Blog

Entertainment

Tax Accountants Sunshine Coast

Entertainment Expenses & Tax Deductions

What does the ATO consider to be entertainment? Are these expenses tax deductible? – Enrich Bookkeeping Solutions and Tax Accountants in Sunshine Coast!

We were recently contacted by a client who had seen that we had coded food purchases to his drawings account, which he believed should have been entertainment.

The purchases were small amounts at take out places, such as KFC and McDonalds. He had not provided receipts and therefore we made the decision to code to entertainment.

Upon receiving advice from the client that these were business expenses and not personal, we recoded to entertainment.

Generally, entertainment is not tax deductible and you cannot claim any GST back on these expenses.

So, what does the ATO consider to be entertainment?

Entertainment includes food, drink or recreation and any accommodation connected to providing this entertainment.

Recreation will include any leisure activities, such as a game of golf.

Providing entertainment to staff in your organisation could attract fringe benefits tax (FBT), which I don’t believe many business owners are aware of.

With Christmas just around the corner, many employers will be starting to plan their Christmas parties for staff. This will be considered entertainment by the ATO, so it is important to understand your obligations.

The ATO outlines some factors that need to be considered when providing entertainment, as to when FBT applies. The four factors the ATO asks you to consider are:

a) WHY is the food or drink being provided?
b) WHAT type of food or drink is being provided?
c) WHEN is the food or drink being provided?
d) WHERE is the food or drink being provided?

If we apply these four factors to our client above situation, we will find that the expenses are very likely considered entertainment.

a) WHY is the food or drink being provided?
In this clients situation, most food being provided was to staff members for lunch or after work drinks, it would be fair to say that this food and drink is being provided in a social situation and the employees enjoyed themselves.

b) WHAT type of food or drink is being provided?
While these takeaway meals are not elaborate, they will have been provided to create a social element for lunch. While after work drinks have not been provided during work hours or during lunches, the ATO says that a social context is created when serving alcohol.

c) WHEN is the food or drink being provided?
Lunches are being provided during work hours, and sometimes during staff meetings.
Alcohol is being provided after work hours for employees to enjoy themselves.

d) WHERE is the food or drink being provided?
This food is often consumed off the client’s premises and therefore more likely to be entertainment.

Given the above facts, it is likely that these expenses are entertainment and are not tax deductible.