Never is a tax topic more hotly disputed, misunderstood and argued than that of fringe benefits tax especially when it come to Meal Entertainment. With fringe benefits season just around the corner the issue will once again rear its ugly head.
It is easy to understand the position of many small business operators who take a clients and business associate out to lunch or down to the local coffee shop. These types of social meetings are a great way to start a business relationship, build a repore with a key person, seal the deal or to express gratitude. Many come to the conclusion that if it is a meeting has a direct nexus to their business that the cost of meal and drinks is a business expense and fully deductible.
The ATO are clear on this – not only is meal entertainment not deductible it is also subject to Fringe Benefits Tax. The ATO’s argument is that food and drink are sustenance for our body and therefore not business related and are of a private nature.
The ATO have produced the following scenarios and outlined what the deductibility and Fringe Benefit treatment are.
|
Situation |
Income tax |
FBT |
| Employee takes two clients to lunch at a restaurant - cost $150 |
Employee's portion: $50 tax deductible, Client's portion: $100 non-deductible |
Employee's portion: $50 fringe benefit, Client's portion: No FBT |
| Employee has meal in restaurant while travelling on business trip |
Tax deductible |
No FBT ('otherwise deductible' rule) |
| Employee has meal in an 'in-house canteen' |
Tax deductible |
Exempt from FBT |
| Employer provides sandwiches and juice for working lunch in office (not entertainment) |
Tax deductible |
Exempt from FBT |
| Employer provides substantial lunch with wine for employees and clients in office |
Non-deductible |
Exempt from FBT |
| Employer provides social function for employees /clients in office
|
Non-deductible |
Exempt from FBT |
| Employer provides social function for employees and associates in office |
Cost per employee: Non-deductible, Cost per associate: Tax deductible |
Cost per employee: Exempt benefit, Cost per associate: Taxable fringe benefit
|
| Employer reimburses employee for cost of private party |
Amount reimbursed is tax deductible |
Taxable fringe benefit |
| Employer provides employee and associates with theatre tickets |
Tax deductible |
Taxable fringe benefit |
Minor Benefits – Exemption from Fringe Benefits
To be eligible for this provision the taxable value must be under $300 per employee and be infrequent and irregular.
The ATO have stipulated that “it is not appropriate to specify the number of times associated benefits that are identical or similar to a minor benefit, or benefits provided in connection with the minor benefit, can be provided while satisfying the 'infrequency and irregularity' criterion. However, the more often and regular those benefits are provided, the less likely that this criterion would be satisfied”
This is an absolutely impractical response from the ATO and honestly has many accountants in our industry frustrated that there are not clear guidelines on this issue. In Taxation Ruling TR 2007/12 It concludes that an employer who provides a Christmas party for its staff fails to qualify because the benefit is not infrequent as a Christmas party is arranged annually for the staff and hence occurs on a regular basis. On the other hand the ATO have released a fact sheet entitled Fringe Benefits Tax and Christmas Parties and includes the use of the minor benefit exemption in the examples it provides.
Our position at Interactive Accounting is to concentrate on the regularity instead of the frequency so that if the benefit is provided on a regular basis, every week, month, quarter or year then it does not qualify for the exemption. If the benefit occurs ad-hoc or on a one-time only basis then it will qualify as a minor benefit.
Conclusion
If you are incurring and claiming meal entertainment in your accounts you have two choices. Keeps records and pay the appropriate FBT or have the meal entertainment that is applicable to you and your employees paid out as dividends. If you are unsure about your obligations please contact support@interactiveaccounting.com.au
Remember: GST is only claimable on the tax-deductible portion.
