This isn't going to be a philosophical discussion on what constitutes entertainment in our modern society. No. This post is all about tax and specifically what is considered to be 'entertainment' for tax purposes and what that means for you and your business (fun, right?!).
‘Entertainment’ is defined in ITAA1997 s32-10 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 an expense is considered entertainment of a client it will be non-deductible and you will not be eligible for any GST credit. 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 means that you’ll probably need to lodge an FBT return covering these benefits being provided to your employees, including potentially yourself, and pay the relevant Fringe Benefits Tax. It will mean that the entertainment expenses will be deductible and the GST credit on the expenses can be claimed. It is also worth noting the FBT itself paid to the ATO will also be tax deductible.
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 items not typically 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 wish to register for FBT, 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 they will be considered entertainment, but exempt from FBT. This means no FBT, but also no deduction or GST credits to be claimed.
If you have any questions about FBT or anything else as equally exciting, please contact your accountant.
If you’ve got issues in your business you don’t seem to be able to get on top of, why not get in touch? You name the problem and I’m sure we can help.