A guide to entertainment expenses

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Entertainment can mean providing food, drinks and recreation. Recreation can include amusement, sport and similar leisure time activities, for example, tickets to sporting events, cruises, a joyflight or a harbour cruise.​

It also includes accommodation or travel in connection with such entertainment above. ​

Some common examples of entertainment ​

Entertainment expenses are generally not deductible. ​

Two main exceptions need to be noted:​

Firstly, sustenance is not considered entertainment. For example, providing tea and coffee in the office for your staff is sustenance and not entertainment. Same with a few sandwiches given at a staff training session or morning or afternoon tea.​

Secondly, some entertainment is subject to FBT and if you pay FBT on an expense, then it is deductible for income tax. This is because FBT is already a tax on companies and the ATO doesn't want to give you a double kick of tax. ​

There are other exceptions listed in the Income Tax Assessment Act in s32-30 Employer expenses, s32-35 Seminar expenses, s32-40 Entertainment industry expenses, 32-45 Promotion and advertising expenses and s32-50 Other expenses. Many of these are complicated and require a whole article to explain. ​

If an expense is deductible for income tax, then you will be able to claim GST on that expense. The GST follows the deductibility of the expense.​

This heading might make you think of an inquisitive kid talking to you but actually, it’s a really good way to determine if an expense is considered entertainment. If you’re really keen for some bedtime reading, you can check out the details of these 4W’s in this tax ruling.​

If you are providing food and drink to an employee, these four simple questions could be asked:​

Why - Why was the food and drink provided? Were they just refreshments to complete the working day or was it provided to the employee to enjoy themselves?​

What - What type of food and drink was it? Was the food pretty standard or was it fancy? Having alcohol as part of the equation points more towards entertainment than business.​

Where - Food or drink provided on your business premises or at the employee's usual workplace is less likely to be entertainment. Food or drink provided off your business premises, such as at a function room, hotel, restaurant or consumed with other forms of entertainment, is more likely to be entertainment.​

When - was it during the work day, during overtime or while an employee was travelling? If so, this is less likely to be entertainment.​

The easiest way to give you an understanding of what is deductible can be done through common examples your business may face. It’s not a comprehensive list but it gives you a starting point to think through how it works.  ​

^ A minor benefit is one that is provided to an employee or their associate on an “infrequent” or “irregular” basis, which is not a reward for services, and at a cost less than $300 (inclusive of GST) per benefit. Read more about it here.​

Valuing Entertainment Benefits will affect the deductibility of expenses and GST claimability.​

The Australian Tax Office (ATO) provides three methods that can be used by businesses to value and record their entertainment expenses:​

1. Actual Method.​

2. 50/50 Split Method.​

3. 12 Week Register Method.​

The Actual Method and the 50/50 Split Method are the most commonly used:​

This method requires all entertainment benefits to be separated into the following categories:​

Only the meal entertainment provided to staff, and their associates, is subject to FBT. These costs will be tax deductible and you are able to claim the GST input tax credits.​

Client entertainment is not tax-deductible and GST input tax credits cannot be claimed.​

Minor benefits provided to staff and their associates are also not tax deductible and GST input tax credits cannot be claimed.​

The 50/50 Split Method is the easiest method to use. It takes the value of all meal entertainment provided (for staff, associates, clients and other persons), and treats 50% of the total as taxable entertainment.​

Therefore a tax deduction will be available and GST input tax credits can be claimed on the 50% subject to FBT. The other 50% is not deductible and GST input tax credits cannot be claimed.​

The Minor Benefit Exemption does not apply if you choose this method.​

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GST can’t be claimed on non-deductible entertainment expenses. In order to claim GST for the period, you can add up the GST portion on claimable entertainment expenses with any GST you’ve paid on other expenses during the same period. ​

For example, you’ve spent a total of $150 on books as gifts for your employees during April, May, and June. You’re eligible to claim the GST portion ($150*0.10 = $15) of your entertainment expenses at 100%. This is because:​

As a result, you can include this $15 in your BAS and claim it back.​

You need to keep records such as invoices or receipts in order to make claims. As required by the ATO, you also need to keep records of the following information:​

Keeping these records will help you to calculate the entertainment expenses you’re eligible to claim. ​

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