You may have recently read or heard about a little Canberra café – Patissez – sending the internet into a frenzy over its scarily named ‘Freakshow’ shakes. Well, this mini phenomenon came up in conversation today, and led to a discussion around what the fringe benefits tax (FBT) consequences might be if an employer provided one of these shakes to an employee.
FBT is perhaps one of most misunderstood areas of the Australian taxation system, yet it applies whenever an employee (or an employee’s associate, or a former employee) receives something of value from their employer (or, indeed someone else if their employer is a party to the arrangement) other than wages or salary.
The complexity of the FBT law – in particular the law’s application to the provision of food and drink – is readily demonstrated by attempting to answer the following question:
If an employer provides a freakshow milkshake to an employee, does an FBT liability arise?
In order to answer the question, the following further questions must be considered:
- Does the provision of food and drink constitute ‘entertainment’? and
- Does an exemption apply?
If the employer is a tax-exempt body, additional issues arise, so lets proceed on the basis that the employer in question is a tax paying organisation.
Is it entertainment?
The ATO suggests a why, what, when and where test to decide whether or not food and drink constitute entertainment. That is:
- Why is the food or drink being provided?
- What type of food or drink is being provided?
- When is the food or drink being provided?
- Where is the food or drink being provided?
Having regard to the elaborate nature of these freakshakes (we are not talking about a light working lunch of sandwiches and mineral water here), not to mention the undeniable spectacle that they are designed to create, the provision of a freakshake will more likely than not constitute entertainment.
Does an exemption apply?
The two main exemptions that can apply when an employer provides food and drink by way of entertainment to an employee:
- Food and drink consumed on business premises on a working day (the property exemption); and
- The minor benefits exemption.
Food and drink provided to, and consumed by, a current employee on business premises on a working day are exempt property benefits, provided the food and drink are not
- valued as meal entertainment under the FBT law;
- provided under a salary sacrifice arrangement;
- provided to an associate of an employee or to a former employee.
The exemption from FBT applies even if the food and drink were prepared elsewhere (for example takeaway food and drink consumed on business premises) and regardless of whether or not the food and drink constitutes entertainment.
Therefore, takeaway freakshakes brought back to the office for consumption on a workday by current employees, and valued as property fringe benefits, will be exempt from FBT.
Alternatively, a fringe benefit with a taxable value under $300 that would be unreasonable to treat as a fringe benefit is exempt from FBT under the minor benefits exemption. This exemption cannot apply to entertainment benefits provided by tax exempt bodies, to entertainment valued as meal entertainment with taxable value calculated using the 50:50 split method, or if the benefit is provided under a salary sacrifice arrangement.
Accordingly, an employer can claim the minor benefits exemption even if employees consume freakshakes at the café (if they can get a table), provided this benefit is provided infrequently and irregularly and not valued as meal entertainment using the 50:50 method.
One last point to remember, is that if a meal entertainment fringe benefit is exempt from FBT, you cannot claim the cost as an income tax deduction, nor can you claim any GST credits for GST incurred in providing the benefit.
Still confused? The FBT law is a complex web of valuations, reductions and exemptions; if you are an employer and want some certainty that you are accurately identifying the fringe benefits you are providing, please contact us to discuss your situation.