Christmas Parties, Entertainment and Tax
Believe it or not, Christmas is just around the corner already, which will leave many of you thinking about how best to reward staff. It may also have crossed your mind to consider how much of the expenditure that you will make will be tax deductible.
Generally, if you provide entertainment for your team, clients or any other business contact, some of your business entertainment expenses are tax deductible. Below is a list of different types of expenditure on entertainment and the applicable tax treatment.
Fully Deductible Expenses
The following is a list of the entertainment expenses that are fully deductible:
1. Meals while travelling on business
The cost of a meal while travelling on business is fully deductible as long as there are no business contacts present.
The cost of food and drink at a conference or business course, which continues for four hours or more, is fully deductible.
3. Meal allowances
A tax-free meal allowance paid by an employer to an employee working overtime is fully deductible.
4. Executive dining facilities
The cost of a light meal provided to employees in an area reserved for senior management is fully deductible when the meal is provided during the course of the employees’ normal duties.
5. Morning and afternoon teas
Morning and afternoon teas in an executive dining facility or at a conference are fully deductible.
6. Promotions open to the public and trade display
Entertainment provided by a business as part of a function open to the public, or at trade displays to advertise the business, are fully deductible.
For example: The costs of crockery/glassware hire, food, room hire, equipment
7. Monetary sponsorship
The cost of sponsoring entertainment is fully deductible where the sponsorship is principally for promotion or advertising to the public.
8. Entertainment provided for market value
Providing entertainment for market value is fully deductible. For example: the cost incurred by a restaurant in providing meals to patrons.
The cost of providing samples for advertising or promotional purposes is fully deductible.
10. Charitable entertainment
Entertainment provided to members of the public for charitable purposes is fully deductible. For example: A business donates food to a Christmas party in a children’s hospital.
The cost of providing entertainment to a person to review your business for a paper, magazine, book or other medium, is fully deductible.
12. Licensed premises operators
Costs incurred by a licensed premises operator in providing a special offer are fully deductible. For example: Happy hour of cheap drinks or two-for-one price meals.
50% deductible Entertainment Expenses
The following is a list of the four types of entertainment where deductibility is limited to 50%:
The cost of corporate boxes, corporate marques or tents
The cost of accommodation in a holiday home or time-share apartment
The cost of hiring a pleasure craft
The cost of food and beverages enjoyed in any of the three locations listed above, or food and beverages enjoyed on or off the business premises for a social event
Goods and services tax (GST)
You can claim the full GST portion on all entertainment expenses you have incurred throughout the year. If the entertainment expenses are only 50% deductible, you need to make an adjustment once a year for the 50% non-deductible portion.
The GST adjustment is calculated by multiplying by 3 and dividing by 23 the non-deductible entertainment expenses, exclusive of GST. This needs to be returned in the GST return in the period your income tax return is filed or due to be filed.
Many clients find it easier to claim the correct portion as they go, throughout the year.
Fringe benefit tax (FBT)
If employees (including shareholder-employees) can enjoy an entertainment benefit at their discretion and outside their employment duties, this benefit will be subject to FBT.
Any entertainment expenses that come under the 50% deductibility rules are not liable for FBT.
You will see that in general, a Christmas party held for staff or clients will be 50% deductible. If you code the expense to “entertainment” in your Xero, MYOB or Quickbooks file, your accountant should discuss with you to make the necessary adjustments as part of the annual accounting process.