A guide to entertainment expenses

Back in corporate Australia in the 80’s, people were wining and dining staff and clients to “talk business” and claiming tax deductions under the umbrella that it was doing business. The government wasn't happy about it so they reformed the tax laws regarding entertainment and due to its nature and multiple scenarios, it’s one of the most complicated areas of tax law.​

As a business owner, you know that entertainment expenses are an important part of your overall financial picture. Not only do they help keep your staff happy and increase their morale but it adds a positive culture to your business. But navigating the world of entertainment expenses can quickly lead you down a rabbit hole - what kind of expenses are tax-deductible, and which ones aren’t?  ​

This guide will provide you with the information you need for entertainment expenses:​

Entertainment can mean providing food, drinks and recreation. Recreation can include amusement, sport and similar leisure time activities e.g. tickets to sporting events, cruises, a joyflight or a harbour cruise.​

It also includes accommodation or travel in connection with such entertainment above. ​

Some common examples of entertainment ​

Entertainment expenses are generally not deductible (unless subject to FBT). ​

A couple of main exceptions need to be noted:​

There are other exceptions listed in the Income Tax Assessment Act in s32-30 Employer expenses, s32-35 Seminar expenses, s32-40 Entertainment industry expenses, 32-45 Promotion and advertising expenses and s32-50 Other expenses. Many of these are complicated and require a whole article to explain. ​

If an expense is deductible for income tax, then you will be able to claim GST on that expense. The GST follows the deductibility of the expense.​

This heading might make you think of an inquisitive kid talking to you but actually, it’s a really good way to determine if an expense is considered entertainment. If you’re really keen for some bedtime reading, you can check out the details of these 4W’s in this tax ruling.​

If you are providing food and drink to an employee, these four simple questions could be asked:​

Why - Why was the food and drink provided? Were they just refreshments to complete the working day or was it provided to the employee to enjoy themselves?​

What - What type of food and drink was it? Was the food pretty standard or was it fancy? Having alcohol as part of the equation points more towards entertainment than business.​

Where - Food or drink provided on your business premises or at the employee's usual workplace is less likely to be entertainment. Food or drink provided off your business premises, such as at a function room, hotel, restaurant or consumed with other forms of entertainment, is more likely to be entertainment.​

When - was it during the work day, during overtime or while an employee was travelling? If so, this is less likely to be entertainment.​

The easiest way to give you an understanding of what is deductible can be done through common examples your business may face. This is not a comprehensive list but it gives you a starting point to think through how it works.  ​

^ A minor benefit is one that is provided to an employee or their associate on an 'infrequent' or 'irregular' basis, which is not a reward for services, and at a cost less than $300 (inclusive of GST) per benefit. Read more about it from the ATO here.​

Valuing entertainment benefits will affect the deductibility of expenses and GST claimability.​

The Australian Tax Office (ATO) provides three methods that can be used by businesses to value and record their entertainment expenses:​

1. Actual Method.​

2. 50/50 Split Method.​

3. 12 Week Register Method.​

The Actual Method and the 50/50 Split Method are the most commonly used.​

This method requires all entertainment benefits to be separated into the following categories:​

Client entertainment is not tax-deductible and GST input tax credits cannot be claimed.​

Meal entertainment provided to staff (and their associates) is subject to Fringe Benefit Tax. These costs will be tax-deductible and you are able to claim the GST input tax credits.​

Minor benefits provided to staff (and their associates) are not tax-deductible and GST input tax credits cannot be claimed.​

The 50/50 Split Method is the easiest method to use. It takes the value of all meal entertainment provided (for staff, associates, clients and other persons) and treats 50% of the total as taxable entertainment.​

Therefore, a tax deduction will be available and GST input tax credits can be claimed on the 50% subject to FBT. The other 50% is not deductible and GST input tax credits cannot be claimed.​

The Minor Benefit Exemption does not apply if you choose this method.​

GST can’t be claimed on non-deductible entertainment expenses. Only the GST portion of claimable entertainment expenses can be deducted.​

For example, you’ve spent a total of $150 on books as gifts for your employees during April, May, and June. You’re eligible to claim the GST portion ($150/11 = $13.64) of your entertainment expenses at 100%. This is because the gifts are not entertainment.​

You need to keep records such as invoices or receipts in order to make claims. As required by the ATO, you also need to keep records of the following information:​

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