At some point, every organisation provides meals or refreshments to its employees, clients and other persons alike but there is often doubt about how to account accurately for these expenses. In this blog, we will discuss what constitutes entertainment and its correct tax treatment.
Generally speaking, there is no tax deduction available for entertainment expenses except for "meal entertainment" expenses which can provide an income tax deduction for the company, but also attract Fringe Benefits Tax (FBT).
FBT is applicable on the ‘provision of meal entertainment’. Thus, care is needed to ascertain what constitutes meal entertainment versus other forms of entertainment that are not subject to FBT and are non-deductible for Income Tax.
Provision of meal entertainment
The ATO has released the Taxation Ruling TR 97/17 to discuss this and determine whether entertainment occurs, each and every time food or drink is provided.
Their view is that to determine this, an objective assessment is required of the circumstances in which the meal or beverage was provided.
Food and drink that is determined to be entertainment by this criterion will be taken as meal entertainment and liable to have FBT applied. Below is an overview of how this objective assessment is to be made:
WHY TEST – why is the meal or beverage being provided? Is it being offered for refreshment at work or in a social situation where the purpose is for the employees to enjoy themselves? It is not entertainment in the first situation but takes the character of entertainment in the second.
WHAT TEST – to determine what meal or beverage is being provided. Provision of morning and afternoon tea or light meals or working lunch is generally not entertainment but an elaborate meal and/or liquor is likely to be entertainment.
WHEN TEST - to determine when the meal or beverage is being provided. If it is being provided during work time, during overtime or while an employee is travelling, it is less likely to be entertainment but if it is provided otherwise or even at a staff function held during work time, it has the character of entertainment.
WHERE TEST – to determine where the meal or beverage is being provided. When provided at the employer’s premises it is less likely to be entertainment as opposed to that offered in a restaurant, hotel, function room, etc which is more likely.
While we hope the above information provides some new insight or clarifies existing queries you may have had, the Keeping Company team are always here to assist should you have any further questions regarding entertainment and how to best manage it within your business.
Download your copy of the CPA FBT Checklist here.
Tax Ruling TR 97/17 by Australian Tax Office
FBT Checklist 2018 issued by CPA Australia
For all media enquires please contact Tracy Miller, CMO, Keeping Company 0414 898 452.