Under the income tax law, a taxpayer carrying on a business can generally claim a deduction for expenses incurred in producing taxable income or that is required to carry on the business.
Buying a client coffee or lunch may look to be a necessary business cost. However, the legislation specifically denies a deduction for certain expenses, like fines and entertainment expenses. Entertainment expenses include the cost of business lunches, and attendance at sporting events, gala or social nights, concerts or other similar functions or events. This is the case even if business discussions or transactions occur.
What is tax deductible?
The Australian Taxation Office (ATO) has clarified that there are instances (albeit few!) where the provision of food and drink is not characterised as entertainment and, therefore, these expenses are tax deductible.
To determine whether the cost of your client’s meal is an entertainment expense the ATO considers the following factors:
1. Why is the food or drink being provided?
If food or drink is provided for enjoyment or in a social setting it is regarded as entertainment. Therefore, a meal provided for the purpose of refreshment and substances (e.g. to enable employees to complete the working day in comfort) does not have the character of entertainment.
2. What type of food or drink is being provided?
The more extravagant a meal, the more likely it is to have the character of meal entertainment. Hence, a three course meal, compared to a light meal (eg sandwiches, finger food, fresh fruit), is more likely to have the character of entertainment.
3. When is the food or drink being provided?
Food or drink provided during work time, overtime or while travelling overnight for work will not likely be characterised as entertainment.
4. Where is the food or drink being provided?
Food or drink consumed on your business premise is less likely to be considered as entertainment. In contrast, food and drink provided in a function room, hotel, restaurant, café of coffee shop is more likely to be meal entertainment.
In summary, a light meal and drink consumed on business premises during working hours would be tax deductible; whereas, breakfast, lunch or dinner at a restaurant for a business networking meeting is a non-deductible entertainment expense.
Please contact one of our tax accountants at The Quinn Group on (02) 9223 9166 or submit an online enquiry.