

-

this taxable value forms the employee's individual fringe benefits amount (subsection 5E(2)) or excluded fringe benefit (subsection 5E(3));

•

reports an employee's individual fringe benefits amount (grossed-up to the reportable fringe benefits amount) on the employee's payment summary (section 135P - if in excess of the $2,000 de minimisthreshold);

•

adds up all employee's individual fringe benefits amounts (ignoring the de minimis threshold) and excluded fringe benefit amounts for those benefits with a GST credit entitlement (subsection 5C(3)) the result being the type 1 aggregate fringe benefits amount;

•

adds up all employee's individual fringe benefits amounts (ignoring the de minimis threshold) and excluded fringe benefit amounts for those benefits with no GST credit entitlement (subsection 5C(4)) the result being the type 2 aggregate fringe benefits amount;

•

grosses-up the type 1 aggregate fringe benefits amount using the higher type 1 gross-up rate (subsection 5B(1F));

•

grosses-up the type 2 aggregate fringe benefits amount using the lower type 2 gross-up rate (subsection 5B(1G));

•

adds up grossed-up types 1 and 2 aggregate fringe benefits amounts which forms the fringe benefits taxable amount upon which tax is imposed (subsection 5B(1A) and section 66).

3.17 The method in paragraph 3.16 (including reporting) applies to employers who are subject to FBT in the normal fashion, including rebatable employers such as registered charities. Section 65J provides a capped rebate of tax of up to $30,000 per employee to rebatable employers but otherwise the method stays the same. ^[3]

3.18 The FBTAA provides certain employers with a 'blanket' exemption on all benefits provided to their employees so that they are not required to apply all of the items listed in paragraph 3.16. However, this 'blanket exemption' is limited or capped. Section 57A exempts benefits provided by public hospitals and ambulance services (subject to a standard $17,000 cap per employee) and registered public benevolent institutions and registered health promotion charities (subject to a standard $30,000 cap per employee) have their exemptions capped using a quasi-reportable system (subsection 135Q(3)) and quasi-taxing system (subsections 5B(1D) to 5B(1L)).

3.19 Currently benefits arising from meal entertainment, car parking and entertainment facility leasing expenses are excluded from reporting for all taxpayers (paragraphs 5E(3)(a), (b) and (c)). These types of benefits are also excluded from the caps allowing for an unlimited tax exemption for employers covered by section 57A (subsection 5B(1L)) or unlimited rebates for tax-exempt employers (subsection 65J(2H)).

3.20 There are other 'blanket exemptions', such as for religious practitioners conducting pastoral duties that are unaffected by the budget measure as benefits received by these employees are not currently capped. In addition, section 135Q (about reporting) only applies to employers described in section 57A or 58, so that employees of exempt employers not covered by those sections will not have amounts reported on their payment summaries.

Certain employers provided with concessions

3.21 Some organisations are exempt from FBT where the total grossed-up value of certain benefits (which are benefits that are not otherwise excluded) provided to each employee during the FBT year is equal to, or less than, the capping threshold. If the total grossed-up value of fringe benefits provided to an employee is more than that capping threshold, an organisation will need to pay FBT on the excess.

3.22 Table 3.1 outlines the types of organisations that are eligible for an FBT exemption, the capping thresholds that apply and whether the organisation needs to be endorsed by the Commissioner of Taxation to access the FBT exemption.

Table 3.1

3.23 Some employers qualify for an FBT rebate and are referred to as 'rebatable employers'.

3.24 The FBT rebate is an entitlement to a rebate equal to 48 per cent of the gross FBT payable, subject to a capping threshold. ^[5]

3.25 Rebatable employers are entitled to have their liability reduced by a rebate equal to 48 per cent of the gross FBT payable (subject to a $30,000 standard capping threshold). If the total grossed-up taxable value of fringe benefits provided to an employee is more than $30,000 a rebate cannot be claimed for the FBT liability on the excess amount. The $30,000 capping threshold applies even if the rebatable employer did not employ the employee for the full FBT year.

3.26 The capping thresholds apply to each employee of an FBT concessionally taxed employer regardless of whether:

•

the employee is employed for the full FBT year or only part of that year;

•

the employee is employed on a full-time or part-time basis; and

•

the employee received any concessional taxed benefits from another employer or employers.

Reportable fringe benefits

3.27 The FBTAA determines whether the taxable value of a fringe benefit forms part of an employee's individual fringe benefits amount or is an excluded benefit. It does this so as to calculate an employee's reportable fringe benefit total for publication on an employee's payment summary in the following income tax year (sections 135M to 135Q). An amount is reported only if it exceeds a $2,000 de-minimis threshold.

3.28 The reportable fringe benefits total of an employee is used to assess the employee's eligibility for transfer payments and other tax concessions as well as an employee's liability to certain levies and surcharges. This ensures that employees with remuneration consisting entirely of salary are treated equally, when compared to those in receipt of fringe benefits. The introduction of FBT was designed to ensure that all forms of cash and non-cash remuneration for employees receive equivalent treatment.

3.29 An employer currently does not have to allocate the following excluded benefits to employees or report them on payment summaries (subsections 5E(2) and (3)):

•

entertainment by way of food and drink, and benefits associated with that entertainment, such as travel and accommodation, regardless of which category is used to value the benefit;

•

car parking fringe benefits, not including car parking expense payment benefits;

•

hiring or leasing entertainment facilities such as corporate boxes;

•

remote area residential fuel where the value of the benefit is reduced under the FBTAA;

•

remote area housing assistance where the value of the benefit is reduced under the FBTAA;

•

remote area home ownership schemes where the value of the benefit is reduced under the FBTAA;

•

remote area home repurchase schemes where the value of the benefit is reduced under the FBTAA;

•

costs of occasional travel, being that which occurs from time to time and not at regular intervals, to a major Australian population centre by employees and their families living in a remote area;

•

freight costs for food provided to employees living in a remote area; and

•

fringe benefits provided to address certain security concerns relating to the personal safety of an employee, or an associate of the employee, arising from the employee's employment.

3.30 The following are further excluded by the Fringe Benefits Tax Regulations 1992 (made for the purposes of paragraph 5E(3)(i) of the FBTAA):

•

emergency or other essential health care provided to an employee or associate who is an Australian citizen or permanent resident, while the employee is working outside Australia and no Medicare benefit is payable;

•

certain Australian Government overseas living allowance payments, for example cost of living adjustments, post adjustments, child supplements, and child reunion supplements;

•

certain benefits provided to Defence Force members, for example particular forms of housing assistance, reunion travel, assistance provided for removing and storing household effects, allowances paid to families with special needs, education assistance for children in critical years of schooling, elements of overseas living allowances, and removal expenses of a spouse due to marriage breakdown;

•

certain benefits provided to police officers, for example particular forms of housing assistance, assistance provided for removing and storing household effects, certain relocation assistance and certain car benefits arising from travel between home and work by police officers using unmarked police vehicles that are fitted with a police radio and concealed or portable warning lights and sirens;

•

certain car benefits arising from travel between home and work by police officers, ambulance officers and fire fighters using marked emergency vehicles; and

•

car benefits arising from an employee's private use of pooled or shared cars (subject to certain conditions).

3.31 The nature of most excluded benefits is that they are either difficult or costly to attribute to particular employees or are difficult or costly to allocate part of the taxable value of the benefit to a particular employee. ^[6]

3.32 However, some of the excluded benefits have now become part of some employee's salary packaging arrangements (as defined in section 136) undermining the rationale for the exclusion and undermining the integrity of the FBT system.

Alternative valuation rules for meal entertainment benefits (compliance cost savings methods)

3.33 Generally, when an employer provides entertainment to both employees and non-employees (for example, clients), only the part of the entertainment that relates to employees and their associates is subject to FBT.

3.34 However, those employers mentioned in Table 3.1 do not pay FBT on any of the meal entertainment benefits they provide to their employees.

3.35 The taxable value of the food or drink, and the associated accommodation or travel, is calculated using the respective valuation rule according to whether the benefit is an expense payment, property, residual or tax-exempt body entertainment fringe benefit.

3.36 If an employer cannot easily determine the actual expenditure, they can use a 'per head' basis of apportionment.

3.37 Alternatively, an employer may instead elect to value the food, drink and associated accommodation or travel as a 'meal entertainment fringe benefit'. If they make this election, they cannot use the per head basis of apportionment and the taxable value is calculated under the meal entertainment rules.

3.38 Where an employer elects to classify a fringe benefit as a meal entertainment fringe benefit, they have to classify all fringe benefits arising from the provision of meal entertainment during the FBT year as meal entertainment fringe benefits.

3.39 Specifically, the provision of meal entertainment under Division 9 of Part III means:

•

providing entertainment by way of food or drink;

•

providing accommodation or travel in connection with, or to facilitate the provision of, such entertainment; and

•

paying or reimbursing expenses incurred by the employee for the above.

3.40 The provision of meal entertainment does not include the provision of entertainment by way of recreation.

3.41 If an employer elects to classify the provision of meal entertainment as a meal entertainment fringe benefit, the meal entertainment provided does not give rise to an expense payment fringe benefit, property fringe benefit, residual fringe benefit or tax-exempt body entertainment fringe benefit.

3.42 An employer cannot include meal entertainment provided by someone other than the employer (that is, someone who is not the employer) in the election.

3.43 This means that if a fringe benefit arises from meal entertainment provided by someone other than the employer, the employer must value the fringe benefit according to the rules for that type of fringe benefit. It could, for example, be an expense payment fringe benefit, a property fringe benefit, a residual fringe benefit or a tax-exempt body entertainment fringe benefit.

3.44 There are two methods an employer can use to calculate the taxable value of meal entertainment fringe benefits:

•

50-50 split method; and

•

12-week register method.

3.45 These options are also available to income tax-exempt employers, who may be exempt from income tax but may have a liability for FBT.

3.46 Both methods are based on an employer's total meal entertainment expenditure. This includes expenditure that might otherwise be exempt from FBT or not normally subject to FBT.

3.47 Under the 50-50 split method, the taxable value is 50 per cent of an employer's total meal entertainment expenditure.

3.48 The 12-week register method is based on the total meal entertainment expenditure and an appropriate percentage, as evident from the 12-week register.

3.49 Under the 50-50 split method, the total taxable value of meal entertainment fringe benefits is 50 per cent of the expenses an employer incurs in providing meal entertainment to all people (whether employees, clients or otherwise) during the FBT year. An employer's total meal entertainment expenditure includes expenditure that might otherwise be exempt from FBT or not normally subject to FBT.

3.50 The 50-50 split method was introduced to assist in reducing compliance costs in employers not having to apportion different types of meal entertainment to different benefits and different recipients. However, the method can produce the wrong result (a concessional result) in respect of salary packaged entertainment which is easily valued and attributable to a particular individual. If the method is adopted, the value of a salary packaged benefit provided to an employee is effectively halved.

Entertainment facility leasing expense benefits - alternative valuation rules (compliance cost saving method)

3.51 Similar rules also apply in respect of entertainment facility leasing expense benefits. The taxable value of recreational entertainment is calculated using the respective valuation rule according to whether the benefit is an expense payment fringe benefit, property fringe benefit or residual fringe benefit.

3.52 Where an employer provides recreational entertainment by hiring or leasing entertainment facilities, they may elect to use the 50-50 split method.

3.53 Entertainment facility leasing expenses are the expenses incurred in hiring or leasing:

•

a corporate box;

•

boats or planes for providing entertainment; and

•

other premises or facilities for providing entertainment.

3.54 Expenses, or parts of expenses, that are not entertainment facility leasing expenses for these purposes are:

•

expenses attributable to providing food or beverages; and

•

expenses attributable to advertising that would be an allowable income tax deduction.

3.55 Generally, the transport to and from an entertainment facility will be a separate benefit that will not be part of the entertainment facility leasing expense.

3.56 However, the transport may be part of the entertainment facility leasing expense where the transport is provided as part of an all-inclusive package.

3.57 Expenses incurred in hiring or leasing a boat or plane in their entirety for the purposes of providing entertainment will be 'entertainment facility leasing expenses'. For example, the hiring or leasing of a houseboat or a charter flight where the whole plane is hired for entertainment purposes would meet the definition of entertainment facility leasing expenses.

3.58 When an employer gives an employee a plane ticket for travel to a holiday destination, the expense may relate to entertainment but will not be an entertainment facility leasing expense because the purchase of an airfare is not the hiring or leasing of a plane.

3.59 However, if the plane ticket is part of an all-inclusive package that includes holiday accommodation, the taxable value of the benefit may be partly attributable to an entertainment facility leasing expense being the cost of hiring the holiday accommodation. For example, providing an all-inclusive holiday package to an employee organised through a travel agent that includes both flights and the hire or lease of holiday accommodation will be a single benefit whose taxable value is partly attributable to entertainment facility leasing expenses. As the benefit is partly attributable to entertainment facility leasing expenses, the whole of the package will be treated as an entertainment facility leasing expense.

3.60 The phrase 'other premises or facilities' has a wide meaning. In the same way that a corporate box is a part of larger premises or a facility (being the sporting stadium), items that satisfy this category of entertainment facility leasing expense must be either:

•

an entire premises or facility; or

•

a distinct area or separate room of a larger premises or a facility.

3.61 The following are examples of 'other premises or facilities' for providing entertainment:

•

a function room in a club or hotel that has been hired to the exclusion of others;

•

a hotel/motel room;

•

a room in a bed and breakfast facility;

•

a cabin on a cruise ship;

•

a cabin or on-site van at a caravan park;

•

a marquee;

•

a golf course that is hired or leased for a set time or full day to the exclusion of others, for example for a corporate golf day; and

•

a tennis court that is hired to the exclusion of others, for example for a corporate tennis day.

3.62 The following would not be 'other premises or facilities' for providing entertainment:

•

a seat on a plane;

•

a seat at a sporting event;

•

a table in the dining room of a club or hotel;

•

golf green fees or memberships; and

•

caravan site fees.

3.63 An employer may elect to use the 50-50 split method so that the total taxable value of fringe benefits arising from the use of entertainment facilities an employer hires or leases is 50 per cent of all entertainment facility leasing expenses.

3.64 The minor benefits exemption does not apply if an employer elects to use the 50-50 split method for valuing entertainment facility leasing expenses.

3.65 The 50-50 split method for entertainment facility leasing expenses only applies to expenses an employer incurs. It does not include, for example, those expenses incurred by an employee that an employer reimburses.

Summary of new law

3.66 Schedule 3 to this Bill amends the FBTAA to limit the concessional treatment of salary packaged entertainment benefits.

3.67 Entertainment benefits are those benefits that are meal entertainment benefits (those relating to the provision of meal entertainment) or entertainment facility leasing expense benefits.

3.68 Salary packaging is generally an arrangement by which an employee reduces his or her salary and wages in return for receiving a non-cash benefit.

3.69 Schedule 3 to this Bill limits the concessional treatment of salary packaged entertainment benefits by making three core changes.

3.70 Firstly, Schedule 3 ensures salary packaged meal entertainment and entertainment facility leasing expense benefits will always appear as part of an employee's reportable fringe benefits total which is included on their payment summaries. This is achieved through the removal of an existing reporting exclusion.

3.71 Secondly, Schedule 3 removes access to elective valuation rules when valuing salary packaged entertainment benefits to prevent unintended and excessively concessional values being applied to those benefits.

3.72 Lastly, Schedule 3 introduces a cap on the total amount of salary packaged entertainment benefits that employees can be provided by exempt employers (covered by section 57A) and rebatable employers (covered by section 65J) that are subject to a reduced amount of FBT.

Comparison of key features of new law and current law

Detailed explanation of new law

3.73 Schedule 3 to this Bill amends the FBTAA to make a number of small changes to limit the concessional treatment of salary packaged entertainment benefits.

Including entertainment benefits in an employee's reportable fringe benefits total

3.74 Schedule 3 amends the definition of excluded fringe benefit to remove the provision of meal entertainment (as currently defined in section 37AD) provided under a salary packaging arrangement and a benefit wholly or partly attributable to entertainment facility leasing expenses (currently defined in subsection 136(1)) provided under a salary packaging arrangement (salary packaged entertainment benefits). [Schedule 3, items 4 and 5, paragraphs 5E(3)(a) and (c)]

3.75 By removing salary packaged entertainment benefits from the definition of 'excluded fringe benefit', entertainment fringe benefits will form part of an employee's individual fringe benefits amount and reportable fringe benefits total.

3.76 'Salary packaging arrangements' (currently defined in subsection 136(1)) are arrangements under which an employee receives a benefit and either agrees to forgo salary or wages in return for a benefit or receiving the benefit is part of the employee's remuneration package and it is reasonable to conclude that the employee's salary or wages would be greater if the benefit were not provided.

Removing access to elective valuation rules when valuing salary packaged entertainment benefits

3.77 Schedule 3 prevents Division 9A of Part III (about elective valuation rules for meal entertainment benefits) and section 152B (about elective valuation rules for entertainment facility leasing expense benefits) applying to value salary packaged entertainment benefits. [Schedule 3, items 6, 10 and 11, section 37AC and subsection 152B(2)]

3.78 The elective valuation rules can provide an unintended and excessively concessional value being applied to salary packaged entertainment benefits, particularly in relation to employers who are generally exempt from FBT.

3.79 To ensure that entertainment fringe benefits are allocated an appropriate taxable value (as determined under the core FBT rules), the elective valuation regimes cannot be applied to determine the taxable value of salary packaged entertainment benefit. However, the elective valuation rules will remain available to calculate the value of other benefits that fall within their current scope.

3.80 The elective valuation regimes are provided so as to reduce compliance costs in relation to apportionment and valuation of individual entertainment benefits, which in some cases can be considerable. However, the compliance costs in relation to valuing a salary packaged entertainment benefit are not subject to the same issues due to the existence of the agreement between the employer and employee to reduce salary and wages in return for providing/receiving the entertainment benefit.

3.81 Retaining access to the current elective valuation rules for salary packaged entertainment benefits would undermine these changes by reducing the reporting of these benefits and effectively raising the proposed new cap on the maximum amount of these benefits that can be accessed at concessional FBT rates.

Introducing a cap on the total amount of salary packaged entertainment benefits that certain employees can be provided that are exempt from or subject to fringe benefits tax at concessional rates

FBT exempt employers (section 57A employers)

3.82 Currently, certain specified employers are exempt from FBT where the total grossed-up value of certain benefits (which are benefits that are not otherwise excluded, known as 'excluded fringe benefits') provided to each employee during the FBT year is equal to, or less than, the capping threshold. If the total grossed-up value of fringe benefits provided to an employee is more than that capping threshold, an employer will need to pay FBT on the excess.

3.83 As Schedule 3 removes salary packaged entertainment benefits from being an excluded fringe benefit, without further changes, the grossed-up taxable value of those benefits will be taken into account in determining whether, and by how much, the capping threshold has been exceeded.

3.84 Rather than remove in full the concessional treatment of salary packaged entertainment benefits for these employers, Schedule 3 limits the existing concession by increasing the existing capping threshold by the lesser of:

•

$5,000; and

•

an employee's total grossed-up taxable value of salary packaged entertainment benefits (i.e., those benefits relating to the provision of meal entertainment or entertainment facility leasing expenses).

[Schedule 3, items 2 and 3, subsection 5B(1E) (step 3A in the method statement) and subsection 5B(1M)]

3.85 This effectively provides each employee of those employers a separate single grossed-up cap of $5,000 each FBT year for salary packaged entertainment benefits which remain eligible for the current FBT exemption. Where this cap is exceeded, any benefits may be taken into account under the existing caps before determining whether there is any excess to be taxed.

Example 3.1: New Step G for determining the employer's aggregate non-exempt amount under subsection 5B(1E)

A public hospital ^[7] provides an employee, Lee, with the following benefits during the 2016-2017 FBT year ^[8] :

Salary packaging arrangement

•

a television with taxable value of $1,000 (GST creditable); ^[9]

•

domestic air travel with taxable value of $2,000 (GST creditable); ^[10]

•

reimbursed child care fees with a taxable value $3,000 (not GST creditable);

•

reimbursement of restaurant meals with taxable value of $1,800 (not GST creditable); ^[11]

•

reimbursement of cost of Canadian holiday accommodation with taxable value of $1,200 (not GST creditable); ^[12] and

Not through a salary packaging arrangement

•

food and drink provided by a third party while attending a corporate event with taxable value of $400 (GST creditable). ^[13]

The employer does not elect under section 37AA (about meal entertainment) or section 152B (entertainment facility leasing expenses) to value entertainment benefits under any of the elective valuation rules.

The employer's aggregate non-exempt amount (under subsection 5B(1E)) for the 2016-2017 FBT year is calculated in the following way:

Step A

The employer works out what would be the individual fringe benefits amount for each employee, if section 57A did not apply. This is determined by adding the taxable values of the benefits provided in respect of the employee's employment, except for any excluded fringe benefits. The notional 'individual fringe benefits amount' for Lee is calculated as:

= $1,000(tv) + $2,000(travel) + $3,000(child care)
+ $1,800(restaurant meals)
+ $1,200(holiday)


= $9,000


The notional individual fringe benefits amount is now broken down into 2 components. Those where GST input tax credits were available to the employer and those where no GST input tax credits are available.

Where a GST input tax credit is available - the taxable values of the benefits identified are added together to give what is referred to as the step 3 of subsection (1K) amount (see subsection 5B(1K)), which in Lee's case is:

= $1,000(tv) + $2,000(travel)


= $3,000


The difference between the notional 'individual fringe benefits amount' and the 'step 3 of subsection (1K) amount' calculated for each employee is referred to as the step 4 of subsection (1K) amount (see subsection 5B(1K)),which in Lee's case is:

= $9,000 - $3,000


= $6,000


Step B

The employer (because they are covered by section 57A) is also required to allocate each employee's share of the taxable value of certain benefits which would qualify as excluded fringe benefits (other than car parking fringe benefits, non-salary packaged meal entertainment benefits and non-salary packaged entertainment facility leasing expense benefits). The employee's share of such excluded fringe benefits must also be divided into two parts based on whether GST input tax credits were available, and are referred to as the step 3 and step 4 of subsection (1L) amounts, respectively (see subsection 5B(1L)).

As Lee does not have a share of any excluded benefits other than non-salary packaged meal entertainment, ^[14] the value of the step 3 and step 4 of subsection (1L) amounts for Lee is nil.

Step C

Each employee's step 3 of subsection (1K) and (1L) amounts (i.e., benefits in respect of which GST input tax credits were available) are added together to determine the type 1 individual base non-exempt amount (see subsection 5B(1H)). For Lee this is:

= $3,000 + $0


= $3,000


Similarly, the type 2 individual base non-exempt amount (see subsection 5B(1J)) is calculated as the total of an employee's step 4 of subsection (1K) and (1L) amounts. For Lee this is:

= $6,000 + $0


= $6,000


Step D

Each employee's type 1 and type 2 individual base non-exempt amount is grossed-up (see subsections 5B(1F) and 5B(1G)).

The individual grossed-up type 1 non-exempt amount (see subsection 5B(1F)) for Lee is:

= $3,000 x {(0.49 + 0.1)/[(1 - 0.49) x (1 + 0.1) x 0.49]}


= $6,439


The individual grossed-up type 2 non-exempt amount (see subsection 5B(1G)) for Lee is:

= $6,000 x [1/(1 - 0.49)]


= $11,765


Step E

For each employee, the employer adds the individual grossed-up type 1 non-exempt amount and the individual grossed-up type 2 non-exempt amount to determine the individual grossed-up non-exempt amount (see step 1 in the method statement in subsection 5B(1E)) and for Lee this is:

= $6,439 + $11,765


= $18,204


Step F

The employer must now apply the threshold test for Lee by subtracting $17,667 from each employee's individual grossed-up non-exempt amount. This is the step 2 of subsection 5B(1E) amount (see step 2 in the method statement in subsection 5B(1E)). For Lee this is: ^[15]

= $18,204 - $17,667


= $537


Step G

If the Step F result is positive ^[16] , the employer must now calculate how much of the individual grossed-up non-exempt amount (or Step E amount) relates to benefits covered by subsection 5B(1M) (about salary packaged entertainment benefits) for each employee. ^[17] For Lee the Step E amount includes the following:

Grossed-up GST creditable salary packaged entertainment benefits

= $0 x {(0.49 + 0.1)/[(1 - 0.49) x (1 + 0.1) x 0.49]}


= $0


Grossed-up not GST creditable salary packaged entertainment benefits

= $1,200(holiday) + $1,800(restaurant meals)
x [1/(1 - 0.49)]


= $5882


Grossed-up value of subsection (1M) benefits included in the individual grossed-up non-exempt amount

= $0 + $5882


= $5882


Therefore, the individual grossed-up non-exempt amount (or Step E amount) of $18,204 includes an amount of $5,882 as relating to benefits covered by subsection 5B(1M).

Step H

Each employee's amount calculated under Step F, if it is a positive amount, is reduced by the lesser of $5,000 and the result of Step G (but not below zero) in order to determine the employee's aggregate non-exempt amount (see subsection 5B(1E)) for the 2016-2017 FBT year.

The aggregate non-exempt amount for Lee is:

= $537 - $5,000(lesser of $5,882 and $5,000)


= $0(as the result is less than $0)


This amount of $0 will be included in the employer's fringe benefits taxable amount when calculating the FBT liability in relation to Lee for the 2016-2017 FBT year.

Step I

Lee's reportable fringe benefits amount to be reported on his payment summary is his individual fringe benefits amount grossed-up by the type 2 formula.

= $9,000(see Step A) x [1/(1 - 0.49)]


= $17,647


FBT rebatable employers (section 65J)

3.86 Rebatable employers (certain specified tax-exempt entities) are entitled to have their liability reduced by a rebate of the gross FBT payable (subject to a capping threshold). If the total grossed-up taxable value of certain fringe benefits provided to an employee (which are benefits that are not otherwise excluded, i.e., excluded benefits) is more than the capping threshold a rebate cannot be claimed for the FBT liability on the excess amount.

3.87 As Schedule 3 removes from being an excluded benefit, salary packaged entertainment benefits, without further changes, the grossed-up taxable value of those benefits would be taken into account in determining whether, and by how much, the capping threshold has been exceeded.

3.88 Rather than remove in full the concessional treatment of salary packaged entertainment benefits for these employers, Schedule 3 limits the existing concession by increasing the existing capping threshold by the lesser of:

•

$5,000; and

•

an employee's total grossed-up taxable value of salary packaged entertainment benefits (i.e., those benefits relating to the provision of meal entertainment or entertainment facility leasing expenses).

[Schedule 3, items 7 and 8, subsection 65J(2B) (step 2A in the method statement) and subsection 65J(2J)]

3.89 This effectively provides each employee of those employers a separate single grossed-up cap of $5,000 each FBT year for salary packaged entertainment benefits which remain eligible for the current FBT rebate. Where this cap is exceeded, any benefits may first be taken into account under the existing caps before determining whether there is any excess which will be ineligible for rebate.

Consequential amendments

Definitions

3.90 The definition of 'salary packaging arrangement' has been amended to ensure it captures both benefits provided to employees and benefits provided to associates of an employee where the employee has reduced their salary and wages in return for the benefit. [Schedule 3, item 9, definition of 'salary packaging arrangement' in subsection 136(1)]

3.91 This removes possible ambiguity as to whether the definition was limited to benefits provided only to employees or also covers benefits provided to associates of employees. The intended operation of the definition was to cover benefits provided to both employees and their associates.

Repealing inoperative provisions

3.92 A number of inoperative provisions have been repealed from the FBTAA in order to reduce the overall volume of the Commonwealth statute book. These changes have no substantive effect on the operation of the law. [Schedule 3, items 1, 2 and 7, subsection 5B(1), step 3 (paragraph (a)) of the method statement in subsection 5B(1)(e) and step 2 (paragraph (a) of the method statement in subsection 65J(2B)]

Application and transitional provisions

3.93 Schedule 3 to this Bill applies to the 2016-17 FBT year and later FBT years. [Schedule 3, item 12]

Statement of Compatability with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Limiting fringe benefits tax concessions on salary packaged entertainment benefits

3.94 Schedule 3 to this Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

3.95 Schedule 3 to this Bill amends the FBTAA to limit the concessional treatment of salary packaged entertainment benefits by:

•

removing the reporting exclusion in respect of salary packaged entertainment benefits;

•

removing access to elective valuation rules when valuing salary packaged entertainment benefits to prevent unintended and excessively concessional values being applied to those benefits; and

•

introducing a cap on the total amount of salary packaged entertainment benefits that certain employees can be provided that are exempt from or subject to fringe benefits tax at concessional rates.

Human rights implications

3.96 Schedule 3 does not engage any of the applicable rights or freedoms.

Conclusion

3.97 Schedule 3 is compatible with human rights as it does not raise any human rights issues.

REGULATION IMPACT STATEMENT

Background

3.98 In the 2015-16 Budget, the Government announced that it would introduce a separate single grossed-up cap of $5,000 for salary sacrificed meal entertainment and entertainment facility leasing expenses ('entertainment benefits') for certain employees of NFP organisations, and that all use of salary sacrificed meal entertainment benefits will become reportable, with effect from 1 April 2016.

The problem

3.99 Currently, most salary sacrificed fringe benefits provided to certain employees of NFP organisations are reportable and FBT exempt, or rebatable, only up to a set cap. However, entertainment benefits are specifically excluded from this requirement. That is, these benefits are not required to be reported (including for certain tax and transfer payment income tests) and are not taken into account when considering whether an employee has exceeded the FBT caps. This means that such benefits are uncapped, limited only by the employee's salary.

3.100 These 'excluded' entertainment benefits apply to:

•

employees of public benevolent institutions and health promotion charities that are currently entitled to FBT exempt benefits up to a $30,000 ^[18] cap;

•

employees of public hospitals, NFP hospitals, and public ambulance services that are currently entitled to FBT exempt benefits up to a $17,000 cap; and

•

employees of NFP organisations that are eligible for an FBT rebate (up to a $30,000 cap, with the rebate capped at 48 per cent).

3.101 The uncapped benefits that can be salary sacrificed are very broad, and include holiday accommodation, cruises, weddings, and meals and alcohol at restaurants. The expenditure does not need to be incurred in Australia. Employees of affected NFP organisations are able to reduce their income tax liability by salary sacrificing these entertainment benefits, which is not available to other employees.

3.102 The uncapped entertainment benefit is also inequitable, with greater benefits for employees on higher salaries and those who have greater financial freedom to forgo higher proportions of their salaries on eligible items. Over time, the convenience and marketing of meal entertainment cards has also led to increased take up, increasing the cost to revenue.

3.103 Salary packaging companies have widely promoted and facilitated this uncapped benefit, including through 'meal entertainment cards'. For instance, the quotes below, taken from a sample of salary packaging websites (accessed in August 2015), provide a sense on how this benefit is being promoted:

'Want tasty tax savings for breakfast, lunch and dinner? Whenever you dine out with friends, family or colleagues, simply swipe your card and enjoy tax-free meals!' - PBI Solutions

'All you need to do to package this item is go out for a meal - there are savings in every bite you take!' - Smartsalary

'The EPAC Meal Entertainment Card allows you to set aside money from each pay to put exclusively towards dining out. This money is transferred to your card before it's subjected to income tax, so it effectively grants you tax free dining!' - EPAC

3.104 Treasury has estimated the cost to revenue, in terms of revenue forgone, in its annual Tax Expenditure Statement arising from the FBT exemption for entertainment benefits. According to the latest Tax Expenditure Statement, released in January 2015, the estimated revenue forgone was $350 million in 2010-11 and is projected to rise to $545 million in 2017-18.

Case for government action / Objective of reform

3.105 The case for action is based on the Government's commitment, as outlined in the 2015-16 Budget, to return the budget to surplus as soon as possible, and forms part of the Government's objective to improve the fairness of tax rules and benefits systems.

3.106 The objectives of the reform are:

•

reflect developments that no longer warrant continued uncapped exemptions for entertainment benefits that are salary sacrificed; and

•

limiting the use of salary sacrificed entertainment benefits, to improve the fairness of the FBT system.

3.107 Entertainment benefits were originally excluded from reporting and the FBT caps on compliance costs grounds because, at the time, many of the benefits were not easily attributable to individuals. However, this rationale is no longer appropriate for salary sacrificing arrangements that allow benefits to be easily valued and attributed to an individual employee, such as the through the use of meal entertainment cards.

Policy options

3.108 There are four options to deal with entertainment benefits:

•

Option 1: maintain the status quo;

•

Option 2: include salary sacrificed entertainment benefits under the existing FBT exemption/rebate caps;

•

Option 3: introduce a separate cap and allow salary sacrificed entertainment benefits up to $5,000 to be exempt. Benefits exceeding $5,000 would be counted in calculating whether an employee exceeds their FBT exemption/rebate caps; and

•

Option 4: introduce a separate cap and allow salary sacrificed entertainment benefits up to $2,000 to be exempt. Benefits exceeding $2,000 would be counted in calculating whether an employee exceeds their FBT exemption/rebate caps.

3.109 Only salary sacrificed entertainment benefits will be affected by these options. Non salary sacrificed entertainment benefits, such as in-house canteens, will not be affected.

3.110 Option 1 would preserve the current FBT treatment of entertainment benefits. Option 2 would mean that salary sacrificed entertainment benefits would be taken into account under the standard FBT caps and no longer treated separately. Options 3 and 4 are closely related to each other; the only difference is the size of the cap. These options would retain concessional FBT treatment for entertainment benefits.

3.111 With the exception of Option 1, all of the proposed options require legislative amendments and would apply prospectively from 1 April 2016 to coincide with the start of the new FBT year. This start date ensures that affected employees have time to adjust to the new arrangements, without existing arrangements being affected.

Cost benefit analysis of each option / Impact analysis

3.112 If the status quo is not maintained, the proposed options will overwhelmingly impact employees of certain NFP organisations who salary sacrifice entertainment benefits. Although the costings make certain assumptions on the uptake of entertainment benefits, the likely impact of this proposal on affected employees is difficult to verify, as entertainment benefits are not reportable for FBT purposes. However, some insights can be gained from examining the data relating to the current FBT caps based on tax returns for individuals employed by NFP organisations.

3.113 In relation to the FBT exemptions cap, the data indicates:

•

Of the approximately 920,000 individuals employed by eligible NFP organisations, 53 per cent had reportable fringe benefits in 2012-13, meaning that 47 per cent of individuals had no reportable fringe benefits. As individuals that do not report any fringe benefits are unlikely to utilise entertainment benefits, almost half of eligible NFP employees will not be affected by the proposed options that would eliminate or cap entertainment benefits. Even if they happen to do so, they will be able to claim these benefits up to the relevant caps.

•

For those employed in public benevolent institutions and health promotion charities, around 40 per cent are close (that is, within $500) to breaching the exemption cap. A further 11 per cent have a buffer of up to $2,000 before they exceed the cap. Around one third of individuals had a buffer of more than $5,000 before they exceed the cap.

•

For those employed in public, NFP hospital and public ambulance services, around 67 per cent are close (that is, within $500) to breaching the exemption cap. A further 11 per cent have a buffer of up to $2,000 before they exceed the cap. Around 10 per cent of individuals had a buffer of more than $5,000 before they exceed the cap.

3.114 For individuals with a reportable fringe benefit from a rebatable NFP employer in 2012-13, around 9 per cent are close (that is, within $500) to breaching the $30,000 cap. However, around 73 per cent have a buffer of more than $5,000 before they breach the cap.

3.115 This suggests that for employees of NFP organisations that are eligible for an FBT rebate, the proposed options are only likely to adversely affect a small percentage of individuals, particularly as the entertainment benefits for this group is less attractive due to the partial rebate.

3.116 Anecdotal evidence indicates that the take up of salary packaged entertainment benefits appears to be lower than salary packaging items under the existing exemption caps, although take up rates vary between eligible NFP organisations. Voluntarily provided data by salary packaging providers indicates that entertainment benefits can range from an average of $2,400 to as high as $8,500 per annum, with a simple average of around $5,500.

3.117 Option 1 would not meet the Government's objectives to repair the budget nor improve the fairness of the tax system.

3.118 Option 2 means employees currently claiming meal entertainment benefits that are already close to breaching their current exemption caps will be most adversely affected as they will be unable to absorb any additional fringe benefits without exceeding the FBT caps. These individuals are likely to reconsider whether it is in their interests to continue with claiming entertainment benefits as FBT applies at the highest marginal tax rate. Options 3 and 4 mitigate these adverse impacts by providing scope for affected employees to continue to claim entertainment benefits by retaining concessional treatment for these benefits.

3.119 As the salary packaging industry has promoted the utilisation of these entertainment benefits, they are also likely to be adversely affected by these proposed options. However, they have previously indicated that should entertainment benefits be reformed, rather than removing the benefit entirely, a cap on entertainment benefits should be imposed.

Compliance cost impacts

3.120 In terms of tax compliance obligations, however, it is employers that are responsible for reporting and paying FBT even though employees are the main beneficiaries of the FBT reporting exemption for salary sacrificed entertainment benefits, as they are able to reduce their income tax liability.

3.121 Options 2, 3 and 4 also make salary sacrificed entertainment benefits reportable for all employers, not just NFP organisations, to ensure consistency in treatment. However, it is understood that outside the NFP sector, there is very little, if any, uptake of salary packaging arrangements for entertainment benefits given the lack of financial advantages from doing so. Given this, the focus of the compliance costs impacts will be on NFP employers.

3.122 There are around 5,700 NFP organisations entitled to the FBT exemption and around 3,400 NFP organisations entitled to the FBT rebate. Around 20 per cent of FBT exempt and around 16 per cent of rebatable NFP organisations did not have any reportable fringe benefits in 2012-13. Based on the number of NFP organisations that have reportable fringe benefits in 2012-13, the proposed options that involve changing the status quo are expected to affect around 7,400 NFP organisations.

3.123 For Option 2, employers, when completing their FBT tax returns, will have to incorporate any salary sacrificed entertainment and entertainment facility leasing expenses. However, as this option utilises existing infrastructure (as this option involves including a previously excluded benefit into the existing FBT calculation) the regulatory impacts are comparatively smaller than Options 3 and 4. Options 3 and 4 will mean that employers would have to deal with a separate cap, adding to administrative and compliance costs, while new Australian Taxation Office forms and software changes to deal with the separate cap will likely need to be implemented.

3.124 This qualitative analysis is confirmed by the quantitative costings. Given the similarities between Options 3 and 4, the regulatory costs are identical (which is based on an assumption of an hourly wage rate of $65.45). Table 3.2 shows the regulatory costs for Option 3, which is the preferred option. Option 2 is estimated to impose a regulatory burden of $0.21 million on community organisations.

3.125 For affected NFP employers, there will be regulatory start-up costs associated with education, notifying their employees of the proposed change, and implementing any changes. Options 3 and 4 are expected to result in ongoing costs as employers will need to allocate fringe benefits to two separate caps, which will not be required under Option 2.

Table 3.2: Regulatory costing for Option 3 ^[19]

Consultation

3.126 The tax proposals have been informed by three separate independent reviews which have examined the FBT treatment for NFP organisations.

3.127 Two of these reviews (Contribution of the Not-for-Profit Sector, Productivity Commission Research Report 2010 and the Not-for-profit Sector Tax Concession Working Group 2013) found or recommended that the uncapped entertainment benefits should either be limited or abolished. While the Australia's Future Tax System Review in 2010 did not specifically make a recommendation on this uncapped benefit, the review instead recommended the gradual phase out of the FBT caps.

3.128 While limited consultation on the proposals reflects the cabinet-in-confidence nature of the decision making process, it is noted that extensive consultations were a feature of each of these past reviews.

3.129 Public consultation took place on the draft legislation. The objective of this consultation was to ensure that the legislation delivered on its policy intent and did not result in any unintended consequences. The exposure draft legislation and explanatory materials were released on the Treasury website in June 2015.

3.130 None of the submissions raised technical drafting issues with the exposure draft legislation.

3.131 While submissions raised concerns about the impact of the measure on the NFP sector, most submissions were supportive of imposing a cap on entertainment benefits. However, there was a general view that the $5,000 cap was too low and needed to be raised. Figures of between $10,000 and $20,000 were the most common suggestions for the revised cap. A few submissions were against the policy of treating entertainment benefits as reportable fringe benefits as they were concerned about the flow on implications from taking into account such benefits for certain calculations such as Higher Education Loan Program debts. A few submissions were opposed to the introduction of a cap, as it would affect their ability to attract, recruit and retain quality staff.

Conclusion and recommended option

3.132 The preferred option is to introduce a separate $5,000 cap on entertainment benefits. This option strikes a balance between the Government's objectives to improve fairness in the tax system and repairing the budget. By not completely eliminating the uncapped benefits, the preferred option retains concessional treatment and reduces the potential adverse effects on the NFP sector. This measure is estimated to have a gain to revenue of $295.0 million over the forward estimates period.

Implementation and evaluation

3.133 Legislation is required to implement the proposed measure to introduce a separate $5,000 cap on entertainment benefits.

3.134 As the Government has set the start date as 1 April 2016, the proposed measure needs to be enacted prior to this start date to provide certainty to affected NFP organisations and their employees.

3.135 The Commissioner of Taxation would be responsible for administering the tax rules. The Australian Taxation Office will monitor compliance and will advise Treasury if any problems are identified so remedial action, if appropriate, can be considered.