Taking team members, clients and suppliers out for a meal can be an opportunity to start, or further develop, a great working relationship.
Many small business owners even choose to cover the cost of such an outing. However, how can you be sure this is a legitimate business expense?
You’re building a relationship that will, at least in your opinion, help your business earn more money in the long run. So why wouldn’t the cost of that be tax deductible?
Unfortunately many of these expenses are not deductible and working out which ones are is more complex than most business owners would like.
To help you navigate the minefield and make an informed decision when it comes to claiming meal related expenses, we have developed a simple ‘cheat sheet’ to walk you through the various possibilities.
When employees travel for work and stay overnight in a location that is not their home, they are entitled to claim reasonable amounts for meal expenses.
If an employee has a meal in a restaurant while travelling for work purposes the expense is tax deductible and exempt from fringe benefits tax.
When making your claim you should consider what the ATO determines to be ‘reasonable’ in any given tax year which can be found in their annual update.
For the 2015 financial year, the amount is generally between $102 to $121 per day.
If an employer provides sandwiches and drinks for a working lunch or dinner in the office, the amounts are tax deductible and exempt from FBT.
However, if this meal is more elaborate and includes wine, the meal deduction is likely to err on the side of entertainment and be disallowed by the ATO.
Shouting the team pizza over a training session is A-OK. Trying to claim the in-house Christmas Party is not.
If the employer has an in-house café or canteen, and provides meals to employees during the working day, the expenses are tax deductible and exempt from FBT.
Please note that if the employee pays for the meal and is not reimbursed by their employer the amount is not tax deductible to the employee as it is considered to be a private expense.
As a business owner, you might often be out and about and stop in for a coffee and a muffin in between client meetings.
Again, should these expenses not be a 7 course degustation, then the ATO are willing to allow the deduction.
Usually when an expense is incurred in running a business, or in the course of earning your income, we assume the amount is deductible unless some special tax rule specifically denies the deduction.
With meal expenses, I would encourage you to approach the situation from the opposite perspective. Assume the amount is not deductible unless, after working through the following list of questions, you can clearly establish that it is a legitimate business expense.
It is necessary to split meals purchased for staff and meals purchased for customer, suppliers and other business associates.
While the expenses may be deductible if provided to an employee (see later steps) meals and other entertainment provided to non-employees are not deductible.
As with all tax deductions you need to ‘pay to play’.
The person (or business) that pays for the meal is the one claiming the deduction. If an employee pays for the meal and their employer reimburses them for the expense it is the employer that will seek to claim a deduction for the item.
If you have supplied meals or other entertainment to an employee and subsequently reported these amounts as a fringe benefit AND paid the appropriate amount of fringe benefits tax (FBT) on them, then the amounts can be claimed as a deduction.
It is important to remember that fringe benefits tax is levied at the top marginal tax rate which is much higher than the benefit achieved from the deduction in most cases.
We can look to use the available FBT exemption for some assistance here. For example the Minor and Infrequent FBT exemption, which allows you to provide minor (less than $300 per employee) and is infrequently (not regular) meal benefits to employees without paying FBT while still claiming a tax deduction.
The ATO has not given a clear definition of what they consider to be infrequent or irregular they have gone as far as to say the more often and regularly benefits are provided, the less likely an employer will satisfy this criterion.
The type of food and drink purchased can be relevant in determining its deductibility.
The more expensive and elaborate the items purchased the less likely they are to be deductible.
We also need to consider why the meal was purchased. Was the intention to provide entertainment or sustenance?
Essentially what this means is that a sandwich and a can of drink provided to an employee as sustenance while working is far more likely to be an allowable deduction than a five course meal at the best restaurant in town on Friday night after work, which is clearly entertainment.
The final important consideration is where and when was the meal purchased and consumed?
During work hours or after hours? In your place of work/business or elsewhere?
Generally speaking meals on site during work hours are more likely to be deductible than a restaurant meal after work.
It’s important to clearly separate the deductible and non-deductible meals purchased in your accounting records. This will ensure that deductions are not claimed on these amount in error.
Additionally, ensure that the appropriate GST code is used. Many business owners incorrectly claim GST credits on meal expenses which are not deductible. This results in the need for yearend accounting adjustments and potential amendments to your Business Activity Statements.
Finally, give your accountant as much information as you can about the circumstances surrounding meals you provide to employees and associates as part of running your business.
This will allow them to make an informed decision when working with you and ensure that you do not over claim or under claim deductions.
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