Should you ask any accountant whether your entertainment expenses are deductible, their first reaction is often “No!” Whilst this is considered a rather grey area, I’m here to share a few tips on when your Christmas lunches may or may not be deductible for tax purposes, to ensure you’re not missing out on any business deductions and that the ATO doesn’t come to the party.
The term ‘entertainment’ is broadly defined as the consumption of food, drink or recreation type activities.
In determining the creditability to your claim and analysing the expenditure, you can ask yourself the following questions:
- What is the purpose of the lunch or event?
- Why is the entertainment being provided – for business purposes (whereby the food or drink is for refreshment or sustenance) or social (where the purpose is enjoyment);
- What is being provided – an elaborate meal (a 3-course lunch inclusive of alcohol), a morning/afternoon tea (sandwiches, coffee, cake and juice), etc.
Takeaway tip – the nature of the expense (entertainment verses sustenance) can impact your eligibility to GST input tax credits and income tax deductions. Liaise with your accountant as to what is best practice to avoid under or over claiming..
- What is the time and location of the event?
- Where is the event taking place – at a lavish restaurant, on business premises, or at a local café?
- When is the event occurring – during or after business hours (perhaps whilst travelling)?
Takeaway tip – Whilst many taxpayers are wary of not crossing the line, based on these general rules many may be missing out on some very legitimate tax deductions by not considering the why what, where and when. So be sure to discuss these questions in detail at tax time to ensure you’re maximising your tax position.
- So, is my Christmas lunch considered ‘meal entertainment’ or characteristic of ‘mere sustenance’?
- Example 1 – Julie Couts is a barrister who has decided to hold her next mentor catch-up this Christmas period over morning tea (which included tea, cakes and a selection of sandwiches). This would not generally have the character of meal entertainment; therefore, Julie could claim the cost of the light refreshment in conjunction with the meeting as an income tax deduction and claim the GST credits.
- Example 2 – during this period Julie also arranged a Christmas social event with one of her significant referees, to thank him for his support during the year. They enjoyed a 2-course meal and glass of wine at the Rialto to celebrate. This would be considered meal entertainment. Therefore, the cost of the food and drink would not be considered an income tax deduction and the GST credits could not be claimed.
- Example 3 – in conjunction with the above events, Julie purchased a Christmas Hamper for her mentor and a bottle of wine for her referee as a Christmas gift. These would not be considered entertainment and therefore considered an income tax deduction and the GST credits could be claimed.
These questions help to establish whether the expenditure is incidental to a business meeting or an unrelated social gathering. Light refreshments in respect to a business meeting are accepted as a business cost and considered mere sustenance and therefore deductible. In respect to the lavish lunch, given alcohol is involved, this adds far less creditability to the claim and would generally be considered meal entertainment and not deductible in nature. However, each event should be considered separately and discussed with your accountant.
Should you require clarification or wish to discuss any of these points in more detail please do not hesitate to get in touch with Sam Zebrowski at Samantha.firstname.lastname@example.org or on 03 8823 9702.