FBT
Entertainment
For tax purposes, entertainment means food, drink, recreation or accommodation provided for enjoyment, and it has special rules for income tax deductions, GST credits and fringe benefits tax.
Entertainment, for tax purposes, has a wider meaning than in everyday language. It covers food, drink and recreation, such as meals, cocktail parties, sporting events, theatre tickets and holidays, as well as accommodation or travel connected with these activities. The aim of the rules is to limit tax advantages for expenses that have a strong private enjoyment element, and they apply to income tax, fringe benefits tax and GST in different ways.
For income tax, the general rule is that entertainment expenses are not deductible, unless there is an exception. An important exception is where the entertainment is provided to an employee and FBT is payable on the benefit. In that case the employer can usually claim a deduction for the cost, and the FBT paid. Another exception is entertainment provided as a normal part of a business that supplies it, such as a restaurant or entertainment venue, in the course of carrying on that business.
For FBT, entertainment provided to employees or their associates may be a fringe benefit. The rules look at the type of entertainment, who attended and how the cost is valued. Meal entertainment has its own valuation methods. Some entertainment is exempt, for example a function that is a minor benefit, or a work-related event such as light refreshments at a meeting on the business premises, which can be exempt in specific circumstances.
The GST rule is directly relevant to claiming credits. A business generally cannot claim GST credits for entertainment unless FBT is payable on the benefit, or the entertainment is provided to clients or customers as part of the business's own supplies. If the entertainment is provided to employees and is exempt from FBT, or is provided to clients and not deductible, the GST credit is generally denied. A business should therefore consider the FBT outcome before claiming credits.
Records are vital. The business should keep tax invoices that identify the entertainment and who attended, particularly for meal entertainment. Employees should provide details of who was present and the business purpose. If a payment mixes entertainment with something else, such as a conference with meals, the business may need to split the cost between the parts. Records generally need to be kept for five years.
A common misunderstanding is that a client lunch is fully deductible. For income tax it is usually not, and GST credits are often not available either. Another mistake is to claim a staff Christmas party in full without checking whether FBT applies or whether the minor benefits exemption is relevant.
This is general information only, so confirm the treatment with the ATO or a registered tax professional.
Worked example
A business spends $2,200 including GST on a restaurant dinner for staff and their partners. If FBT is payable on the benefit, the business may claim the $200 GST credit ($2,200 x 1/11) and a deduction for the cost. If the benefit is exempt from FBT, the GST credit is generally not claimable, and the cost may not be deductible. The business checks which situation applies before it lodges its BAS.
Practical tips
- Decide whether the entertainment will be subject to FBT before you claim GST credits or deductions, as the answer drives both.
- Record who attended and the business purpose on the tax invoice or alongside it.
- Keep entertainment separate from other expenses in your accounting software, so that it is easy to report correctly.