Entertainment... is it deductible?

Let me entertain you! 

What is Entertainment?

According to the ATO, you can provide entertainment by way of food, drink or recreation. Any accommodation and travel connected to the provision of food, drink and recreation is also considered to be entertainment.

Generally entertainment expenses are not deductible and some expenses will require you to register for Fringe Benefits Tax (FBT).  

Some examples of entertainment are:

  • A company dinner to celebrate EOFY
  • A golf day out to celebrate a business milestone
  • A takeaway coffee in the morning
  • Christmas party for staff, their partners and clients

Can entertainment be deductible?

Entertainment can be tax deductible when it attracts FBT. More information in the section below. 

Otherwise, entertainment is generally not a business deductible expense. However, there are some expenses that would be classified as deductible entertainment for some businesses, but non-deductible expenses for others. 

In most cases, providing your employees with food and drink is entertainment and therefore not deductible. However, if what was provided was not for the employee’s enjoyment, then this expense would not be classified as entertainment and would therefore be deductible. For example, this encompasses expenses like tea, coffee and biscuits provided for employees to complete the working day in comfort or food and drink supplied during a workshop (as long as there is no alcohol involved). This is also known as ‘sustenance’.

When deciding on the deductibility of entertainment expenses, there are four questions that need to be answered: “Why, what, where and when”. 

“Why” was the expense incurred? Was it for business or personal reasons?

“What” was the expense incurred? Was it a lavish lunch? Or a coffee and a sandwich?

“Where” was the expense incurred? Was it on business premises or was it in a cafe or restaurant?

“When” was the expense incurred? Was it during business hours, or on the weekend?

Example: Buying a client a takeaway coffee for a meeting

Why: It was a business expense and purchased as a goodwill gesture for the client

What: It was a small take away coffee, valued at $4.80.

Where: It was a takeaway coffee and consumed in your office’s meeting room

When: It was purchased during work hours for a business meeting.

Based on these reasons, this takeaway coffee is not classified as entertainment and is a deductible business expense.

Example: Taking a client out for drinks

Why: It was a business expense and purchased as a goodwill gesture for the client.

What: Glass of red wine, costing $12.00.

Where: Howling Owl Bar 

When: 7pm on a Friday night.

Whilst the intention of this expense is for business purposes, the ATO frowns upon claiming alcohol as a business expense. Therefore, this is an entertainment expense and not deductible.

Also, your business industry will determine whether the expense is entertainment or a deductible business expense. For example, most businesses purchasing tickets for a show at the Adelaide Festival Centre is entertainment and therefore not a deductible business expense. However, if you are a theatre critic, buying theatre tickets are probably deductible.

Does entertainment attract Fringe Benefits Tax (FBT)?

Not all entertainment expenses attract FBT. One FBT exemption is called the ‘the Minor Benefits Exemption’.  If the expense is less than $300 and it is unreasonable to treat it as a fringe benefit, then it does not need to be reported as a Fringe Benefit.

For example, your work Christmas lunch was held on a work day, on work premises, and it cost $125.00 per head. Entertainment is definitely being provided, as the main goal of the lunch is to enjoy yourself - therefore it is not deductible for tax purposes. It is also exempt from FBT, as it is under the minor benefits exemption threshold.

However, if an entertainment expense exceeds $300 it should be treated as a Fringe Benefit and you cannot apply the Minor Benefits Exemption. For example, you pay for your employee’s gym memberships which total $485.00 each. As the cost of the entertainment is above $300, it is not exempt and FBT must be paid.

When an entertainment expense attracts FBT it also ceases to be a non-deductible expense for the business. If you have to pay FBT on the entertainment expense, then you can claim it as a business expense and it will reduce your taxable income.  If you do not pay FBT on your entertainment expense, you cannot claim it as a business expense and therefore cannot use it to reduce your taxable income. 

The ATO has devised this ruling so you do not pay tax twice on the expense - once on your Fringe Benefits Tax Return and then again on your income tax return.

 

Christmas Party Example

Gym Membership Example

Is it an entertainment expense?

Yes

Yes

Is it exempt from FBT?

Yes

No

Can you claim a tax deduction for this expense?

No

Yes

Can you still spend the money, even if it is not deductible?

Believe it or not, life is not about tax.

You can still spend the money, even if it is not deductible. A great way of building company, employee and client culture is by enjoying a dinner together or a day out at the Fringe - this can be worth so much more than any tax deduction.

 

xxx Lauren

(and co-author Caitie Copley)

Close

50% Complete

Get started today!

Get on top of your business. Sign up to The Real Thiel and get small business news and information direct to your inbox!