WHAT IS “ENTERTAINMENT”?
This is something we’ve covered briefly before, but it comes up so often I thought why not briefly cover it again?
‘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 it 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? Broadly speaking, it means that you’ll need to lodge an FBT return for these benefits being provided to your employees 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 actually 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 things not 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 & 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.
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? Not only do we provide a full suite of bookkeeping and tax services here at Generate, but we’re also able to help with business coaching, strategy workshops, business plans and much more. You name the problem and I’m sure we can help.