Food and Drink affects Income Tax, GST and FBT

Food and drink affects income tax, GST and FBT. Whether and to what extent depends on whether it is entertainment or a business expense.

Anything your business spends on food and drink is either a business expense or entertainment. Whether it is one or the other doesn’t just affect income tax, but also GST and FBT.

Income Tax

If it is a business expense, you get a tax deduction. If it is entertainment, you don’t. Div 32 ITAA97 denies any tax deduction for entertainment.

With one exception, when the entertainment was provided to employees and you paid FBT on it, then Div 32 ITAA97 no longer applies and you still get the tax deduction.

GST

GST just follows income tax on this one. So to the extent that you get a tax deduction, you also get an input tax credit (‘GST credit’). And to the extent that you don’t get a tax deduction, you also don’t get a GST credit. So this one is easy.

FBT

FBT only applies to entertainment provided to employees. So whether you provided entertainment to clients or other third parties is completely irrelevant with respect to FBT. FBT just worries about benefits provided to your employees.

If you did provide entertainment to employees, it is either a property fringe benefit, expense payment fringe benefit or a residual benefit.

A property fringe benefit is when your business pays for the food and drink. An expense payment fringe benefit is when your employee pays but then you reimburse them for the expense. And a residual benefit is when provide other benefits and food and drink is a part of it. Depending on which benefit it is different rules apply to the valuation of these benefits.

Working all this out is really time-consuming. You have to look at each expense and then determine the number of employees and clients and so on. That is tedious work. And so the legislator offers you an easy way out.

Div 9A FBTAA

And that easy way out is Div 9A of the Fringe Benefit Tax Assessment Act (FBTAA). You don’t have to apply Div 9A. You have a choice. But Div 9A might save you a lot of time and money.

Div 9A works like this. You throw all entertainment expenses for food and drink into one separate basket and call this basket ‘meal entertainment’.

And then you either just pay FBT on 50% of everything that is in this basket – the so-called 50/50 method. Or you keep a 12-week register and determine how much of your food and drink expenses go to employees. And then you apply that percentage to your meal entertainment basket.

So that is the tax treatment of entertainment in a nutshell. But the big question is which of your food and drink expenses is a business expense and which is entertainment? This is the hard one and we will cover this over the next few articles.