Can I claim a tax deduction for entertainment expenses?

Many business owners enjoy treating their clients and staff to an expensive lunch or night out at a sporting event every now and then, and hope to write off the expense as a tax deduction. But the answer to whether you can claim a deduction for entertainment expenses isn’t a simple yes or no response. We explain more below. 

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What are entertainment expenses?

Entertainment-related expenses include food, drink and recreation — things like lunches, sporting or theatrical events, or other parties for staff, referral partners or clients. The general rule is that entertainment expenses are not tax deductible, however, there are certain factors that must be considered as there are exceptions to this rule.

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According to the Income Tax Assessment Act 1997, entertainment is defined as food, drink or recreation for entertainment purposes or accommodation or travel relating to providing entertainment by way of food, drink or recreation. Put simply, if you and your business audience are being “entertained” and there is food, drinks, travel or accommodation associated with this entertainment, then it probably counts as an entertainment expense. But is it tax deductible? Probably not, but maybe — we’ll explain further. 

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When is food and drink classed as entertainment?

When determining if food or drink is classed as entertainment (meaning it’s not tax deductible), the ATO provides certain factors that must be considered:

• Purpose: Why is the food and drink being provided? Is it for refreshment purposes only? If so, it will generally not be considered entertainment. If it’s provided in an entertainment setting, it’s likely classed as entertainment. 
• Type: What food and drink is being provided? Generally, morning and afternoon tea or light meals are not considered entertainment. 
• Timing: When is it being provided? If the food or drink is provided during work hours, overtime or while travelling, it’s likely to not be considered entertainment as it’s a work-related purpose — unless it’s associated with entertainment, for example, a social function during work hours.
• Location: Where is it being provided? Food and drink at the workplace is less likely to be entertainment, while at a hotel, restaurant, or with other entertainment, it is more likely to be.

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What entertainment expenses are tax deductible?

If you’ve determined that an expense is classed as an entertainment expense, while generally not deductible, there are certain exceptions for when you can claim a tax deduction:

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Seminars

Food, drink, travel and accommodation expenses will generally be tax deductible when relating to a seminar that goes for more than four hours. However, the seminar must be orgaised for either of two reasons:

1. Training purposes.
2. Allowing the employer and employees to discuss business policy at a location owned by someone whose business includes organising or hosting seminars.

Fringe benefits

If your entertainment expense is related to providing a fringe benefit, you’ll generally be able to claim a deduction for the cost and also claim any GST paid.

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Keep in mind that entertainment provided to people other than employees or their partners (for example, to your clients) is not subject to FBT. This will generally mean you cannot claim a tax deduction for entertainment expenses provided for clients. 

In-house dining 

If your work place has an “in-house dining facility”, a deduction may be claimed for food and drink expenses incurred during work hours, when provided to employees. In-house dinding means a private dining area for employees to use during work hours. This does not include staff parties held in the dining area, which would be classed as entertainment. 

Entertainment for charitable purposes

You’ll generally be able to claim a deduction for entertainment expenses in the case where they relate to a charity event for vulnerable members of the community. 

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Are employee gifts tax deductible?

As an employer, it's crucial to understand the tax rules regarding Fringe Benefits Tax (FBT) and the ability to claim tax deductions and GST on certain gifts.

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• Cash: Cash gifts can be tax deductible if processed through payroll with applicable withholding tax and superannuation. These do not attract FBT, but employees will pay income tax on the amount.
• Entertainment gifts: Gifts like event tickets are not tax deductible, and you cannot claim GST on these items.
• Non-entertainment gifts: These gifts are tax deductible, and you can claim GST. Non-entertainment gifts under $300 are particularly advantageous for avoiding FBT and claiming a tax deduction.

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Are Christmas parties tax deductible?

A Christmas party is considered entertainment and is income tax-deductible if it is subject to FBT. However, it’s important to note that any food or drink expenses associated with a Christmas party provided on a working day, on the business premises, for current employees are exempt from FBA — Costs exempt from FBT cannot be claimed as a tax deduction.

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If the party is held outside of the business premises, or employees are free to bring their partners, you don’t pay FBT if the party is classed as a minor benefit (the cost for each person is under $300) — again, if it’s exempt from FBT, it cannot be claimed as a tax deduction. 

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Seek advice if you’re unsure

As you can probably see, there are quite a few grey areas when determining when an entertainment expense might be tax deductible. If you’re planning on treating your colleagues or clients to an event, it’s a good idea to get clarity around what you’re able to claim as a deduction. 

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If you’d like more information, please feel free to reach out to us at Bonerath & Co.