Can I claim a tax deduction for entertainment expenses?

Are entertainment expenses tax deductible in Australia? Learn the rules for client entertainment, meals, staff functions, GST and FBT so you can claim expenses correctly and avoid costly tax mistakes.

In most cases, entertainment expenses are not tax deductible in Australia. This includes many client lunches, drinks, sporting events and other social functions, even where there is a genuine business purpose.

There are exceptions. Some entertainment expenses can be deductible where they are subject to fringe benefits tax (FBT), while food and drink that is not considered entertainment may be deductible under the normal business expense rules.

The treatment depends on what is provided, who receives it and the circumstances in which the expense is incurred.

Entertainment expenses at a glance

For most Australian businesses:

• Client entertainment is generally not tax deductible.
• GST input tax credits generally cannot be claimed on non-deductible client entertainment expenses.
• Entertainment provided to employees may be deductible where it is subject to fringe benefits tax.
• Minor entertainment benefits may be exempt from FBT, but that does not automatically make the expense tax deductible.
• Food and drink provided for ordinary work purposes may not be considered entertainment at all.

The rules can therefore produce different tax outcomes for two expenses that appear very similar.

What are entertainment expenses?

Under Australian tax law, entertainment includes food, drink or recreation, as well as accommodation or travel connected with providing entertainment.

Common examples of entertainment expenses include:

• business lunches with clients
• drinks with clients or referral partners
• Christmas parties and other staff parties
• cocktail parties and social functions
• sporting events
• theatre or concert tickets
• hospitality in a corporate box
• recreational activities provided to employees or clients.

An expense does not become deductible simply because it is a business cost from a commercial perspective.

For example, entertaining clients may help strengthen business relationships or generate future work. However, client entertainment can still be non deductible for income tax purposes.

Are entertainment expenses tax deductible?

Generally, no.

The Australian Taxation Office applies a general rule that expenditure incurred in providing entertainment is not deductible unless a specific exception applies.

This means a business usually cannot claim a tax deduction simply because the entertainment is connected with earning assessable income.

However, there are deductible entertainment expenses in certain circumstances.

One important exception is where entertainment is provided to an employee as a fringe benefit and fringe benefits tax applies. Other exceptions can apply to certain meals provided during business travel, qualifying seminars and some workplace dining arrangements.

Is client entertainment tax deductible?

Client entertainment is generally not tax deductible.

This can include:

• taking a client to lunch or dinner
• buying drinks for clients
• taking a client to a sporting event
• entertaining clients in a corporate box
• paying for recreational activities
• hosting clients at Christmas parties or other social functions.

This remains the general position even when there is a clear business reason for the expense.

For example, a business lunch held to discuss a new contract can still be considered entertainment. The fact that business was discussed during the meal does not necessarily make the expense deductible.

Likewise, putting client entertainment into a marketing budget does not change its tax treatment. How an expense is classified internally does not determine whether it is deductible under tax law.

Can I claim GST on client entertainment expenses?

Generally, no.

Where client entertainment is non deductible for income tax purposes, the business will generally not be entitled to claim the related GST input tax credits.

For example, if a GST-registered business spends $220 taking a client to dinner and the dinner is non-deductible entertainment, it would generally not claim the GST input tax credit relating to that expense.

The GST treatment can be different where entertainment is provided to employees and is subject to FBT.

Does fringe benefits tax apply to entertainment expenses?

Fringe benefits tax can apply when entertainment is provided to employees or their associates.

For example, if a business pays for an employee to attend a restaurant dinner, sporting event or social function, a fringe benefit may arise.

Where an entertainment expense is subject to fringe benefits tax (FBT), the cost of providing the benefit will generally become deductible. The business may also be able to claim the relevant GST input tax credits.

This can create an outcome that initially seems unusual:

• entertainment provided to an employee may be deductible because FBT applies
• the same entertainment provided to a client may remain non deductible because the client benefit is not subject to FBT.

Where employees and clients attend the same function, the expenditure may therefore need to be apportioned.

Does FBT apply to client entertainment?

FBT generally does not apply to entertainment provided solely to clients.

Fringe benefits tax relates to benefits provided to employees and their associates.

However, if an employee attends a client function, that person's attendance can create a fringe benefit even though the client portion of the entertainment is not subject to FBT.

For example, if an employee takes two clients to lunch and the business pays for all three meals, the employee's meal may have FBT consequences while the two client meals are generally treated as client entertainment.

When is food and drink considered entertainment?

Not all food and drink provided by a business is entertainment.

The Australian Taxation Office generally considers four main factors when determining whether food or drink is considered entertainment:

Why is the food or drink being provided?

Food and drink provided primarily for refreshment or sustenance is less likely to be entertainment.

Food and drink provided as part of a social occasion is more likely to be considered entertainment.

What food and drink is being provided?

Tea, coffee, biscuits and light meals are less likely to have an entertainment character than an elaborate restaurant meal with alcohol.

When is the food or drink provided?

Food and drink provided during ordinary working hours, overtime, business travel or certain seminars may be less likely to be entertainment.

Food and drink provided during parties and social functions is more likely to be entertainment.

Where is the food or drink provided?

Food and drink provided on business premises is less likely to be entertainment than food provided at a restaurant, hotel or function room.

However, location alone does not determine the result. A staff party held on business premises can still be entertainment.

Is a business lunch tax deductible?

A business lunch with clients will generally not be tax deductible where it has the character of entertainment.

This applies even when the lunch is a genuine business meeting.

For example:

Coffee and a biscuit during a meeting: may not be considered entertainment.

A sandwich provided during a working meeting: may be deductible depending on the circumstances.

A restaurant lunch with a client: generally client entertainment and not deductible.

Dinner and drinks with a prospective client: generally non deductible entertainment expenses.

The purpose, type of food and drink, timing and location all need to be considered.

What is meal entertainment?

Meal entertainment is entertainment provided by way of food or drink.

It can include:

• restaurant meals
• staff dinners
• Christmas parties
• cocktail parties
• meals provided as part of social functions
• other food and drink provided in an entertainment setting.

Providing food does not automatically create meal entertainment. Light meals provided for ordinary work purposes may not be considered entertainment.

Employers can also have specific options for valuing meal entertainment for FBT purposes, including methods that apply to the taxable value of benefits.

Are entertainment expenses 50% deductible?

You may come across references to expenses being 50% deductible where there is a mix of business and private use. However, this is not a general rule for entertainment expenses in Australia. Entertainment has its own tax rules and is generally non-deductible unless a specific exception applies.

There is also a 50:50 split method for meal entertainment under Fringe Benefits Tax rules, but this relates to calculating the taxable value of meal entertainment benefits. It does not mean that entertainment expenses with a significant private element are automatically 50% tax deductible.

Can entertainment expenses ever be fully deductible?

Yes, some entertainment-related expenditure can be deductible where a specific exception applies.

Examples can include:

• entertainment provided as a fringe benefit where FBT applies
• certain meals during overnight business travel
• meals provided at certain eligible seminars
• certain meals provided through an in-house dining facility.

The expense needs to satisfy the relevant rules. There is no general rule that entertainment becomes 100% deductible merely because it is completely business-related.

Are Christmas parties tax deductible?

Christmas parties are generally considered entertainment.

Whether Christmas parties are tax deductible depends on:

• where the party is held
• whether employees, associates or clients attend
• the cost per person
• whether FBT applies
• whether an FBT exemption is available.

For example, a Christmas party for current employees held on business premises on a working day may be exempt from FBT.

However, an FBT exemption does not necessarily make the entertainment expense deductible.

If a Christmas party is held at a restaurant or function room, different FBT consequences may apply.

Client entertainment at the same Christmas party will generally remain non deductible.

What is the minor benefits exemption?

A benefit provided to an employee may qualify for the minor benefits exemption where its taxable value is less than $300 and it would be unreasonable to treat it as a fringe benefit after considering the relevant circumstances.

The $300 amount is therefore not an automatic rule.

For example, a minor benefit provided occasionally may qualify, while a similar benefit provided frequently may not.

If entertainment qualifies for an FBT exemption as a minor benefit, this does not automatically mean the entertainment becomes tax deductible.

Are employee gifts tax deductible?

The answer depends on whether the gift is entertainment or non-entertainment.

Entertainment gifts can include:

• sporting tickets
• theatre tickets
• concert tickets
• recreational experiences.

Non-entertainment gifts can include items such as hampers, flowers or other physical gifts.

A gift provided to an employee may also be a fringe benefit, and the minor benefits exemption may be relevant where the value is less than $300.

The gift and any associated Christmas party should generally be considered separately.

What about an in-house dining facility?

Special rules can apply to an in-house dining facility.

An in-house dining facility may include a dining room or similar facility located on business premises where food is provided to employees.

Meals provided to the taxpayer's employees in an ordinary staff cafeteria or dining room can receive different treatment from entertainment provided at a staff party or social function.

For example, a free meal provided through an employee dining facility during work may have a different tax treatment from a Christmas function held in the same dining room.

The nature of the food, purpose of the event and circumstances still need to be considered.

Are meals at seminars tax deductible?

Meals provided at certain business seminars can fall within an exception to the general entertainment rules.

The treatment depends on the nature and duration of the seminar and whether the food and drink is reasonably incidental to the event.

Light meals provided during genuine business training can therefore have a different tax treatment from a social dinner held after the seminar.

The fact that an event is called a seminar does not automatically make all associated expenditure deductible.

What about meals during business travel?

Meals consumed during genuine overnight business travel are generally treated differently from entertainment.

For example, where an employee travels interstate for work and the employer pays for accommodation and an ordinary evening meal, that expenditure may not be considered entertainment.

A social dinner, sporting event or other recreation added to the trip may need to be treated separately.

Examples of deductible and non-deductible entertainment expenses

• Coffee and biscuits during a business meeting is generally not entertainment and may be deductible
• Light meals during a working meeting may be deductible depending on the circumstances
• Business lunches with clients at a restaurant are generally non deductible
• Client drinks at a hotel are generally non deductible
• Corporate box used to entertain clients are generally non deductible
• Sporting events for clients are generally non deductible
• Employee restaurant dinner may attract FBT and deduction treatment should be considered
• Employee Christmas party depends on FBT and available exemptions
• Client attendance at a Christmas party is generally non deductible
• Meal during genuine overnight business travel is generally not entertainment and may be deductible
• Meals at certain seminars may be deductible
• Ordinary meals in an in-house dining facility may have special rules apply

What records should businesses keep?

Businesses should keep records that make it possible to determine the correct income tax, GST and FBT treatment of entertainment expenses.

This can include:

• invoices and receipts
• the date of the expense
• details of the food, drink or recreation provided
• the names or categories of people attending
• whether attendees were employees, associates or clients
• the business purpose
• the location
• the cost per person where relevant.

Keeping these records is particularly important where employees and clients are attending functions together, because different tax treatment can apply to different attendees at the same event.

So, can I claim a tax deduction for entertainment expenses?

Most entertainment expenses are not tax deductible, particularly client entertainment.

There are important exceptions, including entertainment provided to employees where FBT applies and some expenditure associated with business travel, seminars and workplace meals.

The key questions are:

Was entertainment provided?
Who received the benefit?
Does fringe benefits tax apply?
Does a specific tax deduction exception apply?

Getting these classifications right can affect income tax deductions, fringe benefits tax and GST input tax credits.

If you're unsure whether entertainment expenses incurred by your business are deductible, Bonerath & Co. can help you determine the correct treatment and ensure the expenses are recorded appropriately.

Learn more about our Accounting & Tax services or contact our team to discuss your circumstances.

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