Coming into the silly season we often get asked about entertainment expenses. What’s reasonable? What’s deductible?
In short
Entertainment expenses are generally not deductible.
This includes the cost of business lunches… even if you’re doing ‘business’, attendance at sporting events… even if your client signed on the dotted line at the event, as well as gala or social nights, concerts and similar types of functions or events.
Exceptions to the rule
There are exceptions where entertainment does become deductible, but in the case of the ATO, the exceptions are few and very specific.
Including for example, the cost of providing food at a seminar or training session over four hours long, or providing meals to staff if you own/operate a restaurant or suitable dining facility. Read the full list of deductibles here.
Should we cancel the Christmas party & staff gifts?
No way!
As small business owners we work hard all year and Christmas is a great excuse to celebrate your achievements. With careful planning you can provide employees with end of year benefits in the most tax effective way.
If you use the actual expenditure method you need to split expenditure between employees and non-employees (including clients/customers). FBT is payable on the expenditure applicable to employees only. If the expenditure can be kept to <$300 per employee (on a per person basis) it should be exempt from FBT but won’t be tax deductible and no GST credits can be claimed. We suggest if giving gifts to employees that this be done separately to the Christmas party so that the value of the gift is not included in the $300 exemption.
Gifts under $300 which are considered to be entertainment (cinema, concert, sporting event tickets) are eligible for the $300 minor and exempt benefits exemption and should escape FBT but are not tax deductible and no GST can be claimed.
Gifts under $300 and not considered to be entertainment (hampers, gift vouchers, alcohol) are eligible for the $300 minor and exempt benefits exemption and should not only escape FBT but also will be tax deductible and the GST component can be claimed. This makes non-entertainment gifts far more attractive to employers!
Note: This area of law is extremely complicated and we cannot deal with every possibility in this short blog, so if you’re unsure or wish to confirm any issues, please contact us to discuss further.
The 542 take
To keep accurate accounting records we recommend that non-deductible entertainment be coded separately to deductible entertainment. That way, come tax time the lines will not be blurred. For our clients we set up the chart of accounts with Entertainment (non deductible), and the deductible entertainment can be posted to client meetings and staff amenities as a starting point; and the chart of accounts can be built from there.
If you need to adjust your entertainment spend, talk to us and arrange a consultation.
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