Meal Entertainment & FBT

• Entertainment can be provided despite business discussions occurring – s32-10(2) of the ITAA 1997 states that entertainment can be provided even if business discussions or transactions occur.
• Provision of food, drink, and recreation is not always entertainment – The note to s3210 also states that “meals [consumed] on business travel overnight, theatre attendance by a critic [and] a restaurant meal of a food writer” are examples of what is not entertainment, thus acknowledging that the provision of food, drink and recreation is not always entertainment.
• Entertainment takes its ordinary meaning – This means that the provision of biscuits, tea, coffee, soft drinks and light meals on an employer’s business premises is not the provision of entertainment.
• Timeliness and connection are relevant in determining if the provision of property is entertainment –
  • Timeliness – whether entertainment occurs soon after the provision of the items of property, and whether the usefulness of the item of property expires after consumption
  • Connection – Whether there is a direct connection between the item of property and the entertainment – eg where the entertainment is the expected outcome of the provision of the property

Based on this, the Commissioner concludes that costs incurred in giving items of property such as bottled spirits, groceries, TVs, computers etc do NOT generally constitute the provision of entertainment (as consumption of these items is usually delayed).

The FBTA Act s 37AD defines the ‘provision of meal entertainment’ by reference to three circumstances:

1. The provision of entertainment by way of food or drink
2. The provision of accommodation or travel in connection with or facilitation of entertainment by way of food or drink (eg tax travel to and from a restaurant); or
3. The payment or reimbursement of expenses incurred in providing entertainment by way of food or drink related accommodation or travel

When one of the three exists, the definition is satisfied irrespective of whether business discussions or transactions occur, or the provision of entertainment is in connection with the working of overtime or otherwise in connection with the performance of work duties, or for the purposes of promotion or advertising, or at, or in connection with a seminar.

The Commissioner of Taxation considers the following factors to objectively determine if the provision of food or drink constitutes the provision of entertainment (Taxation Ruling TR 97/17):

why the food or drink is being provided; This test is a 'purpose test'. For example, food or drink provided for the purposes of refreshment does not generally have the character of entertainment, whereas food or drink provided in a social situation where the purpose of the function is for employees to enjoy themselves has the character of entertainment.

what type of food or drink is being provided; Morning and afternoon teas and light meals are generally not considered to constitute entertainment. However, as light meals become more elaborate, they take on more of the characteristics of entertainment. The reason for this is that the more elaborate a meal, the greater the likelihood that entertainment arises from the consumption of the meal.

For example, when an employer provides morning or afternoon teas or light meals, that food or drink does not usually confer entertainment on the employee. By contrast, a three course meal provided to an employee during a working lunch has the characteristics of entertainment. The nature of the food itself confers entertainment on the employee.

when that food or drink is being provided; Food or drink provided during work time, during overtime or while an employee is travelling is less likely to have the character of entertainment. This is because in the majority of these cases food provided is for a work-related purpose rather than an entertainment purpose. This, however, depends upon whether the entertainment of the recipient is the expected outcome of the provision of the food or drink. For example, a staff social function held during work time still has the character of entertainment.

where the food or drink is being provided; Food or drink provided on the employer's business premises or at the usual place of work of the employee is less likely to have the character of entertainment; refer to the reasons in (b) and (c) above. However, food or drink provided in a function room, hotel, restaurant, cafe, coffee shop or consumed with other forms of entertainment is more likely to have the character of entertainment. This is because the provision of the food or drink is less likely to have a work-related purpose.

The ATO determines that none of the above individual factors will be determinative; however, paragraphs (a) and (b) are considered the more important. The application of the above factors results in the determination of whether the food or drink amounts to meal entertainment. Once this determination is made, the employer must then decide whether each item of actual expenditure on meal entertainment is to be treated individually under the ITAA and FBTAA or whether to elect that one of the methods contained in Division 9A of the FBTAA is to apply. If the election is made then the taxation outcome for the individual meal is no longer relevant. The fringe benefits tax and income tax consequences are discussed at paragraphs 29 to 32 and 37 of TR 97/17.

There are certain types of food and drink expenditure which do not amount to ‘entertainment’. These include:

Sustenance (light refreshments)

• morning and afternoon teas
• light meals (provided no alcohol is served) in the context of a working lunch, eg sandwiches.

Business travel

Food or drink provided in the course of overnight business travel is not entertainment. Accordingly, the cost of meals consumed by travelling employees and business clients in meal entertainment. However, if an element of entertainment is introduced (i.e. a floor show), then the character of the food or drink is changed and it becomes meal entertainment.

The portion of food or drink provided to non-travelling employees or business clients remains meal entertainment where the actual method of apportioning meal entertainment is used.

Minor items of property

See 'when does a provision arise?' re timeliness and direct connection, and some examples of what is and what is not entertainment are below:

Entertainment
Costs incurred in providing glasses of champagne, hot meals, theatre tickets, holiday accommodation, hired entertainers, and hired sporting equipment, have a dynamic and immediate character. Consumption can usually occur immediately. These items of property do not last beyond initial consumption (or are to be returned at the end of the hire period).

Not entertainment
Costs incurred in the giving of items of property, such as bottled spirits, groceries, games, TV sets, VCRs, computers, crockery, swimming pools, gardening equipment, etc; have an enduring character, and only an indirect nexus to any immediate entertainment. Consumption is usually delayed. The items of property usually require further steps before they can be consumed, and consumption can occur over a long period.

Accordingly, the above types of property that do not amount to entertainment are a deductible expense where the requirements of ITAA 1997 s 8-1 are satisfied. However, FBT is payable if the costs incurred are not an exempt property benefit or a minor benefit.

Alcohol
The provision of alcohol is generally entertainment as it has social connotations and therefore provides or affords diversion or amusement. However, TR 97/17 concludes that a deduction is allowable in some circumstances such as:

Seminars
Alcohol consumed at seminars and training seminars is generally deductible. Similarly, alcohol provided at ineligible seminars does not constitute entertainment where it is included in the course cost and the course is otherwise deductible under ITAA 1997 s8-1.

Business travel
When an employee travelling on business purchases an evening meal at a restaurant which is accompanied by the consumption of some wine, the ATO concludes in TR 97/17:

“67. In this situation the employee is travelling in the course of his or her employment and the meal purchased is of a type that is normally consumed at home. It is impractical to suggest that drinking wine in these circumstances changes the nature of the meal. The food or drink does not amount to meal entertainment. It is consumed by the employee while undertaking work-related travel.”

Warning – light refreshments consumed off business premises
It is common for various employees or business owners to meet offsite (i.e. at a café) for a business-related purpose.

Where ‘light refreshments’ such as soft drinks, coffee and/or light snack (eg muffin) are consumed during these meetings, the ATO has indicated that the expenditure incurred in these circumstances will NOT have the character of entertainment where the meetings form part of the normal process of generating income for the business – PBR 1051237471365 as an example.

However, this does not mean that the employer will escape liability for FBT altogether. In particular, an employer would only be able to escape an FBT liability by relying on the minor benefit exemption s 58P, or the property benefit exemption in s41 of the FBTA Act.

In the case of a minor benefit exemption, an employer would need to demonstrate (amongst other things) that similar or identical benefits are provided on an infrequent and irregular basis to the particular employee. In these circumstances, it is unlikely to be satisfied where the sales manager, BDM, etc undertake these meetings on a regular basis at a coffee shop and cafes and receive the benefits regularly.

Importantly, the property benefit exemption in s41 will be unavailable in this circumstance. This is because for this exemption to apply, the property must be provided on a working day on the business premises of the employer.

Employers should record the following information on entertainment they provide so the taxable value of the fringe benefit can be calculated:

• The date the entertainment was provided - receipts, invoices, bank/credit card statement transaction date, employee reimbursements
• Who is the recipient of the entertainment (employee, associate of employee, client, etc) – keep a register of attendees for large events [if recipient of meal entertainment is not identified, minor benefit exemptions cannot be applied]
• The cost of the entertainment – a bank/credit statement showing the total amount is not sufficient
• The kind of entertainment that was provided (nature of the meal) – description of the meal, its purpose
• Where the entertainment was provided – employer’s office, name of restaurant/café/bar/etc

Identifying what is (and what is not) entertainment is the most crucial step employers must complete which respect to such expenses. This is because the FBT, income tax and GST implications of incurring these expenses are often different to the implications that arise in relation to non-entertainment expenditure.

TIP: classify entertainment in relevant categories:

• Meal entertainment – broadly arises from the provision of food and/or drink, and/or related accommodation or travel; or
• Recreation – which basically includes any form of amusement, sport or leisure-time pursuit

The distinction is important because special valuation methods (e.g. 50/50 split method) apply to meal entertainment, which generally cannot be used to value recreation. There are also different requirements under the FBT reporting rules. I.e. recreation may need to be reported on an employee’s payment summary, whereas meal entertainment are only reportable if they are provided to an employee under a salary packaging arrangement.

This is a brief section, as it is to give the general public an understanding of the different methods available to determine the FBT consequences.

As such, there are three methods available to use:

• The actual method (default method)
• The 50/50 split method under Div. 9A
• The 12-week register method under Div. 9A (rarely used due to lack of register being maintained)

If the other options are not elected, then the employer is deemed to have valued their meal entertainment expenditure using the actual method.

Any expenditure incurred on food and drink that does NOT represent meal entertainment (eg light refreshments provided on business premises) must be valued using the actual method.

It is important to carefully choose the FBT valuation method to be used to value the meal entertainment expenditure, particularly because of the following implications:

• The FBT methods also apply for income tax and GST purposes – The FBT valuation method selected by an employer is also applied when an employer claims income tax deductions and GST in respect of the meal entertainment expenditure
• The FBT valuation method chosen applies to all of the employer’s meal entertainment expenditure for the entire FBT year – That is, an employer cannot use different methods to value some of its non-salary packaged meal entertainment expenditure for an FBT year
• The concessional valuation methods and meal entertainment – Only non-salary packaged meal entertainment expenditure can be valued using either the 50/50 split method or 12-week register method. The actual method must be used to value salary packaged meal entertainment, or to value expenditure on food and drink that is not meal entertainment (e.g. light refreshments provided on business premises).

NOTE: FBT is NOT payable on meal entertainment provided to non-employees (e.g. clients or suppliers), as such, there is NO income tax deduction and NO GST claimable for these as well.

Certain minor benefits are exempt from FBT by virtue of s 58P of the FBTA Act and applies, on a per benefit basis,7[‘ if all of the following conditions are met:

• A benefit is provided in respect of an employee’s employment (to an employee and/or their associate)
• The ‘notional taxable value’ of the benefit is less than $300 (including GST)
• Having regard to the the following criteria set out s 58P(1)(f), it would be unreasonable to treat the benefit as a fringe benefit and, therefore, as being subject to FBT:
  • The infrequency and irregularity with which associated benefits have been or are reasonably expected to be provided
  • The aggregate value of the minor benefit and associated benefits (i.e. the greater the cumulative sum over the year, the less likely the exemption will apply)
  • The practical difficulty in valuing the minor benefit and any associated benefits (i.e. the harder it is to value, the more likely the exemption will apply)
  • The circumstances in which the minor benefit and any associated benefits are provided (e.g. the exemption is more likely to apply if it is adhoc in nature and not wholly or principally by way of a reward for services rendered)

Entertainment by way of food or drink and associated accommodation or travel costs (“meal entertainment”) is not deductible under ITAA 1997 s 8-1 unless an exception applies (ITAA 1997 s 32-5).'

The main exception is where an employer provides a fringe benefit to an employee or associate (ITAA 1997 s 32-20). Other circumstances where an income tax deduction is available under ITAA 1997 s 8-1 are where certain exempt fringe benefits are provided and where the food or drink is provided in particular circumstances (ITAA 1997 s 32-25). The FBTA Act allows a reduction in the amount of FBT payable if the employee would otherwise have been entitled to an income tax deduction for the benefit.

The consequences of the above rules are:

• food or drink provided as a fringe benefit is a deductible expense of the employer
• certain food or drink exempt from FBT (or where FBT is reduced) is a deductible expense of the employer
• employers need to apportion food or drink, and
• if employers rely on the minor benefits exemption, the food or drink is not deductible.

So, where FBT is payable in respect of entertainment provided to an employee or their associate, income tax deduction and GST credits are available on the portion of expenditure subject to FBT.

The following table will assist employers to determine whether the food or drink provided in a given circumstance constitutes meal entertainment. The taxation result prescribed in the table is relevant if the employer wishes to treat each item of actual expenditure on food or drink separately under the FBTAA and the ITAA where applicable. If the employer elects to use one of the methods provided in Division 9A of the FBTAA, then the taxation outcome for an individual meal is no longer relevant. However, its characterisation as meal entertainment or not is still relevant.

ME = Meal Entertainment
Y = Yes
N = No
Y/N = depending upon what is provided, food or drink may or may not amount to the provision of meal entertainment
# = an income taxable employer has the option to claim a deduction for the cost of the meal and include $30 in their assessable income – s 32-70 of the ITAA

You can find this table here.

This post was built using a variety of resources including:

The National Tax & Accountants' Association Ltd 

CCH / Wolters Kluwer FBT guides

Australian Taxation Office https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/Types-of-fringe-benefits/Entertainment-related-fringe-benefits

https://www.ato.gov.au/law/view/document?locid=%27TXR/TR9717/NAT/ATO%27&PiT=19990627000001

https://www.ato.gov.au/law/view/document?src=hs&pit=99991231235958&arc=false&start=1&pageSize=10&total=1&num=0&docid=EV%2F1051237471365&dc=false&stype=find&tm=phrase-basic-1051237471365

Fringe Benefits Tax Assessment Act 1986 (FBTA Act) https://www.legislation.gov.au/Details/C2013C00059

This information is general in nature only. It is intended as a guide as to how meal entertainment may affect businesses in Australia, and is a true reflection of any particular business. Do not rely on this information as the only source of information as it is not intended to be used in such a way, is not comprehensive and does not take your business's circumstances into consideration.