Every business faces this. We invite clients or business partners to dinner, social event or we take our employees out to celebrate something special or just to do a "team building".
The benefits of doing this can translate into potential increase of revenue or improving the relationships in the workplace which can lead to increase of productivity. So no doubt, it is business expense and kind of unavoidable these days.
Understanding the difference between entertainment and non-entertainment expenses is very important because it dictates how we treat the expense in the books.
Where we identify the expense as non-entertainment we can claim the full cost as tax deduction and also claim any GST credits that are included in the cost.
Unfortunately, where the expense is identified as entertainment, no tax deduction is available and no GST credits can be claimed (unless the expense is subject to Fringe Benefit provided to our employees and their associates - explained later).
Providing light meal refreshments within business premises (such as morning tea, overtime meals..etc) or paying for the meal cost while attending seminars or conferences is fully deductible to the business and GST credits are available.
Examples of other non-entertainment expenses would include:
Birthday morning tea celebrations, light lunches, meals whilst travelling, CPD breakfasts or lunches, attending conference or seminars.
On the other hand, taking staff to a restaurant or other social event would only be deductible to the extent it is a Fringe Benefit on which the Fringe Benefit Tax is payable (does not apply to exempt fringe benefits). Benefits provided to employee associates are also included.
Examples of entertainment expenses would include:
Team functions, work celebration lunch/dinner, lunch with client, Friday night drinks, Christmas party, drinks after work, meals provided with other entertainment.
To help differentiate between the two, the following should be considered:
· Why is the meal provided?
E.g. Refreshment (light meals at meeting) or overtime meal would be non-entertainment
E.g. Social situation & enjoyment (celebration or reward) would be considered as entertainment
· What is provided?
E.g. Morning and afternoon tea, light meals, snacks would be non-entertainment
E.g. More elaborate (3 course) meals would be entertainment
· When is it provided?
E.g. During work time (overtime, work travel) - non-entertainment
E.g. Outside normal work time - entertainment (unless overtime)
· Where is it provided?
E.g. Employers premises would be considered as non-entertainment
E.g. Off Site would be considered as entertainment
Identifying an expense as entertainment is leaving us with two options. Where the entertainment is provided to clients or someone who is not an employee and their associate, the cost is not deductible for tax purposes and we can't claim GST credits. Even though it is a business expense, we need to remove it as expense for our tax calculation purposes.
Where we provide entertainment to our staff and their associates, we can claim tax deduction and GST credits to the extent that the provision is Fringe Benefit and we (as employer) are liable to pay fringe benefit tax.
Caution needs to be exercised where the benefit falls into "exempt entertainment benefit" category (e.g. minor benefit). In this case, provision of such benefit does not trigger fringe benefit tax, however such benefit is also not deductible for tax and we can't claim GST credits.