With the emergence of Australia’s gig economy and digital businesses, more and more small business owners find themselves doing business in cafés over coffee. Now in that situation, picking up the bill for a client’s snack, lunch or coffee may appear to be a basic cost of doing business in our increasingly disaggregated economy.
However, don’t labour for one moment under the illusion that the Australian Tax Office (ATO) will grant you a deduction for it. Annoyingly for Australia’s legion of small business owners, the tax rules around entertaining clients are far from being black and white.
The provision of entertainment to clients, employees, associates and suppliers carries implications for your business for income tax, fringe benefits tax (FBT) and goods and services tax (GST). Entertainment as a concept is defined in Australia’s income tax legislation and entertainment does not constitute a separate category of benefits within the FBT system.
A Fraction Too Much Friction
Never has a taxation topic attracted more disputes and fevered arguments while generating more confused misunderstanding than Australia’s current fringe benefits tax regime. This is especially so it when it comes to the vexed issue of meal entertainment.
One the classification of client refreshments and meals, dismiss the thought that the commonly observed rule of thumb that you can claim expenses provided they relate directly to your business earning assessable revenue applies to this situation. Regardless of whether you are meeting clients over coffee to discuss new business opportunities or a new product launch, the ATO will deny any claims it deems to be an entertainment expense. These are not tax deductible.
However, the ATO in its Tax Ruling TR 97/17 states that entertainment is not deemed to occur every time you provide food or drink to clients.
Hence, there are some instances when you these costs are deductible. Confused? Here are some rules of thumb to help you clarify your situation.
Four elements determine if the cost associated with client refreshments and meals meets the threshold of qualifying as an entertainment expense.
1. Is It Being Supplied For Refreshment Or Enjoyment?
Any food and drink provided in a social environment or for enjoyment is regarded by the ATO as being non-deductible entertainment. However, this definition does not apply to simple refreshments that enable you, your staff and your client to comfortably conclude your working session.
2. How Ostentatious Are Your Refreshments Or Meal?
Providing no alcohol is made available, simple meals such as salads, finger food, or sandwiches are not classified by the ATO as entertainment. Similarly, morning or afternoon coffees, teas, fruit juice, biscuits and even cakes (Tax Ruling IT 2675) are deductible under the ATO Tax Ruling TR 97/17.
3. Is The Food And Drink Consumed During Or After Normal Working Hours?
Refreshments made available during normal working hours are unlikely to be classified as entertainment by the ATO.
4. Is The Food And Drink Consumed On Your Commercial Premises?
Refreshments and food consumed while meeting on your business premises are less likely to be deemed to be entertainment compared with eating in a café, coffee shop, restaurant or hotel.
Remember the ATO regards leaving a tip at a restaurant or café after a meal or refreshments as being entertainment. In this context, the ATO’s view is that the tip assumes the same character as the food and drink.
Make Tax Deductibility Work For Your Business
So, your business may claim certain expenses as a deduction providing your clients are served light refreshments during your normal working hours whilst present on your commercial premises. To avoid uncertainty or a problem further down the track, it is always best to consult your accountant to ensure you receive clear professional advice that reflects your businesses circumstances.
In a tough competitive environment, accessing tax breaks however small can help your small businesses build business relationships while still enjoying a modest tax break. Have your accountant clarify how the ATO will be likely to apply the legislation to your approach to client refreshments and your business may be in a position to reduce your ongoing business costs while nurturing those essential relationships.
These days, tax legislation and the tax rulings continue to evolve. Moreover, how the ATO seeks to apply them can vary disparately depending on your businesses specific circumstances and the facts involved.
As the business owner, you are responsible for ensuring you receive accurate timely advice from your tax advisor professionals on the specific tax situation that applies to your business.
If you find your small business incurring and claiming meal entertainment in your annual accounts, you effectively have two choices. Firstly, maintain accurate records and pay the appropriate FBT. Alternatively, have the meal entertainment due to you and your employees repatriated in the form of dividends.
General Advice Warning: Information provided on this website is general in nature only and does not constitute personal advice. The information has been prepared without taking into account your personal objectives or needs. Before acting on any information on this website, you should consider the appropriateness of the information having regard to your objectives and needs.