Don’t make a meal of changes to fringe benefit tax concessions for salary packaged meal and entertainment benefits

In May this year, the federal budget confirmed the government would introduce a grossed-up cap of $5000 per year on the FBT concessions for salary-sacrificed meal entertainment and entertainment facility leasing expenses (meal entertainment benefits) for employees of certain not-for-profit (NFP) organisations (i.e. public and not-for-profit hospitals, public ambulance services, public benevolent institutions – except hospitals – and health promotion charities).

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

The FBT treatment of meal entertainment and entertainment facility leasing expense benefits has been reviewed by a number of different inquiries and some changes were bound to eventuate.

A 2010 Productivity Commission report observed:

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 …

The FBT cap on exempt benefits provided by NFPs is currently $17,667 for public and not-for-profit hospitals and public ambulance services and $31,177 for public benevolent institutions (except hospitals) and health promotion charities. In addition to the capped exemptions, employees of these NFPs can also salary sacrifice meal entertainment benefits with no FBT payable by the employer. It is these benefits that will now be subject to a separate grossed-up cap of $5000 per year per employee. This is intended to apply from 1 April 2016.

All meal entertainment benefits will also become reportable benefits and thus will count towards an employee’s “reportable fringe benefits amount” for an income year. An employee has a reportable fringe benefits amount” if their individual fringe benefits amount for the relevant FBT year (i.e. the FBT year ending on the previous 31 March) exceeds $2000. At present, meal entertainment fringe benefits are “excluded benefits” and therefore are ignored in working out an employee’s reportable fringe benefits amount.

The government has now released draft legislation to implement this change.

Under that legislation, the law would be amended to introduce a separate single grossed-up cap of $5000 for salary packaged meal entertainment and entertainment facility leasing expenses (entertainment benefits) for employees of public benevolent institutions, health promotion charities and employees of public and not-for profit-hospitals and public ambulance services. Currently, these employees can salary package entertainment benefits (without limit i.e. uncapped) with no FBT payable by the employer and without the benefits being reported.

The draft legislation also proposes to amend the definition of “salary packaging arrangement” 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.

Also under the changes, all salary packaged entertainment benefits will become reportable fringe benefits. This will be achieved through the removal of an existing reporting exclusion. 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”. Employers should take note of this.

The proposed changes will remove access to elective valuation rules when valuing salary packaged entertainment benefits to prevent unintended and excessively concessional values being applied to those benefits. To ensure that entertainment fringe benefits are allocated an appropriate taxable value (as determined under the core FBT rules), the elective valuation regimes will not be able to 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.

According to the government, 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.

The draft legislation would introduce some significant FBT changes that employers will need to become familiar with.

Terry Hayes is the editor-in-chief of tax news reporting at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.