How To Tax Deduct Business Lunches
Can you tax deduct business lunches? In principle No, but maybe Yes.
It starts with a clear No but then there four back doors that allow you to tax deduct some business lunches nevertheless.
Tax Deductible or Not
Business expenses are tax deductible per s8-1 (1) ITAA97.
s8-1 (1): You can deduct from your assessable income any loss or outgoing to the extent that …(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
Entertainment expeneses are not tax deductible per s32-5.
s32-5: To the extent that you incur a loss or outgoing in respect of providing entertainment, you cannot deduct it under s8-1.
So it all depends on whether your business lunch falls under business or entertainment.
Entertainment
And you get a clear answer straight away. Not the one you want to hear. But a clear answer nevertheless. A business lunch is entertainment.
It starts with a vague definition in s32-10 (1):
Entertainment means (a) entertainment by way of food, drink or recreation and any transport or (b) accommodation or travel to do with providing entertainment by way of food, drink or recreation.
But then gets very specific in the note to s32-10. A business lunch is entertainment.
These are some examples of what is entertainment: business lunches, social functions.
Even if you dicuss business or close a deal over lunch. s32-10 (2) removes any doubt.
You are taken to provide entertainment even if business discussions or transactions occur.
So up to this point business lunches are entertainment – there is no but, if or when – and hence not tax deductible. s32-10 is very clear on that.
Back Doors
But then higher forces relented and gave you a huge backdoor in the form of TR 1997/17. And three other ways out. If you get through one of these, you can still tax deduct your business lunches.
Backdoor #1 The 4W Test
TR 1997/17 is your best chance to qualify for a tax deduction. It allows you to tax deduct business lunches – or any other entertainment – if the expense passes the Why, What, Where and When test. We call that the 4W test.
If the answer to these four questions together — why, what, where and when – indicate that the dominant purpose of the lunch was business, then it doesn’t count as entertainment.
The Why and What carry the most weight, but the Where and When shouldn’t completely undermine your Why and What. The four answers should tie together and make sense.
WHY did you do it? For a social reason or business? Taking a client out to lunch is a solid business reason. Taking out a friend is not.
WHAT did you have? Was it purely functional or lavish? Sandwiches and coffee hint at a business meeting. A lavish four-course meal doesn’t.
WHERE did you do it? Lunch on business premises will help your cause. At a restaurant or café you need the When to back you up.
WHEN did you do it? During business hours supports your claim of a business expense. At night it doesn’t.
So if your business lunch ticks these 4 questions, it is not entertainment but a business expense. And so it is tax deductible and not subject to FBT either.
Backdoor #2 Sustenance
If the business lunch takes place on business premises and is reasonably simple without alcohol, the ATO will count it as sustenance and not as entertainment.
Think of a working lunch or late-night dinner consisting of pizza, sandwiches, muffins, biscuits or other finger food with water, orange juice, tea or coffee.
Since this doesn’t count as entertainment, you can tax deduct the costs – and don’t have to pay FBT.
Backdoor #3 FBT
If you pay FBT for an expense – any expense – then you can tax deduct that expense even if it is entertainment.
s32-20: Section 32-5 does not stop you deducting a loss or outgoing to the extent that you incur it in respect of providing entertainment by way of providing a fringe benefit.
So whenever you pay FBT for a business lunch, you can tax deduct that portion of the expense that was subject to FBT.
Backdoor # 4 Sudiv 32-B
And then there is another tiny door. Certain entertainment expenses are tax deductible thanks to the exceptions listed in Subdiv 32-B..
This subdivision allows you to tax deduct a business lunch if it falls under certain employer, seminar, promotion and advertising or other expenses. There is also a specific exception for businesses in the entertainment industry.
The list of exceptions is long with plenty of carve-outs. We only list a few that might be most relevant to a business lunch. So please google the actual section of ITAA 97 for more details.
If you provide a lunch in an in-house dining facility, that expense might be tax deductible per s32-30. The same might apply to food or drink that would be subject to FBT but is not due to certain exemptions in the FBT Act.
If you provide a business lunch at a seminar that lasts 4 hours or more, you can deduct these entertainment expenses per s32-35.
If you provide a lunch to promote or advertise your goods or services – a product lunch for example – you may be able to claim a deduction per s32-45, but only if ordinary members of the public have an equal chance to attend your event.
GST
If your lunch is tax deductible for income tax purposes, then you can also claim the input tax credit in your BAS. But if it isn’t, then you can’t
GST just follows what you do for income tax. Whatever is tax deductible as a business expense, gives you an input tax credit (as long as it is a taxable supply).
FBT
FBT uses the same definition of entertainment as income tax does in s32-10 ITAA97. So employees’ food and drink during a business lunch starts out as entertainment for FBT purposes as well.
If an employee attends the business lunch and that portion of the expense ends up being subject to FBT, then you can tax deduct that part of the expense no matter what. Whatever you pay FBT on, is tax deductible for income tax purposes per s32-20.
However, not all food and drink provided consumed by employees is necessarily entertainment. The 4W rule in TR 1997/17 also applies to FBT. So if a meal passes the 4W test, then the employee’s meals are not subject to FBT either. The same applies to sustenance.