This article aims to explain what exactly entertainment is as far as tax is concerned and when you're likely to have provided it to employees or clients and what that means for your business.
If you’ll allow me to get technical for a moment, ‘entertainment’ is defined in the legislation as:
a) entertainment by way of food, drink, or recreation; or
b) accommodation or travel to do with providing entertainment by way of food, drink or recreation
Why is this definition important? Broadly speaking, if it is considered entertainment of a client it will be non-deductible and you will not be eligible for any GST credit on the spend. If it is considered entertainment of an employee then it will subject to Fringe Benefits Tax (FBT).
Subject to FBT? What does that mean? It likely means that you’ll need to lodge an FBT return for these benefits being provided to your employees and pay the associated Fringe Benefits Tax. It will mean that the entertainment expenses will be deductible and the GST credit on the expenses can be claimed. It’s worth noting the FBT actually paid to the ATO will also be tax deductible. Sounds great, but FBT itself isn’t cheap so you want to be careful about providing benefits and be sure the cost makes it worthwhile.
How to identify whether entertainment is being provided? This can be a bit of a grey area, but really you need to consider the why, what, when and where of the situation. The further it gets from tea and biscuits at your desk the more likely it’ll be considered entertainment.
Common examples of things not considered meal entertainment:
tea and coffee provided in the office
snacks for morning/afternoon tea provided in the office
light refreshments provided in the office
food/drink consumed whilst out of town overnight for business
light meals provided at seminars
birthday cake at the office
minor food gifts provided to employees (e.g. gift basket, wine at Xmas, etc.)
Common examples of things that are considered meal entertainment:
business lunch at a cafe/restaurant
after-work drinks at the office (including snacks, food, etc.)
food/drink consumed at a party in the office
food/drink consumed at a party held out of the office
food/drink consumed at an awards night
It is worth noting that differentiating between the client component of a restaurant bill and the employee component might be a bit difficult, so the ATO allows you to pool the client and employee entertainment together and then apply a 50/50 split (i.e. 50% deductible and subject to FBT and the other 50% not deductible and not subject to FBT).
As a final note, if you don’t think you need to register for FBT or simply don't want to, yet you do provide the occasional drinks night for your employees, there is a ‘minor & infrequent’ exemption meaning that as long as the benefits being provided are relatively minor and infrequent then whilst they will be considered entertainment they may be exempt from FBT. This means no FBT, but also no deduction and no GST credit. ‘Minor and infrequent’ isn’t specifically defined, but if it’s under $300 a head and only happens a handful of times each year you should be fine.
Fringe benefits, FBT returns, entertainment … all of this can get complicated pretty quickly so if you’d rather someone else dealt with this for you please drop us a line. We’d love to help.