2022 FBT Series: Analysing entertainment expenses in a world impacted by COVID-19

2022 FBT Series: Analysing entertainment expenses in a world impacted by COVID-19

26 May 2022

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The various impacts of COVID-19 in recent years has affected the entertainment-related spend for many organisations. The purpose of this article is to highlight some of the key ways we are seeing this affect 2022 Fringe Benefits Tax (FBT) returns.

What are the FBT consequences of providing takeaway or home delivery to employees during lockdown?

The closure of restaurants and public venues to dine-in service during the course of the 2022 FBT year led to many employers providing meals to employees by way of takeaway or home delivery. 

Traditionally, such benefits have not often given rise to meal entertainment. This has started to shift however, as employers turn to different ways to entertain their employees (for example, through virtual social gatherings).

Implications for Taxable Employers

Determining whether the provision of food or drink constitutes meal entertainment requires consideration of the criteria set out in Taxation Ruling TR 97/17. More specifically, consideration must be given to the circumstances surrounding the provision of food and drink, including:

1. Why the food or drink is being provided;

2. What type of food or drink is being provided;

3. When that food or drink is being provided; and

4. Where the food or drink is being provided.

While these factors continue to be relevant, the fourth factor (the question of ‘where’ the food was provided) in particular should be considered in the context of restaurant closures, restaurant capacity limits and/or lockdowns, which may prevent or otherwise deter employers from entertaining staff in the same manner that they have historically. Within such a context, the significance of ‘where’ the food or drink was provided arguably becomes more neutral, where employers provide food and drink under circumstances which, through an evaluation of factors one to three, indicate entertainment has been provided. 

An example of this type of outcome could be a virtual end of financial year celebration for staff, during which an employer orders and arranges for elaborate meals to be delivered to the attending employees at their homes, whilst they participate in online activities. A reasonable conclusion in these circumstances could be that the food and drink constitutes meal entertainment. This can be contrasted with an employer that reimburses an employee who orders takeaway whilst working at home one evening, by reason of the employee having to work late.

For FBT purposes, where meal entertainment has been provided, employers can elect to adopt the ‘actual’ method, the 50/50 method or the 12-week register method. Where food or drinks do not constitute meal entertainment, a fringe benefit may still arise (for example, as a property or expense benefit), however employers may consider concessions such as the minor benefit exemption, and the ‘on premises’ exemption (as would be the case, where the ‘actual’ method is adopted for meal entertainment expenditure).

Implications for Not-for-Profit (NFP) Employers

For NFP employers, the guidance set out in TR 97/17 as explained above is similarly relevant. Establishing that food or drink is entertainment in nature may be particularly important for some NFPs, where such benefits are the subject of salary-packaging arrangements for employees. 

The ATO have issued guidance for NFPs indicating that they won’t dedicate compliance resources to investigate whether food and drink has correctly been treated as meal entertainment, where:

• The meal was provided while restaurants and public venues were closed to dine-in services, due to COVID-19 state public health orders; and
• The supplier of the food was authorised as a meal entertainment provider from 1 April 2021.

This clarification should provide NFPs greater certainty, where they provide salary-packaged meal entertainment benefits and are eligible for an FBT rebate or exemption (subject to the relevant capping threshold).

What are the FBT consequences of providing meals to employees whilst travelling, and have or are at risk of obtaining COVID-19?

Employers may have faced situations during the FBT year where an employee had been directed to isolate or quarantine, to comply with State public health orders. Certain benefits provided to employees in these instances may be exempt from FBT as emergency assistance under section 58N of the Fringe Benefits Tax Assessment Act 1986 (FBTAA).

Under this exemption, employers providing emergency accommodation, food and transport to an employee will not be liable for FBT where the benefit is to provide immediate relief to employees at risk of being affected by COVID-19. As per ATO guidance, this includes expenses incurred for food and temporary accommodation if an employee is unable to travel due to restrictions (domestic / interstate / intrastate) and benefits which enable an employee to self-isolate or quarantine.

Flowing from the above, based on current ATO guidance, additional food costs if forced to isolate whilst travelling on business should be considered "emergency assistance" as it is a benefit that allows an employee to self-isolate or quarantine.

Considering the appropriate valuation methodology

Some employers may find benefit in applying the ‘actual’ method, rather than the ‘50/50’ method, for meal entertainment benefits.

This is because of the substantial periods of lockdown across certain States, and the ability (under the ‘actual’ method) to exempt benefits provided that are less than $300 (GST inclusive), which are provided infrequently and irregularly to the recipient employees.

Of course, there may be reasons why some employers will continue to prefer the ‘50/50’ method - the simplicity of this concessional valuation method is among the top reasons. Although, if your organisation experienced a slow-down in the provision of entertainment related benefits, we recommend at least considering the potential cost-savings associated with the ‘actual’ method, if it were adopted, for the 2022 FBT year.

If you have any questions about your FBT obligations, please reach out to your PwC specialist.