When are expenses considered entertainment?

For a business, understanding when an expense is considered “entertainment” is crucial. Not only does it affect the deductibility of that expense for income tax purposes, but it can also prompt fringe benefit tax (FBT) obligations.

What is “entertainment”

The ATO generally considers an expense to be entertainment if it involves:

• Providing food or drink for enjoyment, not sustenance
• Recreational activities, such as sporting events, concerts or holidays
• Travel or accommodation associated with the above

Crucially, the intent and context surrounding the provision of these expenses are important. Consequently, the ATO has established four key factors to assist businesses in determining whether food or drink provided to employees and/or clients will qualify as entertainment. See below:

1. Why are you providing the food or drink for employees?

• If it’s to keep employees going during a long shift, it’s usually not entertainment
• If it’s for social interaction or reward (e.g. celebrating a milestone), it likely is.

2. What type of food or drink are you providing?

• Basic morning tea or sandwiches: unlikely to be considered as entertainment
• Lavish meals, alcohol, or dining at restaurants: likely to be considered as entertainment

3. When are you providing the food or drink?

• During work hours and it the course of duties: less likely to be entertainment
• After hours, on weekends, or at social events: more likely to be entertainment

4. Where are you providing the food or drink?

• On your business premises or at the employee’s usual workplace: less likely
• Off your business premises, such as at a function room, hotel or restaurant, or consumed with other forms of entertainment: more likely

Now let’s look at some examples and see if it’s considered entertainment…

Internal working lunches

Example: Sandwiches and soft drinks provided during an internal strategy meeting

ATO View: Not entertainment because the purpose is business related and not social

Client dinners at a restaurant

Example: Hosting a client for dinner and drinks at a fine-dining restaurant

ATO view: Entertainment because even if business is discussed, the setting and nature makes it social in nature

End of year staff party

Example: offsite Christmas party with catering and drinks

ATO view: Entertainment because recreational in nature and likely to attract FBT unless exemptions apply

Golf days and recreational activities

Example: Taking clients or staff out for a round of golf

ATO view: Entertainment because it’s a clear recreational purpose

What are the FBT implications?

Once you’re content the expense qualifies as entertainment, the next step is to assess whether it will attract Fringe Benefits Tax. Fortunately, the ATO provides certain FBT exemptions that can offer relief to businesses with entertainment expenses. These include:

Minor benefits exemption: If the benefit offered is less than $300 per person and provided infrequently FBT may not apply.

Property Exemption: If food or drink is consumed on business premises during work hours it may be exempt from FBT.

The otherwise deductible rule: If the employee could have claimed a tax deduction for the expense had they paid for it themselves, the employer may not be liable for FBT.

To conclude, classifying expenses correctly is more than just ticking boxes - it’s about understanding the intention behind the cost and aligning with ATO expectations. Misclassifying expenses can lead to denied deductions and/or unexpected FBT liabilities, so it’s important to assess each situation with diligence.

If you're still uncertain whether your business expenses qualify as entertainment, it's best to seek tailored advice from a tax professional.