A common tax question I am asked is whether or not a tax deduction can be claimed for meeting with clients at cafes or restaurants. After all, it is a business meeting I am often told.
In general, meeting a client for a meal is not tax deductible if it meets the definition of being an entertainment expense. Section 32-5, Income Tax Assessment Act 1997 is headed ‘no deduction for entertainment expenses’ for the avoidance of doubt.
There are some exceptions to the general rule that entertainment expenses are not deductible, particularly for the creative industries. People working in film and television may claim the costs of going to the movies, food writers may deduct the cost of restaurant meals, artists may claim for gallery entrance fees. These expenses are not entertainment, but outgoings incurred in the course of work or business.
Food or drink expenses are more difficult to classify as deductible or not. The ATO provide four factors as a guide to how they should be interpreted:
- Is the food or drink being provided for comfort or enjoyment?
- How elaborate is the meal?
- Is the meal being provided during work time?
- Where is the meal being consumed?
As an example, providing tea and biscuits at work will be seen as a refreshment and classified as a ‘staff amenity’. This is a deductible cost. By comparison, going to lunch, dinner or even having a coffee with a client at a restaurant will likely be viewed as an activity undertaken for enjoyment, and held to be entertainment. Birthday cakes consumed at work should be deductible. Food or drink consumed by an employee while travelling overnight on business should also be deductible. But Friday night drinks after hours at the office will not be deductible.
There are different tax rules for food or drink costs for employers and employees.
Employers that pay for their employee’s entertainment costs, such as social events, seminars and Christmas parties, are required to register for Fringe Benefits Tax (FBT). FBT is a complex area of tax law and can result in a wide range of liabilities depending on the method chosen to calculate it. The 50/50 split and the twelve-week register methods involve less administration than the actual method but are likely to result in higher FBT debts.
Another important consideration for employers is that the costs of entertainment expenses for employees that involve the provision of ‘recreation’ as opposed to mere ‘entertainment’ now need to be reported on PAYG Summaries as reportable FBT benefits. This will result in additional tax being deducted from the pays of employees with HELP debts.
Employees are able to claim the costs of food or drink in relation to performing overtime at work if they are in receipt of an allowance under an industrial award. In certain circumstances food or drink consumed at seminars may be claimed, however there are strict rules that define what a ‘seminar’ actually is. Employees travelling on business are allowed to claim for entertainment expenses in certain circumstances, most particularly when they are in receipt of allowances for meals during working hours that considered to be refreshing rather than enjoyable.
Travel allowances paid to employees for meals may be referenced against the reasonable food guidelines set out by the ATO. These guidelines provide reasonable amounts for breakfast, lunch and dinner in every town and city in Australia and daily amounts for overseas destinations in three broad salary bands. Employers may prefer to pay these allowances rather than reimburse employees for their actual costs to avoid having to navigate the complex deductibility rules around food and drink.
Employers may find themselves paying more out in meal allowances than the actual meal costs, but in return they are also contracting out the tax administration liability to their employees. For employees in receipt of meal allowances are not automatically granted a right to deduct the entire amount of the allowances on their tax returns. They still have to substantiate the amount they actually spent by keeping travel diaries, meal receipts, bank and credit card statements that reference the allowances they receive.
End of year celebrations are entertainment expenses. Refer to the first of the four ATO factors from earlier in this article where the question asked is whether food or drink is being provided for comfort or enjoyment. FBT is applicable to Christmas parties except to the extent that the minor benefit rules apply. That is, the value per employee or associate (family member) is less than $300. It may not be that rewarding to the staff but the most tax effective way to hold end of year celebrations are on the business premise during working hours.
Finally, how are staff gifts treated? If hampers, flowers, wine and gift vouchers are given out before the Christmas party and the gift to the employee is valued at less than $300, it is tax deductible. However, staff gifts categorised as ‘entertainment gifts’ – theatre tickets, concerts and vacations are examples – will not be tax deductible even when they are minor benefits. If entertainment gifts are valued at $300 or more they will be subject to FBT.
Please note: This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.