Entertainment expenses - what can I claim?

Entertainment expenses - what can I claim?

The days of the Long Lunches of the 1980s may be well behind us, but there is still a lot of confusion around when entertainment expenses can be claimed as a tax deduction and how this interacts with Fringe Benefits Tax (FBT).  It can be easy to make mistakes that can add a lot to your business's tax bill! 

When is food and drink (and other entertainment) deductible?

It can be difficult, at first glance, to determine where you draw the line between a deductible food and drink expense , non-deductible minor entertainment expense, and entertainment expense that is subject to FBT (and therefore deductible if you pay FBT). 

For deductible food and drink, the rule of thumb could be that it's only deductible if it's not provided for employees to enjoy themselves!  Generally, the ATO will not treat food and drink as entertainment if it is provided purely to allow employees to complete the working day in comfort.  So the coffee, tea, fruit and biscuits in the staff kitchen are not entertainment expenses and are therefore deductible to the business.

Similarly, if the food and drink is provided during a work seminar or business planning meeting, it is more likely that the expense will be viewed as deductible rather than entertainment.  Note, however, that this can change if there is alcohol involved.

If a more elaborate meal is provided (especially if alcohol is involved) and/or if the food and drink is being provided in a restaurant/hotel and outside office hours, the ATO would be more likely to view this as an entertainment expense.  Once you come under the entertainment expense classification, you need to determine if your expense falls under an "exempt minor benefit" for FBT.  If it is exempt from FBT, it is also not deductible to your business.  If you are liable for FBT on the expense, then the expense will be deductible to your business.

Confusing? You bet!  Here are a couple of examples to help explain how FBT and tax deductibility interact:

Christmas party at the office

A company holds a Christmas lunch at its office for staff, their partners and some clients.  Food and drink is provided and taxi travel home is also offered.  Cost per head is $125.

This is classified as entertainment, because the purpose is social (no work being done).

The costs for food, drink and taxi travel for employees and their partners are all exempt, but for different reasons:

• Food and drink for employee minor exempt benefit (under $300) and on a work day at the office
• Taxi for employee specific FBT exemption for taxi travel for an employee directly from the workplace
• Food, drink and travel for partner minor exempt benefit (under $300)

As the employee and partner's costs are exempt for FBT, they are not deductible to the business.

There is no FBT payable on benefits provided to clients, therefore no tax deduction is allowed on these costs either.

As no tax deduction is allowed on the expenses, the company cannot claim any input tax credits on the expenses for GST purposes.

Employee reward

A company wishes to reward the employee who makes the most sales for the quarter.  The reward is a holiday package worth $800.

• The provision of a holiday is considered an entertainment expense.
• No FBT exemption applies as the cost of the package is over the $300 minor benefit exemption.
• The company will need to pay FBT on the benefit provided to the employee.
• The company can claim an income tax deduction for both the cost of the holiday package (and claim GST on the expense) and on the FBT paid.

What are some other examples of entertainment?

Meals and employee rewards are not the only examples of expenses that the ATO classifies as entertainment.  These are some of the other expenses that can be classified as entertainment:

• Sending flowers to clients or employees
• Expenses relating to a corporate golf day
• Membership of a sporting club
• Theatre or movie tickets
• A joy flight or harbour cruise
• A gym membership
• Accommodation and travel in connection with entertaining clients and/or employees over a weekend at a tourist resort

How do I make sure I get it right?

Due to the complex nature of the interaction between FBT, tax deductibility and GST, it pays to check before claiming GST or tax deductions on expenses that might be classed as entertainment.  A quick call to your accountant can make sure you don't make costly mistakes!

For further information on how to treat your business's entertainment expenses, call our specialists on (02) 9988 4033.

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