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As a business owner, you might provide your employees with food, drinks, and gifts from time to time. However, it's important to understand the difference between staff amenities and entertainment expenses, as they have different tax treatments. In this article, we'll explain the distinction between the two and provide practical examples to help you navigate your business taxes easier.
Staff amenities vs entertainment expenses
The Australian Taxation Office (ATO) defines staff amenities as items such as morning tea or light refreshments offered to employees during their workday. While in most cases these items are deductible, however, it doesn't include alcohol. Light meals are treated similarly to morning and afternoon teas and can be claimed as allowable deductions. They are classified as exempt fringe benefits.
As light meals become more elaborate, they can transition into the category of "entertainment". In general sense, entertainment refers to the provision of food, drink, or recreational activities that take place outside the workplace and funded by the employer. These entertainment activities are typically offered to employees, their associates, or clients.
Determining if a particular activity is staff amenities or entertainment
To determine whether an expense falls under staff amenities or entertainment, consider the purpose, type of food or drink provided, timing, and location. If it's for refreshment during work or related to a work-related activity, it's likely a staff amenity. However, if it's more elaborate and designed for employees to enjoy themselves, it may be considered entertainment.
Some examples of providing entertainment can be seen as:
- Staff social functions such as parties
- Christmas parties
- Birthday parties
- Farewell functions
- Anniversary dinners
- Celebrations for achieving sales targets
- Business lunches with clients
- Product release functions
- Golf days
- Gym memberships
- Sporting club memberships
- Reward and recognition functions
Recreation, such as theatre tickets, sports events, or theme park passes, also becomes part of the entertainment category when it is provided to employees and paid for by the employer. However, if it involves work-related physical activities like team-building events, it remains tax-deductible, exempt from FBT (Fringe Benefits Tax), and allows for claiming GST credits.
Read more on ATO website
Navigating Fringe Benefits Tax (FBT) and entertainment expenses
Fringe Benefits Tax (FBT) is a tax employers pay on benefits provided to employees, in addition to their salary. Entertainment expenses may be subject to FBT.
If food and drink are provided during Training Seminars or Conferences, whether inside or outside the work premises, with the main purpose of nourishing the attendees, the cost should be tax deductible. GST can be claimed, and there are no Fringe Benefits Tax (FBT) consequences, as long as alcohol is not included. If alcohol expenses can be separated, the food and alcohol will be tax-deductible, but the alcohol costs will be subject to FBT.
Meals consumed by employees during overnight business travel are not considered entertainment and are tax-deductible for the employer, as long as they are reasonable and the expenses can be substantiated.
If the entertainment expenses are minor (less than $300 per occurrence) and infrequent (not happening frequently), they are not tax deductible but also not subject to FBT. For example, if the total cost of a few takeaway coffees during the week adds up to $20, even though the cost is considered "minor," it is not "infrequent," and therefore falls under the entertainment rules.
The following examples of expenses are tax deductible and not subject to FBT:
- Tea or coffee provided at work
- Birthday cake enjoyed at work during morning tea and coffee breaks
- Light meals consumed at work while working overtime
- A restaurant meal consumed by a Food Critic
Christmas parties and gifts
If a Christmas party is held on the business premises and on a working day:
- If only employees attend, there is no Fringe Benefits Tax (FBT) as it's considered an exempt property fringe benefit.
- If employees' associates attend and the cost per person is less than $300, it's not tax deductible, not subject to FBT, and no GST credits can be claimed.
- If clients attend, their cost is not tax-deductible, and no FBT arises.
If the Christmas party is hosted off the business premises and the cost per person is less than $300:
- For employees, the same rules as above apply.
- If the cost per person is $300 or more, it's tax-deductible but subject to FBT, and GST credits can be claimed.
- If clients are included in the off-premises celebrations, their cost per person is not tax-deductible, and no GST credits can be claimed.
- A bottle of wine provided at a Christmas party is fully tax-deductible, fully creditable for GST, and not subject to FBT as it is not considered entertainment.
If you want to give your staff a non-entertainment-related gift at Christmas, and it costs less than $300 or is a personal device like a laptop or phone primarily used for work, it will be tax-deductible, not subject to FBT, and GST creditable.
Read more on ATO website
Avoiding FBT and any tax issues
To simplify things and avoid dealing with Fringe Benefits Tax (FBT) and other tax issues, there is a simple solution: If an expense falls under entertainment, don't charge it as a business expense. Instead, allocate the cost to a Director's or Shareholder's loan account. You can then reimburse yourself through a salary, dividend, or cash contribution, if allowed. This will help resolve the problem at hand.
It is important to note that you need to maintain thorough accurate recordkeeping and documentation, in case you get audited.
Quick checklist
If you are considering offering food, drink or recreation to your employees, we have provided a simple check list below to ensure compliance:
- Determine if it falls under staff amenities or entertainment category.
- Assess if any exemptions are applicable.
- Explore options to reduce your Fringe Benefits Tax (FBT) obligations related to the provided items.
- Maintain accurate records of the expenses.
- Calculate your FBT liability accurately.
- If necessary, report the relevant amount on the employee's payment summary.
Take control of your finances with Procure
Understanding the difference between staff amenities and entertainment expenses is essential for managing your business taxes effectively. While providing staff amenities is an excellent strategy to reward and retain employees, it is crucial to be aware of the potential tax implications that may arise.
Procure Business Services can provide expert advice in this area and more. Call us today on (03) 9059 8137 or book a quick consultation using the form below.
