Thinking of taking that potential new client to Vue de Monde and claiming lunch as a tax deduction? Wait! Before you step into the limo, there are few things you might want to think about.

Expenses are usually fully deductible provided that they are incurred in producing taxable income or that is required to carry on in business. However section 32.5 of the Income Tax Assessment Act (1997) specifically prohibits a deduction for entertainment expenses. So what are entertainment expenses?

What are entertainment expenses?

Entertainment is defined in section 32.10 as either:

  • Entertainment by way of food, drink or recreation; or
  • Accommodation or travel to do with providing entertainment by way of food, drink or recreation

What is entertainment by way of food or drink?

Entertainment expenses are usually in the form of business lunches, cocktail parties or sporting events and any travel or accommodation that relates to these events. Even having a coffee with a client is an entertainment expense.

The ATO uses a number of different factors to determine if the food and drink provided is classified as entertainment.

  1. Why is the food or drink being provided? Generally if you are providing food or drink such as coffee and biscuits to enable the employee to complete their tasks during the working day they are not considered entertainment expenses. If the food or drink is being provided in a social situation – where the purpose is for employees to enjoy themselves – this will generally be considered entertainment
  2. What is being provided? The more elaborate a meal becomes the more likely it will be entertainment. A full meal such as steak and chips is more likely to be considered entertainment than light meals and refreshments.
  3. When is the food or drink being provided? If the food or drink is being provided during work hours it is less likely to be considered entertainment because it is likely to be used for sustenance rather than entertainment. However, if the purpose of the food and drink is to provide entertainment – for example at a staff function – it is more likely to have the characteristics of entertainment. The cost will therefore be more likely to be classified as an entertainment expense.
  4. Where is the food or drink being provided? Food or drink provided on premises is less likely to be considered entertainment as the purpose is again likely to be sustenance. Food or drink provided at a café or pub, is more likely to be considered entertainment.

None of these factors alone will determine if the food or drink provided is entertainment. Use them as a general guide. The ATO notes that items 1 and 2 are considered the more important factors. We can clarify and confirm claimable entertainment expenses while preparing your taxation documents.

How to claim the entertainment expense

Once you have determined the food or drink is entertainment what is the next step?

  1. You can choose to class the expense as personal and not claim a tax deduction for these amounts; or
  2. Eligible business can register for Fringe Benefits Tax.

Fringe benefits tax

Under this method you pay fringe benefits tax on the taxable value of the entertainment expense.  You are then able to claim a tax deduction for the cost of the entertainment along with the FBT paid. In addition you are entitled to any GST input tax credits arising from the entertainment expense.

Use one of these methods to determine the taxable value

12 week register method:

You must keep a register containing very detailed records on all entertainment spent in a twelve week period. This method is complicated and we recommend you contact us to find out if this is the best method for your business

The 50/50 method:

The taxable value of your meal entertainment for the year is half of all money spent on meal entertainment for the year. This means half the value of the entertainment expenses is an allowable deduction. The associated GST credits can be claimed on your BAS.

Talk us today about how to ensure you are claiming the entertainment expenses you are entitled to.