Entertainment Tax Deductions
Division 32 of the Income Tax Assessment Act 1997 (ITAA 97) contains the rules relating to the deductibility of entertainment expenses. The Division provides that expenditure on entertainment (which includes food, drink and recreation) is not deductible as a general rule. However, the Division lists a number of exceptions where the expenditure can be deductible. It also provides that the expenditure can be deductible to the extent it is subject to fringe benefits tax.
What is entertainment?
Entertainment is defined at section 32-10 ITAA 97 as:
- entertainment by way of food, drink or recreation; or
- accommodation or travel to do with providing entertainment by way of food, drink or recreation.
Common examples of entertainment are:
- business lunches
- social functions
- tickets to sporting and theatrical events.
Entertainment also covers accommodation or travel associated with any of these items.
The section states these are examples of what is not entertainment:
- meals on business travel overnight
- theatre attendance by a critic
- a restaurant meal of a food writer.
The prohibition on entertainment applies to prevent claims (such as depreciation and repairs) for plant and equipment to the extent that it is used for the provision of non-deductible entertainment.
Food and drink
The Commissioner of Taxation (the Commissioner) has issued Taxation Ruling TR 97/17 which sets out his views on the factors to be taken into account in determining whether the provision of food and drink constitutes entertainment. The ruling contains a detailed table that summarises the fringe benefits tax (FBT) and income tax outcomes for various circumstances in which food and drink is provided to employees and their associates. It also provides a number of examples illustrating the interaction of the fringe benefits and income tax provisions in relation to entertainment.
The ruling points to the following questions which need to be considered to determine whether the provision of food and drink constitutes the provision of entertainment:
- why is the food and drink being provided?
If provided for the purposes of refreshment, it will generally not be entertainment. Where provided in a social situation where the purpose of the function is for employees to enjoy themselves, it will generally be entertainment.
- what food and drink is being provided?
The ruling states that morning and afternoon teas and light meals are generally not considered to constitute entertainment. However, the more elaborate the meal, the more likely it will be entertainment.
- when is the food and drink being provided?
If provided during work time, overtime or while travelling, it is less likely to be entertainment as in the majority of these cases food provided is for a work-related purpose rather than an entertainment purpose. This, however, depends upon whether the entertainment of the recipient is the expected outcome of the provision of the food or drink. The ruling states that for example, a staff social function held during work time still has the character of entertainment.
- where is the food and drink being provided?
Where provided on the employer’s business premises or at the usual workplace of the employee, it is less likely to be entertainment. Where provided in a function room, hotel, restaurant or consumed with other forms of entertainment, it is more likely to be entertainment.
The Commissioner accepts that where an employee travelling in the course of performing employment duties consumes food and drink (whether alone, with other employees, with clients who are also travelling, or with a spouse) without any supplementary entertainment (e.g. a floor show), the food and drink do not have the character of entertainment.
Items of property
In determining whether the provision of an item of property constitutes the provision of entertainment, regard should be had to all the circumstances of the case, especially the character of the entertainment to be derived from the item of property provided. The ATO states that this character is distinct from the property itself and relates to the immediate and active use of the property.
In practice, the provision of entertainment can be determined by reference to the following characteristics:
- entertainment occurs soon after provision of the item of property;
- the usefulness of the item of property expires after consumption; or
- the item of property is returned at the completion of use.
There should be a direct connection between the item of property and the entertainment:
- the entertainment should arise from the use of the item of property;
- the entertainment is the expected outcome of the provision of the property.
For example, costs incurred in the giving of items of property, such as bottled spirits, groceries, games, TV sets, VCRs, computers, crockery, swimming pools, gardening equipment, etc; have an enduring character, and only an indirect nexus to any immediate entertainment. Consumption is usually delayed. The items of property usually require further steps before they can be consumed, and consumption can occur over a long period. Hence, these items of property do not generally constitute provision of entertainment.
However, costs incurred in providing glasses of champagne, hot meals, theatre tickets, holiday accommodation, hired entertainers, and hired sporting equipment, have a dynamic and immediate character. Consumption can usually occur immediately. These items of property do not last beyond initial consumption (or are to be returned at the end of the hire period). Hence, these items of property would generally constitute the provision of entertainment.
When entertainment is deductible
Once it is ascertained an expense is entertainment, it must be determined whether it falls within one of the exceptions to the general prohibition on the deductibility of entertainment expenses in Division 32.
Deductible where fringe benefit
Where entertainment expenses are incurred in providing a fringe benefit, the general prohibition on deductibility does not apply. To the extent the amount is subject to FBT, it will be deductible.
Benefits specifically exempt from FBT (including minor fringe benefits) do not qualify for this exclusion from the prohibition. It will therefore be necessary to look to one of the other exceptions to get a deduction for the expense.
Note that where an employer elects to use the 50/50 split method or the 12-week register method for determining the taxable value of meal entertainment fringe benefits, only the corresponding proportion of the meal entertainment expenditure is deductible.
In-house dining facilities
A deduction may be claimed for the cost of providing food and drink on working days to the taxpayer’s employees (including directors) in an ”in-house dining facility”. This also
applies to employees and directors of related companies. However, generally no deduction is allowed for costs incurred on parties (including Christmas parties), receptions or other social functions.
An in-house dining facility means a canteen, dining room or similar facility which is:
- on property occupied by the taxpayer; and
- operated mainly for providing food or drink to employees or directors of the taxpayer or of a related company; and
- is not open to the public.
A boardroom or meeting room with kitchen facilities is not an in-house dining facility.
The cost of providing food and drink to non-employees (e.g. clients) in an in-house dining facility is also deductible on the condition that an amount of $30 is included in the taxpayer’s assessable income for each meal provided. If the taxpayer elects not to include the amounts in assessable income, the cost is not deductible.
The general prohibition does not apply to the provision of food, drink, accommodation or travel to an individual that is reasonably incidental to that person’s attendance at a seminar lasting at least four hours.
Meals, rest or recreation breaks do not affect the continuity of a seminar and are not taken into account in determining its duration.
A seminar includes a conference, convention, lecture, meeting, award presentation, speech, question-and-answer session, training session or educational course.
However, an expense is not deductible if:
- the seminar is a ”business meeting”. A seminar is a business meeting if its main purpose is to enable discussion of the affairs of a particular business between persons associated with that business; or
- the main purpose of the seminar is the promotion or advertising of a business or of its goods or services or the provision of entertainment.
A seminar will not be a “business meeting” if it is organised solely for either (or both) of these purposes:
- training the employer and/or the employer’s employees in matters relevant to the employer’s business; or
- enabling the employer and/or the employees to discuss general policy issues relevant to the internal management of the employer’s business and it is conducted on property that is occupied by a person (other than the employer) whose business includes organising seminars or making property available for conducting seminars.
Taxpayers in business of entertainment
Where the taxpayer’s business consists of providing entertainment to paying clients or customers (e.g. theatres, restaurants), the cost of providing that entertainment in the ordinary course of business is deductible.
This also applies where the provision of entertainment for payment forms only a part of the taxpayer’s business (e.g. the cost to an airline of providing meals to passengers).
A deduction is available for entertainment expenses incurred to promote or advertise to the public the taxpayer’s business or its goods or services and:
- the taxpayer provides entertainment to an individual as part of a contract for the supply of goods or services in the ordinary course of the taxpayer’s business; or
- the taxpayer provides discounted or free entertainment as part of its business; or
- the taxpayer incurs costs in exhibiting the goods and services of its business; or
- the taxpayer provides entertainment that is made available generally to ordinary members of the public.
The general prohibition does not prevent a deduction being claimed for the cost of entertainment provided free to members of the public who are sick, disabled, poor or otherwise disadvantaged. An example would be the provision of a Christmas party in a children’s hospital.
Rules re Christmas parties
When an employer (that is not a tax-exempt organisation and does not use the 50-50 split method for meal entertainment) provides a Christmas party, the following should be noted:
- the costs (such as food and drink) associated with Christmas parties are exempt from FBT if they are provided on a working day on the business premises and consumed by current employees. A taxable fringe benefit will arise in respect of an associate of an employee who attends the party if not otherwise exempt under the minor benefits exemption
- the provision of a Christmas party to employees may be an exempt minor benefit if the cost of the party is less than $300 per employee and certain conditions are met. The minor benefits threshold of less than $300 applies to each benefit provided, not to the total value of all associated benefits.
Income tax deductibility
The provision of a Christmas party is the provision of entertainment. It will be income tax deductible to the extent that it is subject to FBT.
Therefore, any costs that are exempt from FBT cannot be claimed as an income tax deduction. The costs of entertaining clients are not subject to FBT and are not income tax deductible.
Section 32-75 ITAA 97 provides for the Commissioner to look behind the terms of an arrangement to determine how much of an outgoing is (in reality) connected with the provision of non-deductible entertainment.
For example, a company pays to sponsor a football game. Under the same arrangement, the company is given a corporate box at the game. In such a case, the Commissioner will estimate how much the sponsorship costs are related to that entertainment component and disallow them accordingly.
Where advertising signs are provided in conjunction with a corporate box, the Commissioner generally accepts that 5% of the total cost represents the (deductible) portion applicable to advertising and 95% is in respect of (non-deductible) entertainment.
The ATO acknowledges that in some cases a taxpayer may be able to prove a higher proportion of the total cost is applicable to advertising. Relevant factors in determining the amount of the deduction to be allowed include the size, location and prominence of the advertising signs, attendances, the type and extent of media coverage and the nature of the facilities provided in the box.
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