Entertaining, meals and FBT tips and traps
An everyday occurrence across the business landscape in Australia is the practice of taking both existing and potential clients out for a meal to cement the business relationship, with the cost of this meal often covered by one party. Equally, business owners commonly reward by taking high performing employees out for lunch and covering the cost. ARE THE COSTS OF THESE MEALS TAX DEDUCTIBLE? After all, it was a genuine business expense surely, I can claim back the GST and claim a tax deduction? The case outlined above is a clear example of “Meal Entertainment”. Unless the business owner wants to pay the appropriate amount of fringe benefits tax (FBT) no deduction is allowed and the GST cannot be claimed. The provision of meal entertainment is defined as:
providing entertainment by way of food or drink
providing accommodation or travel related to, or to facilitate the provision of, such entertainment
paying or reimbursing expenses incurred by the employee for the above.
In order to determine when the provision of food or drink to a recipient results in the entertainment of that person, an objective analysis of all the circumstances surrounding the provision of the food or drink is required. In making this determination an employer should consider:
Why the food or drink is being provided;·
What type of food or drink is being provided;·
When that food or drink is being provided; and·
Where the food or drink is being provided.
Food or drink which is determined by these criteria to constitute entertainment is taken to be 'meal entertainment'. Considering this, some of the more common practices that could be included as meal entertainment would be:
taking your employees out for lunch at a restaurant
meeting with clients at a café or restaurant for a meal and/or drink
social functions, such as Christmas parties, where food or drink is supplied
If there are no exemptions available, the FBT consequences of providing meal entertainment are, by example using the 2021 FBT rates:
As you can see from the example above, even considering that the event is now tax deductible, the FBT cost associated with providing the meal entertainment benefit is more than the cost of the party. Obviously, we want to avoid paying the FBT where possible. EXEMPTIONS The two most common exemptions available that eliminate the FBT liability are outlined below: MINOR AND INFREQUENT There are some exemptions allowed that will reduce the taxable value of meal entertainment benefits to Nil. However, where this is the case, no tax deduction can be claimed, and neither can the GST. The most common exemption is the minor and infrequent exemption which states:
The cost of the benefit is less than $300 (per person)
The benefit is not provided frequently
Both conditions above must be satisfied for the meal entertainment benefit to be exempt. For example, taking an employee out to lunch to reward high performance would be exempt as it would be an infrequent occurrence and the cost would be less than $300. Alternatively, if taking your employees out to lunch is a regular weekly occurrence for which the employer covers the cost, this no longer satisfies the infrequent condition above and the benefits are subject to FBT, even though the cost is less than $300 per person. IN HOUSE MEALS Simple meals (e.g. sandwiches and juice) provided to your employees within your office to enjoy at lunch are not subject to FBT and are deductible. Be cautious though if meals become more complex, such as including alcohol or multiple courses, as these may alter the characteristic of the benefit being provided and the tax deduction may be lost. In conclusion, the provision of meal entertainment benefits can be a taxation minefield. We strongly suggest that if you have questions regarding your business practices and how you reward your employees please contact your business advisor today.
This article is provided as general information only and does not consider your specific situation, objectives or needs. It does not represent accounting advice upon which any person may act. Implementation and suitability requires a detailed analysis of your specific circumstances.