Before you go all out on a lavish event in the hope of impressing a client and scoring a major tax deduction, understand a few key points.
Paying for food and fun for your clients amounts to what the Australian Tax Office calls “entertainment expenses.”
The bad news is that these are NOT tax deductible.
It is a grey area, however. The ATO doesn’t necessarily consider every instance of providing hospitality to your clients as “entertainment.”
How can you tell whether or not it’s entertainment?
Four key guidelines for entertainment expenses
1. Entertainment expenses should be considered ‘refreshment,’ NOT ‘enjoyment.’
Food and drinks provided ‘just for fun’ or in a social setting are categorised as ‘enjoyment.’
If you provide something modest during a work break, that’s viewed as ‘refreshment.’ A simple tea break with biscuits is very reasonable. This small expense was clearly provided to make your clients more comfortable in the work setting.
2. The expense should not be elaborate.
A light lunch consisting of things like finger foods, salads and sandwiches are acceptable. If the meal includes alcohol, that’s counted as ‘enjoyment’ and not tax deductible.
Other permissible items include:
3. The expense should be incurred during work hours.
This stipulation is pretty straightforward. If you provide refreshments for your clients during business hours, then the expense will probably be tax deductible.
4. The expense should happen on your business premises.
When you provide drinks or food on your premises, then your chance of getting a tax deduction is much better. The ATO tends to look at meals and drinks in a cafe or restaurant as entertainment.
Of course, none of this means that it’s wrong to provide a valued customer, potential client or long-time business partner with a special treat. You just need to be careful when it comes to claiming such entertainment expenses for tax deductions.
Tax breaks are very important to small businesses so it is important to understand this area. Seek advice from accountants who are experts in tax.
Contact us today or give our Adelaide office a call on (08) 8379 9950.
– Kym Nitschke
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