Senate

Explanatory Memorandum

(Circulated by the authority of the Treasurer the Hon Ralph Willis, M.P.)

Chapter 24 - Entertainment expense payments

Overview

24.1 This Bill will amend the Fringe Benefits Tax Assessment Act 1986 (FBTAA) to include a provision which will reduce the taxable value of a benefit which currently arises where an employer makes a payment or reimbursement to an employee to cover expenses incurred by the employee in entertaining clients or other persons on behalf of the employer. The taxable value will be reduced by the amount of expenditure incurred on these other persons who are not associates of the employee. Only the part of the payment or reimbursement that relates to the expenditure on the employee or an associate will be included in the taxable value of the fringe benefit.

24.2 The Bill will also insert a provision into the Income Tax Assessment Act 1936 (ITAA) which will ensure that the amount by which the benefit is reduced will be non-deductible for income tax purposes.

Purpose of amendments

24.3 As part of the 1993 Budget measures, amendments were made to the FBTAA and the Income Tax Assessment Act (ITAA) so that certain benefits provided by an employer to an employee or an associate of the employee would become liable to fringe benefits tax (FBT). The amendments apply from 1 April 1994.

24.4 An effect of these amendments is that where an employee entertains persons on behalf of his or her employer and is subsequently reimbursed by the employer for the cost of providing the entertainment, the full amount of the reimbursement (i.e. for the cost of entertaining the employee (or associates) as well as other persons) is taxable to the employer as an expense payment fringe benefit.

24.5 This Bill will insert a provision into the FBTAA which will ensure that taxable value of the benefit which arises in these circumstances can be reduced by the amount of expenditure incurred by the employee on entertaining, on behalf of the employer, other persons who are not associates of the employee.

24.6 An amendment will also be made to the Income Tax Assessment Act 1936 (ITAA) to ensure that the amount by which the benefit is reduced will be non-deductible for income tax purposes [Clause 128].

Date of effect

24.7 The amendments will apply from 1 April 1994 [Clause 131, Clause 134].

Background to the legislation

24.8 In Taxation (Deficit Reduction) Act (No. 1) 1993 , amendments were made to the FBTAA and the ITAA so that certain benefits provided by an employer to an employee or associate of the employee would become liable to FBT.

24.9 The benefits affected include the provision of entertainment.

24.10 Prior to the amendments, all of these benefits were fringe benefits under the FBTAA. The benefits could be expense payment fringe benefits, property fringe benefits, or residual fringe benefits depending on the type of benefits and how the benefits were provided (including how they were paid for). However, because the expense of providing these benefits was non-deductible under the ITAA, the taxable values of these fringe benefits were reduced by the non-deductible amount. Accordingly, no FBT was payable on these benefits.

24.11 As a result of the amendments, employers will be able to claim a deduction under the ITAA for the cost of providing these benefits to employees or associates of employees. Because the cost of providing these benefits will be deductible to the employer, their values will not be reduced for FBT purposes and a full FBT liability will arise.

24.12 Where these benefits are provided in the form of an expense payment fringe benefit (i.e. the employer pays the liability of the employee either directly to the employee or by reimbursement) the total amount of the payment becomes a fringe benefit. This is the result irrespective of whether the payment or reimbursement relates to a benefit provided to a person other than the employee or an associate of the employee.

24.13 Therefore, where an employee entertains persons on behalf of his or her employer and is subsequently reimbursed by the employer for the cost of providing the entertainment, the full amount of the reimbursement (i.e. the cost of entertaining the employee (or associates) as well as other persons) is taxable to the employer as an expense payment fringe benefit.

24.14 However, more favourable treatment is available under the FBTAA if the employer (rather than the employee) pays for the cost of providing the entertainment. In this case, the only fringe benefit that arises is the cost of the entertainment provided to the employee (or associate). The benefit provided is a residual fringe benefit.

24.15 This Bill will amend the FBTAA to ensure uniform treatment for the provision of entertainment either as a residual fringe benefit or an expense payment fringe benefit [Clause 128].

Explanation of amendments

24.16 The amendment will insert section 63A into Division 14 of Part III of the FBTAA. This section will operate to reduce the taxable value of an expense payment fringe benefit which arises where an employer makes a payment or reimburses an employee for expenditure incurred on entertaining persons other than the employee or associate [Clause 130].

24.17 For the purposes of this section, the provision of entertainment takes the same meaning as that set out in subsection 51AE(3) of the ITAA.

24.18 Subsection 63A(2) will provide that where the taxable value of the expense payment fringe benefit has been reduced under Division 5 of Part III of the FBTAA [Expense Payments Fringe Benefits] no further reduction in the taxable value will be allowed under subsection 63A(1) in respect of the same amount. An example as to how this provision may operate is as follows:

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An employee pays for the lunch of a client of the employer at an "eligible seminar" as defined in subsection 51AE(1) of the ITAA. The employer reimburses the employee for the expenditure incurred by the employee on his lunch as well as the client's lunch. Subsection 63A(2) would operate to deny the employer a reduction in the taxable value of the benefit under subsection 63(A)(1) as the taxable value would have already been reduced to nil because of the 'otherwise deductible' provisions of section 24 of the FBTAA. This is because such expenditure incurred by an employee is not denied deductibility under subsection 51(1) because of the provisions of subsection 51AE(5).

24.19 The Bill will also amend subsection 51AE(5AA) of the Income Tax Assessment Act 1936 (ITAA) and insert subsection 51AE(5AB) to ensure that where the taxable value of a benefit is reduced under section 63A of the FBTAA, the amount by which the taxable value is reduced will not be deductible for income tax purposes [Clause 133] . Subsection 51AE(5AA) provides that where entertainment provided by an employer is a fringe benefit then subsection 51AE(4) does not preclude the employer from claiming under subsection 51(1) of the ITAA a deduction for the cost of providing that benefit.