Changes to Entertainment Benefits for NFPs

It’s time to consider the changes to the new entertainment benefits for Not for Profits, writes Mariana von Lucken, Partner at HLB Mann Judd Tax Consulting in Sydney.

Public Health and Not for Profit sectors rely on salary sacrificed entertainment benefits to help “top up” salaries.

Unfortunately, despite a significant number of submissions to government warning against proposed changes to current salary sacrifice benefits, new entertainment capping rules will apply from 1 April 2016.

Currently employees of public benevolent institutions (PBI) and health promotion charities (HPC) have a standard $30,000 fringe benefits tax (FBT) exemption cap (a “general” cap).

Employees of public and Not for Profit hospitals and public ambulance services have a standard $17,000 FBT exemption cap. (Due to the Temporary Budget Repair Levy, the general caps will be $31,177 and $17,667 respectively for the year ending 31 March 2016.)

Meal entertainment and entertainment facility leasing expenses (EFLE) are able to be salary sacrificed outside these general caps, i.e. they are not subject to FBT, are not reportable, and can be of any amount.

What has changed?

The government wants to place limitations on such expenses. Amendments to the Fringe Benefits Tax Assessment Act 1986 will introduce an additional separate grossed-up cap of $5,000 on top of the existing (general) caps, for salary sacrificed meal entertainment and EFLE for certain employees of NFPs – this equals about $2,550 in actual expenses.

This extra amount will:

• not be subject to FBT
• be reportable
• apply from 1 April 2016.

Two caps will exist:

1. general expenses
2. meal entertainment and EFLE (the “new” cap).

Any excess over $5,000 in salary packaged meal entertainment and EFLE will be part of the “general” cap, i.e. if an employee salary sacrifices $23,000 “other” expenses and $7,000 meal entertainment and EFLE, they can have $5,000 of the meal entertainment and EFLE in the new $5,000 cap, and $25,000 in the “general” cap. This makes $30,000 of expenses (grossed up) free from FBT.

Any salary packaged meal entertainment and EFLE are required to be reported in an employee’s payment summary.

Who is affected?

Any employee in the Public Health and NFP sectors who package meal entertainment or Holiday Accommodation/Venue Hire benefits. Unfortunately there was no recognition of the fact that this benefit is relied on by the NFP sector to “top up” salaries in line with fair real value.

Things to consider:

• Work out what is going to be the entity’s policy on providing meal entertainment and EFLE – keeping in mind that any such expenses over the $5,000 grossed up amount will count to the general cap (the current $30,000 cap that is in place).

• The change occurs from 1 April 2016, so prior to that date you can continue to salary package meal entertainment and EFLE i.e. holiday accommodation costs. After that date the new rules need to be taken into account.

• Be aware of the changes from an employer’s perspective, and ensure that your systems are in place to capture the change from 1 April 2016.

• Make sure that your employees are aware of these changes, and communicate to them what it might mean to other benefits they may be receiving, for example HECS, child care payments and more (this will depend on individuals’ personal circumstances).

• Possibly allowing prepayments (e.g. holidays, venue hire) to be salary packaged prior to 1 April 2016.

The announcement is silent as to whether or not it will allow any pre-April 2016 arrangements to apply post that date. For example, if you have an agreement which is dated pre-April 2016 to provide any meal entertainment or EFLE of $10,000 after that date, say May 2016, that would exceed the gross up amount of $5,000 (assuming your exempt cap of $30,000 is already utilised). It is unclear if the excess will be taxable as the agreement was entered into prior to the new rules applying.

• Possibly pay out in full any accrued salary sacrifice balances for entertainment prior to 1 April 2016.

If you have any queries or concerns in relation to the introduction of this new legislation, or would simply like some further information, please get in touch with your local HLB Mann Judd contact.