The last thing on people’s mind at the end of the calendar year is superfluous things like taxes and bookkeeping. However, whilst your inhibitions may go out the window this festive season, you shouldn’t have to face a looming tax hangover in January.
Many business owners and their staff are in the midst of planning well earned staff parties and client luncheons that always seems to go hand in hand with this time of year, but time and time again the same sordid question is asked by our clients: “how much of this can I claim as a tax deduction?”
Whilst it’ll be nice to think that the tax man will shout the next round of drinks at the work Christmas function; it’s important to remember that the ATO’s policies on employee and client entertainment are often complex and confusing.
Firstly, we need to establish what exactly is “entertainment”?
Entertainment is defined as entertainment provided to clients and/or employees by way of food, drink or recreation. In general, the ATO will treat client entertainment expenses as non-deductible. Where employees are concerned, these expenses will likely be subject to Fringe Benefits Tax (FBT) and if so, it will be tax deductible.
As most business owners will see, entertainment is an easily confused grey area. To help further define the meaning of entertainment, contemplate the following:
Define the circumstances
The circumstances surrounding the premises and reason for providing entertainment need to be taken into consideration. If you are serving basic food and drink (i.e. sandwiches and tea, coffee, water) to refresh employees and clients during a meeting at your office then this activity and its associated costs are generally not considered “entertainment”.
However it should be noted that the more “meal” you provide the more chance there is that it will be classed as entertainment. If this is the case, the portion of costs associated with the client is not deductible; however the portion of the expense relating to the employee will be subject to FBT and will be tax deductible (the extent to which depends on the FBT method chosen to apply to entertainment).
The location of where you chose to provide food and drink is also a determining factor in whether it will be classed as entertainment. As indicated, light meals in your office during business hours will generally be deductible and not considered as entertainment. However, if clients are taken to a café, restaurant or hotel outside of office hours wherein food and drinks are purchased then this is less likely to involve work-related activities and more likely to be classed as entertainment.
Therefore, as much as SMEs owners would like to claim lunches and dinners with clients as part of their end of year celebrations, it should be seen as more of a gesture of goodwill than an eventual tax deduction.
Staff end of financial and calendar year parties
It should be noted that costs for the most common events at this time of year (end of year parties) are most likely subject to FBT as employees are involved. Entertainment expenses that are taxable FBT expenses are income tax deductible. But beware of being led into a false sense of security, as the FBT costs will most likely outweigh the income tax deduction!
There is however, a silver lining; entertainment costs associated with Christmas parties can be exempt from FBT if the event is classed as a “minor and infrequent benefit”.
As you can imagine, there are indeed complex rules surrounding this definition, but the first thing you need to establish is if the cost per head is less than $300. Then ask yourself: “how often do we put on parties like this?” If the Christmas party is the only party you throw a year, then it would be defined as infrequent. If this is the case then it’s possible to claim an FBT exemption and there will be no income tax deduction.
How to make it easier to understand and keep track of these expenses:
A vital tip business owners need to be aware of is concise record keeping of all entertainment expenditure. Make sure you track how often you entertain and how many people are involved. Ask yourself:
• What is the common mix of clients to employees?
• How often do you entertain?
• What are the most common types of events – dinner, sporting events, quick salad lunches?
• How often are these events held on your premises or at another venue?
By knowing and keeping track of these matters, it’ll be easier to present these records to your accountant to work out what can be claimed and the best FBT methods to use.
If at the end of the day, the whole matter of entertainment is too confusing and costly to bear, then considering alternatives may be a better option. Think about gifts to clients such as a hammer, bottles of wine etc. These will be deductible, as long as it is with the view that the gift will benefit your own business. Also consider small gifts to employees (less than $300) as an alternative to an end of year party. In general, you will be able to claim the cost of employee gifts as an income tax deduction (as long as the gift does not form entertainment).
When in doubt, check with your accountant!
The best resource a SME owner can have is an expert accountant. At Lockwood & Ward we can guide you through the complex labyrinth of claiming expenses and also provide you with a clearer picture of how to manage your entertain claims for the year ahead.