Understanding the tax rule on entertainment

The ATO refers to paying for your customers’ food, drink, or leisure in the context of meetings, business dining, and social parties as entertainment expenditure, which makes these expenses as not tax deductible.

Nonetheless, the tax office also implies that there are times when providing food or drink can be deducted to your income (Tax Ruling TR97/17).

Below are some tips to follow:

1. Disregard the basic rule that costs directly tied to achieving your assessable revenue through business meetings can be claimed as tax deductible as the tax office will prohibit any costs classified as entertainment.
2. You should first define what “entertainment” is. To assess whether it is an entertainment you must consider these four (4) factors:

• Amusement vs Refreshment
  • Amusement = entertainment
  • Refreshment = allows everyone in the business premises to finish the workday comfortably
• Lavish vs Simple meal
  • Lavish meal (including liquor) = entertainment
  • Simple meal = sandwiches, finger food, salad, tea, coffee, fruit drinks, cakes and biscuits (Tax Ruling IT 2675)
• During or After Work Hours
  • After work hours = entertainment
  • During work hours = unlikely to be considered entertainment
• Consume on or outside business premises
  • On Business Premises = less likely to be classified as entertainment
  • Outside Business Premises = is likely an entertainment

QUESTION: Can you deduct the expense of a business meetings held at a café or restaurant even if you don’t have a commercial location?

ANSWER: NO

Light refreshments served during a meeting held on business premises can be claimed as a deduction because the ATO does not consider this to be a meal entertainment (IT 2675).

The ATO considers every meal or beverage taken in a café to be entertainment because the place where you dine turns it into a provision of entertainment.

Anything offered to employees at a café is considered a meal entertainment and is subject to the Fringe Benefit Tax.

Specific guidance should still be sought from your accountants to be sure on how to treat these expenditures.

Tax rules and regulations are constantly changing, and their applicability might vary greatly depending on the facts and conditions at hand that is why it is important to check with your accountants.

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