Frustratingly for small business owners, the tax rules around wining and dining clients are not black and white.
When you pay for your clients’ food, drink or recreation in the context of meetings, business lunches and social functions, you are likely to incur what the ATO calls entertainment expenses, which are not tax deductible.
However, the tax office also says that entertainment doesn’t occur every time you provide food or drink (Tax Ruling TR 97/17), meaning there are instances when you can deduct these costs against your income.
Confused? Here are some pointers.
Throwing out the basic rule
With client meals, you need to forget the basic rule that you can claim expenses as long as they are directly related to earning your assessable income.
Even if you are seeing clients to discuss business matters, the tax office will disallow anything it classifies as entertainment expenses.
So the key is to establish what ‘entertainment’ really means.
What is ‘entertainment’?
There are four aspects to consider when deciding whether the cost of your client’s meal is an entertainment expense.
1. Is it being provided for enjoyment or refreshment?
Anything provided for enjoyment or in a social setting is regarded as entertainment. However, this treatment doesn’t apply to refreshments that allow you, your employees and the client to complete the working day in comfort.
2. How elaborate is the meal?
As long as no alcohol is served, simple meals involving sandwiches, finger foods and salads are not deemed to be entertainment. The same goes for morning and afternoon tea favourites like tea, coffee, fruit drinks, cakes and biscuits (Tax Ruling IT 2675).
3. Is it consumed during or outside work time?
Refreshments provided during work time will not likely be characterised as entertainment.
4. Is it consumed on your business premises?
Food or drink consumed on your business premises is less likely to be considered as entertainment when compared with dining in a function room, hotel, restaurant, cafe or coffee shop.
In summary, you may qualify for a deduction if your client is served light refreshments on your business premises during work time. However, it is advisable to consult one of our accounting professionals for tailored advice. You can do so on 03 9417 3511.
Tax breaks are invaluable to small businesses. Figure out the rules around client meals and you could lower your future business costs.
Tax laws and regulations change frequently, and their application can vary widely based on the specific facts and circumstances involved. You are responsible for consulting with your own professional tax advisors concerning specific tax circumstances for your business. Intuit disclaims any responsibility for the accuracy or adequacy of any positions taken by you in your tax returns.
If you have questions regarding accounting issues specifically related to your industry or your business circumstances, you should consult with your own professional tax advisor, accountant, attorney, industry expert or professional association.
Can you claim a tax deduction for the cost of holding a business meeting at a café/restaurant? Sadly, the answer is no*
Businesses are able to provide light refreshments at meetings held on their business premises and claim a deduction for the cost of these refreshments (refer to IT 2675). This is because the ATO considers this not to be meal entertainment. What if you do not have business premises to provide these refreshments? Can you take a client to your local cafe to buy the same refreshments and claim a deduction? Sadly, the answer is no.
The ATO considers any meal & drink consumed at a cafe to take on the character of entertainment. Why? To quote the ATO directly: “The food or drink may not provide entertainment in itself depending on the extent of the meal, but it is the setting in which it is consumed that turns the food or drink into the provision of entertainment. That is, entertainment is provided by way of food or drink, in a social situation at a cafe, despite business discussions taking place.”
What if you do not have a space suitable, or any space at all, to hold meetings? The ATO went on to say: “The fact that there are limited facilities at your business premises for meeting clients does not change the character of entertainment by way of food or drink. This is also the case where there are no business premises.”
*Please note the above was largely referring to a Private Ruling obtained in relation to a sole trader, however the general principles will apply to all taxpayers. The bottom line is that if you provide refreshments at a cafe for clients their component will not be deductible. Anything provided to employees at a cafe will be considered meal entertainment and will fall under Fringe Benefits Tax legislation
