Entertaining your employees and your clients is a great way to build rapport, say thank you or reward them for their efforts. And although it’s a necessary and important expense for many businesses, these benefits are partly diminished by the negative tax implications.
Entertainment fringe benefits arise on food, drink or recreation provided to an employee or their associates (e.g. spouse). Entertainment by means of food and drink can be further classified as meal entertainment, and this determination is crucial, as:
- Meal entertainment provided in respect of employees is subject to Fringe Benefits Tax (FBT), which can make tax deductible and able to claim GST input tax credits on the expenditure; whereas
• Meal entertainment provided in respect of non-employees is not subject to FBT, not tax deductible and the employer is unable to claim GST input tax credits on the expenditure.
As such, it is necessary for employers to allocate their meal entertainment expenditure between that for employees and for non-employees. There are three methods to choose from in determining taxable value. These are:
- The Actual Costs method – the FBT is based on the costs of the actual meal entertainment provided to employees (you need good records).
2. Twelve Week Register Method – a 12 week register determines the percentage of costs for employees and this percentage is applied to total meal expenditure to determine FBT payable.
3. 50/50 Split Method – the FBT payable is based on 50 per cent of the meal expenses paid by the employer during the FBT year.
Careful consideration must be taken in deciding which method to use as each has their own benefits and detriments. For example, the actual costs method provides the employer with a potential entitlement to various FBT exemptions but due to the additional work needed there are increased compliance costs. The 50/50 split method is simple and uncomplicated so it has less compliance costs but at the same time has no entitlement to FBT exemptions.
Here are some simple, more common examples of what constitutes entertainment and meal entertainment:
- Lunch provided during in-house training on business premises – entertainment
- Dinner provided where alcohol is consumed – meal entertainment
- Tickets to the football – entertainment
Author: Stacey Walker
Email: stacey@faj.com.au
