Many people think entertainment and marketing expenses are the same thing but from a tax perspective they are very different. Entertainment is generally not deductible whilst marketing is. It’s important to know the difference between the two so you can understand what’s deductible to your business and what’s not.
Let’s begin by breaking down what these two word’s actually mean.
The generic definition of entertainment is something affording pleasure, diversion, or amusement. The Australian tax law goes even further to describe it as either providing entertainment by way of food, drink or recreation; or by accommodation or travel to do with providing entertainment by way of food, drink or recreation.
Marketing is defined as the action or business of promoting and selling products or services, including market research and advertising. From these definitions we can easily see that these are two very different types of expenses.
Even though these two types of expenses are different there are potential points where they can overlap. This may occur where you take your client out to dinner lunch, or even coffee, you provide food or drinks to your clients at your premises or any other circumstances where you provide something to a client which provides pleasure.
In these cases you must determine if the expenses is marketing or entertainment.
When looking at whether a meal purchased and or provided by your business for a client is deductible there are four questions to ask:
1. Is it being provided for enjoyment or refreshment?
* If the purpose of the meal is pleasure it is unlikely to be deductible.
2. How elaborate is the meal?
* The “fancier” the meal the less likely it is to be deductible
3. Is it consumed during or outside worktime?
* Consumed during work time is more likely to be refreshment and thus deductible
4. Is it consumed on your business premises?
* If consumed on business premises more likely to be deductible
The answers to the above questions should be considered together as generally if the answer to one question leans toward the expense being entertainment, it generally is.
Some examples that you may consider to be marketing that the ATO generally treats as entertainment are listed below.
• Meeting your client at a café during work time and buying them a coffee and cake while discussing business related topics
• Taking your client to a pub for dinner and couple of beers while discussing business related topics
• Inviting all of your clients to a function on your premises outside business hours where alcohol and nibbles are provided
• Meeting your suppliers at a restaurant and buying them lunch while discussing business related topics
Refreshments provided in the office environment such as sandwiches and take-away coffee at a staff training session or client meeting will usually be tax deductible.
Author: Adrian Wardlaw
Email: adrian@faj.com.au
