Contents
- What is entertainment for FBT purposes?
- Meal entertainment fringe benefits
- Taxable value of meal entertainment fringe benefits
- What is recreational entertainment?
- Record keeping
- Reduction in taxable value of entertainment
What is entertainment for FBT purposes?
Entertainment for Fringe Benefits Tax (FBT) purposes includes the provision of entertainment by way of food, drink or recreation, along with associated travel and accommodation. The guidelines pertaining to the entertainment for FBT purposes are outlined in the FBT Act.
Importantly, the provision of entertainment is not a distinct form of fringe benefit. Rather, entertainment provided by an employer (or by an associate of the employer or by a third-party as a result of agreement with the employer) to an employee (or an associate of the employee or a third-party in accordance with the direction of the employee) will be allocated to one of following categories of fringe benefits:
- meal entertainment fringe benefit
- expense payment fringe benefit
- property fringe benefit
- residual fringe benefit
- tax-exempt body entertainment fringe benefit
The appropriate category of allocation will depend on the specific circumstances of the entertainment provided.
The taxable value of the entertainment will be calculated in accordance with the valuation rules set out in the relevant fringe benefit category. Essentially:
- Benefits that are categorised as meal entertainment fringe benefits (e.g. the provision of food and drink at a social function) will be valued under the valuation rules that apply to meal entertainment fringe benefits. Note that the meal entertainment fringe benefit category is not compulsory to utilise. There is further discussion on this concept later in the article.
- Benefits that are categorised as property fringe benefits (e.g. providing a meal to an employee who was entertaining clients) will be valued under the valuation rules that apply to property fringe benefits.
- Benefits that are categorised as residual fringe benefits (e.g. paying for a sightseeing tour for an employee who was entertaining clients) will be valued under the valuation rules that apply to residual fringe benefits.
- And so forth…
Meal entertainment fringe benefits
Keep in mind that food or drink and associated travel and accommodation may only be classified as meal entertainment if it is entertainment. For example, the provision of a light snack to employees during the work day on business premises could not be categorised as a meal entertainment expense as the provision of the food is not ‘entertainment’. In this instance, the benefit provided would need to be allocated to alternative category of fringe benefit e.g. property fringe benefit or residual fringe benefit. The taxable value of the food or drink (and associated accommodation / travel) would then be calculated according to the applicable valuation rules in that relevant fringe benefit category. Note that meal entertainment provided under a salary packaging arrangement must not be classified as a meal entertainment fringe benefit.
There are number of questions to consider in determining whether the provision of food or drink is entertainment. These include:
- When is the food or drink being provided? If provided outside of work hours or outside of work travel time = more likely to be entertainment.
- Why is the food or drink being provided? If for a social event or occasion = more likely to be entertainment. For example, food or drink provided incidentally at a professional development seminar is less likely to be entertainment. Conversely, food or drink provided at a work function to celebrate a staff member birthday is more likely to be entertainment.
- Where is the food or drink being provided? If provided away from business premises = more likely to be entertainment.
- What food or drink is being provided? If the meal is elaborate = more likely to be entertainment. For example, dinner plate meals. Conversely, light meals or refreshments are less likely to be entertainment.
Taxable value of meal entertainment fringe benefits
If any benefit is classified as a meal entertainment fringe benefit, there are two methods that can be employed to calculate the taxable value of the benefits provided:
- The 50-50 split method
- The 12-week register method
Generally, an employer will utilise the method from year to year that results in the lowest FBT liability. Remember that once a benefit is classified as a meal entertainment fringe benefit, all benefits arising from the provision of meal entertainment must be classified in this way. Note also that the taxable value of the meal entertainment fringe benefit will be reduced by any employee contribution.
50-50 split method
The taxable value is simply 50% of total meal entertainment expenditure incurred by the employer throughout the FBT year. Importantly, this is inclusive of meal benefits provided to clients which would otherwise not be subject to fringe benefits tax.
Obviously therefore, the 50-50 split method will be less favourable where a majority of meal entertainment is provided to benefit clients (as opposed to employees and employee associates). Conversely, where the majority of entertainment is provided to employees (and employee associates), the 50-50 split method can be very advantageous as effectively only 50% of meal entertainment expenditure is being subjected to FBT (instead of up to 100%).
It is also vital to be aware that the property benefits exemption and the minor benefits exemption are not available if the 50-50 split method is chosen. Therefore, the classification of food and drink as ‘meal entertainment’ and the selection of the 50-50 split method is probably unideal where meal entertainment benefits could have otherwise been entirely exempt from FBT.
12-week register method
The taxable value is based on meal entertainment expenditure provided to employees (and employee associates) over a period of 12-weeks as recorded on a register. The register is generally valid for that year and the following four FBT years. However, a new register may be required if total meal entertainment expenditure increases more than 20%.
The relevant details to be included in the register include the following:
- The date/s meal entertainment is provided
- Details of who the entertainment is provided to and whether those persons are employees, associates of employees, clients etc.
- The cost of the meal entertainment
- The kind of meal entertainment
- The location of the meal entertainment
- If applicable, whether the meal entertainment is provided at an in-house dining facility.
It is important to be aware that the property benefits exemption is not available under the 12-week register method. However, the minor benefits exemption is available (unlike under the 50-50 split method). Therefore, the 12-week register method may be preferrable over the 50-50 split method where the employer is in a position to utilise the minor benefits exemption.
Again, the classification of food and drink as ‘meal entertainment’ and the selection of the 12-week register method is probably unideal where meal entertainment benefits could have otherwise been entirely exempt from FBT under the property benefits exemption.
What is recreational entertainment?
The provision of recreational entertainment may not be categorised as ‘meal entertainment’ as it is not the provision of food or drink. Instead, the recreational entertainment must be allocated to an appropriate fringe benefit category e.g. property benefit, residual benefit etc. Of course, food or drink (and associated travel / accommodation) provided at these recreational entertainment events may be categorised as meal entertainment fringe benefits.
The taxable value of the recreational entertainment will be calculated under the relevant fringe benefit category valuation rules. Remember that the taxable value of the fringe benefit will be reduced by employee contributions and any deductible component of the entertainment expenditure.
It is also worth noting that there is a 50-50 split method (similar to the 50-50 split method available in respect of meal entertainment) that may be used to calculate the taxable value of hiring or leasing entertainment facilities. This includes the hiring or leasing corporate boxes, boats, planes, or entertainment facilities. The minor benefits exemption and property benefits exemption are not available if the 50-50 split method is applied.
Record keeping
It is essential to maintain records to support your FBT position.
When it comes to entertainment, necessary records might include details of the following matters:
- The date of provided entertainment benefits.
- The recipients of the entertainment benefits.
- The cost of the entertainment benefits.
- The type of entertainment benefits.
- The location of the provided entertainment benefits.
Entertainment by way of food or drink or entertainment associated with hiring or leasing entertainment facilities will generally not need to be included in the employees’ reportable fringe benefits amount in the employee payment summary or income statement. However, entertainment benefits provided under a salary packaging arrangement will generally be reportable.
Reduction in taxable value of entertainment
The taxable value of a fringe benefit (including fringe benefits involving entertainment) is reduced by the amount of entertainment that would have been deductible to the employee had the employee personally incurred the expense. However, note the general position is that entertainment expenses tend not to be deductible for income tax purposes as they are deemed to be a private-natured outgoing. Of course, there are many conceivable exceptions to this basic position.
To avoid confusion, it is worth noting that FBT paid on expenditure which is not-deductible entertainment remains deductible for the employer.
This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.