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Meal Entertainment

Under Section 32-5 of the Income Tax Assessment Act, entertainment expenses are generally not deductible for tax purposes.  Entertainment is defined as meaning entertainment by way of food, drink or recreation.  It also includes entertainment when travelling and obtaining accommodation.  Some examples of entertainment include business lunches and social functions like cocktail parties, Friday night drinks, harbour cruises, and winery tours.   "Entertainment" expenses (generally non-deductible) are to be separately classified from "meal" or "travel" expenses.

A general indicator when determining whether a meal is entertainment or not, is that the more elaborate the food and drink, the more likely it is entertainment.  For example, a light meal would be classified as non-entertainment compared to a four course meal.  Generally the following factors indicate that food or drink is entertainment:

  • Alcohol included
  • Substantial meal
  • Social Occasion (such as award or fundraising dinners)
  • High cost per head
  • Minor business purpose for meeting

It is also important to take into account whether the meal is consumed on an employer's premises compared to an offsite venue.   Offsite premises usually results in the expense being classified as entertainment.

Alternatively, factors that generally suggest that food or drink is not entertainment are:

  • Clear business activity for meeting
  • No alcohol
  • Refreshments/light meal only
  • Usually eligible seminar or training course which includes meals, however the seminar/training is the predominant activity
  • Low cost per head

Refer to the below table for some examples of some common Meal vs Entertainment situations.

Scenario

Explanation

Morning & afternoon food and drink consumed on employers premises. 

Are generally not considered to be entertainment.  The more elaborate the food/drink has the greater chance of it being classed as entertainment.

When food and drink is provided at a social function off premises at a hotel, restaurant or function room.

Food and drink that is provided during work time at a social function is more likely to be considered entertainment.

Food and drink consumed off premises at an employer's social function with a client.  All expenses are paid for by the employer.

This would be considered entertainment for the employee while the client's cost would be a non-deductible entertainment. 

When food and drink is provided whilst travelling overnight on a business trip.

Food and drink is not considered to be entertainment as it is considered sustenance rather than entertainment.  So this would be deductible for the employer.

When an employee and client travel together and they dine together.

Food and drink is not considered to be entertainment.  Considered to be sustenance.

When an employee travels and dines with another employee who is not travelling.

Food and drink is not considered to be entertainment.  Considered to be sustenance.

Refer to TR97/17

FBT and Tax Deductibility

To obtain a tax deduction, entertainment must be provided as a fringe benefit to an employee.   A fringe benefit is a non-monetary benefit provided in respect of employment.  Therefore, employee meal entertainment comes under the FBT legislation.  A meal fringe benefit can come under one or more of the following categories of the FBT legislation:

  • An expense payment fringe benefit, such as an employee being reimbursed for a meal on their credit card;
  • A property fringe benefit, such as where an employer provides food and drink;
  • A residual fringe benefit;
  • Meal entertainment fringe benefit
  • Tax-exempt body entertainment.

Examples of tax consequences under Income Tax laws and Fringe Benefits Tax laws:

Situation

Income Tax

FBT

Employee takes a client out for lunch - cost $120

Employee's portion : $60 tax deductible

Client portion : $60 non deductible

Employee's portion :

$60 FBT

Client's Portion : No FBT

Employee has a meal at a restaurant while on a business trip. Cost $80

Tax deductible $80

Not entertainment

No FBT and not considered entertainment due to the "otherwise deductible rule"

Employer provides a 3 course meal with wine in the office.

Non deductible

Exempt from FBT

Employee has a $70 meal at a restaurant and is paid for by the employer.

Employee  : $70 deductible

Employee : $70 FBT

Employer provides sandwiches and soft drink for lunch at the office.

Tax deductible

Exempt from FBT

Employee has meal in an

"in-house" canteen

Tax deductible

Exempt from FBT

Employer provides a social function for employees and associates in the office

Cost per employee : Non deductible

 

Cost of associates : Tax Deductible 

Cost per employee :  Exempt benefit

 

Cost per associate : Taxable fringe benefit

Minor Benefits - Exempt Fringe Benefits

The ATO has provided employers with a minor benefit FBT exemption.  In order for this exemption to be applied, an item must be under a taxable value of $300 and provided to an employee on an infrequent basis.   Examples of minor benefits are alcohol, perfume, hampers and flowers etc.

Conclusion

It is important that you keep records that allow you to correctly classify the treatment of your expenses under both Income Tax and Fringe Benefits Tax legislation.  It may be worthwhile structuring work related entertainment events in such a manner to ensure correct compliance with relevant legislation.  Plan ahead and call your BBA Advisor for advice on your potential Fringe Benefits Tax exposure.