Business entertainment tax deduction

Back in the late 80’s, the Government became all concerned about the Corporate Fat Cats dining-out and claiming tax deductions in the guise that this was related to marketing and “doing-business”. So, they shut it down.

It’s now one of the most complicated areas of tax law involving tax deductibility, Fringe Benefits Tax (FBT), Goods and Services Tax (GST) and a host of other accounting and tax nightmares to negotiate through. Get it wrong and ATO might have a field-day.

What’s “entertainment”

deductible tax entertainment expensesIn broad terms, it’s the provision of food/drink/recreation consumed outside the work premises, paid for by an employer and provided to employees, their associates and/or clients.

If it’s supplied to employees, its most likely tax deductible, GST credits are allowed but subject to Fringe Benefits Tax (if it’s not minor and infrequent – see below) and if it’s supplied to Clients, its most likely not tax deductible, no GST credits are allowed but not subject to Fringe Benefits Tax (because by definition clients aren’t employees).

It also includes any travel expenses associated with the food or drink provided whether its consumed or not.

Recreation is also considered Entertainment when provided to employees and paid for by their employer This could include Theatre, Footy or Theme Park Tickets by way of example. If it’s work-related physical activities like Team-Building events, it would be tax deductible, not subject to FBT and GST credits are claimable.

What entertainment expenses are tax deductible

If food and drink are supplied inside or outside the work premises in conjunction with some kind of Training Seminar or Conference and the primary purpose is to provide sustenance to attendees, the cost should be tax deductible and GST can be claimed with no FBT consequences, provided it doesn’t include alcohol. If the alcohol component can be separated out, the food & alcohol will be tax deductible, but the alcohol costs will be subject to FBT.

Meals consumed by employees on overnight business travel is not entertainment and is tax deductible to the employer provided it is reasonable and the expense is able to be proven.

Also, if the entertainment is minor (less than $300 per-go) and infrequent (a dictionary definition is “not occurring often; rare”), then it’s not tax deductible but also not subject to FBT. So, if the payment of a few take-away coffees during the week amounts to say $20, even though the cost is “minor”, it’s not “infrequent” so the total cost is caught by the entertainment rules.

The following are also examples of expenses that are tax deductible and not subject to FBT:

Tea/coffee provided at work;

Birthday cake consumed at work with morning Tea and Coffee;

Light meals consumed at work whilst working overtime;

A restaurant meal consumed by a Food Critic.

Xmas Parties

So, Christmas is supposed to be a time of joy and good-tidings – not for the Corporate and Tax Accountants who have-to clean up the financial mess left after the celebrations.

If a Xmas party is provided to employees and/or clients on business-premises and on a “working day” then on a cost/head basis:

If only employees attend there’s no FBT as its an exempt property fringe benefit;

If employee’s associates attend and provided it’s less than $300/head it’s not tax deductible and not subject to FBT and no GST credits can be claimed;

If clients attend then their cost is not tax deductible and no FBT arises.

If it’s provided to employees off-business premises and it costs less than $300/head, same result as for employees above. If it costs $300 or more/head, its tax deductible but subject to FBT and GST credits can be claimed.

If clients are included in the off-business premises celebrations, their cost/head is not tax deductible, and no GST credits can be claimed.

A bottle of wine at a Xmas party is however fully tax deductible, fully creditable for GST and not subject to FBT as this is not considered to be entertainment.

If you want to give your staff a gift at Xmas time and its not entertainment related, costs less than $300 or is a personal device like a Laptop or Phone that’s used primarily for work, it will be tax deductible, not subject to FBT and GST creditable.

Entertainment provided by third parties

Say a client invites “someone” from your Organisation to a game of footy and the person in charge of allocating those tickets decides the staff member in charge of managing the client should go. Even though the employer hasn’t paid for the tickets, they may still be subject to FBT because in the eyes of the law, they facilitated the benefit.

Things may be quite different however and FBT probably wouldn’t apply to the employer if the client had invited the staff member directly because the employer then wasn’t involved in “facilitating” the benefit.

How can FBT and all of this tax and accounting work be avoided?

Simple, if its entertainment, don’t charge it as an expense to your business but put the cost to a Directors or Shareholder’s loan account, then pay it out with either a salary, dividend or a cash contribution where allowable – problem solved!

Like all tax matters however, recordkeeping and documentation is paramount because without it, it would be difficult to argue a reasonable case if ever audited.

NBC are experts in the area of Taxation including Entertainment, FBT and GST. For further advice, please consult your usual NBC Accountant.