FBT
Meal entertainment
Meal entertainment is food or drink provided at restaurants, functions or similar occasions, and it has special valuation methods and rules for fringe benefits tax, deductions and GST credits.
Meal entertainment is a category of entertainment that covers the provision of food or drink, for example a restaurant meal, a cocktail party, a catered function or a working lunch, and the related accommodation or travel. In the FBT system, the rules look at who is entertained, where it takes place and how the employer chooses to value the benefit. Some meal entertainment attracts FBT, some does not, and the treatment also affects the employer's income tax deduction and GST credit entitlement.
Employers who provide meal entertainment to employees can choose from several methods to value the benefit. The actual method uses the real cost of the benefit, the 50-50 split method treats half of the total meal entertainment expenses as a taxable fringe benefit, and the 12-week register method uses a register covering a representative period to estimate the taxable proportion. Each method has record-keeping requirements, and an employer needs to decide which to use for the FBT year.
Who attends matters. Entertainment provided to employees, and to their partners and family members, is generally treated as a fringe benefit. Entertainment provided to clients or customers is not a fringe benefit for the employee, but is generally not deductible for income tax purposes, and GST credits may be denied. Staff functions held on the business premises on a working day, with light refreshments, can be exempt under specific rules. The detail of each exemption should be confirmed with the ATO.
GST credits are linked to the FBT treatment. If the employer chooses a method that results in FBT being payable on the meal entertainment, it can generally claim GST credits and an income tax deduction, subject to holding a valid tax invoice. If the meal entertainment is exempt or not taxed under FBT, GST credits are usually denied and the cost is usually not deductible. Choosing the 50-50 method can bring different results for different meal types.
Practical record keeping includes keeping invoices, noting the purpose and who attended, and tagging the expense in the accounting system as meal entertainment. An employer who uses the 50-50 method must keep an additional record, which is required for the whole FBT year and also affects how the employer handles credits. Mixed events, such as a conference with a meal component, need an allocation of costs.
A common misunderstanding is that business meals are always deductible because they are business related. The tax law treats entertainment differently. Another mistake is to claim a GST credit on a meal for clients without checking the rules. Employers should also think twice before using the 50-50 method without checking the effect on their situation.
This is general information only, so confirm the treatment with the ATO or a registered tax professional.
Worked example
In an FBT year a business spends $22,000 on meal entertainment for staff, including GST. Using the 50-50 method, half of $22,000, which is $11,000, is treated as the taxable value of the benefit. The employer then applies the gross-up rate and FBT rate. The business holds tax invoices for all expenses and may claim GST credits and a deduction if FBT is payable.
Practical tips
- Choose your valuation method before the FBT year ends, and keep the records the method requires.
- Do not claim GST credits on client entertainment without checking the rules, as they are often denied.
- Record who attended and why, as it is the foundation for all the tax treatments.