There may be confusion around understanding the rules for treating valid business entertainment expenses, whether these are deductible, and/or when they may be subject to Fringe Benefit Tax (“FBT”). The questions we get asked by clients are usually “How much can I claim?”, “What types of expenses are claimable?” and “Can I claim benefits for my employees”.
There are three major types of business entertainment expenses to consider:
- 100% deductible, not liable for FBT.
- 50% deductible, not liable for FBT.
- 100% deductible, liable for FBT.
The general rule for claiming entertainment expenses is that if you provide entertainment for your staff, clients, or for any other business purpose, then you would need to consider which of the above entertainment categories it may fall under.
Below is a summary of each type of entertainment expense:
Entertainment – 100% deductible
Entertainment expenses will be 100% deductible (and not liable for FBT) if they are 100% business related. The main types of entertainment expenses we come across in this category include:
- Meals that staff purchase while travelling on business.
- Food and drink provided at a conference (or similar) that lasts at least four hours.
- Light meals provided as part of a board or internal meeting.
- Entertainment or freebies which promote your business to the general public.
Entertainment – 50% deductible
Entertainment expenses will only be 50% deductible (and not liable for FBT) if there is a significant element of personal enjoyment. Judgement will need to be exercised here as the answer may not always be obvious when making this assessment. The main types of entertainment expenses we come across in this category include:
- Food and drink you provide for social events (such as staff parties).
- Entertainment at sports or cultural events including a corporate box.
- Hiring a boat for networking purposes and providing food and drink to people on it.
- Providing food and drink gifts that will be consumed privately by the recipient.
Entertainment – Liable for FBT
Entertainment or other PAYE income benefits received by your staff maybe 100% deductible and liable for FBT. The general rule for FBT is that most benefits given to employees other than their salary or wages are fringe benefits, for which the company is liable for FBT.
In brief, if you are supplying goods or services to your staff for free, or at a reduced price, this may be subject to FBT. To avoid FBT in these stances, staff must pay the lower of at least either 95% of what the goods cost the company or 95% of the selling cost to the public.
Examples of FBT-related benefits you might supply to staff or yourself as a shareholder-employee include:
- Company vehicles available for private use.
- Low-interest or interest-free loans.
- Free, subsidised, or discounted goods and services.
- Gym memberships, medical insurance, or other personal-related insurance paid by the employer.
Generally, there is a $300 exemption threshold per employee per quarter from paying FBT if you provide free, subsidised, or discounted goods and services. However, if the value of the benefits for an employee goes over $300 for a quarter, the full value of the benefits is subject to FBT – the exemption is not deducted first.
The main assumption of differentiating between entertainment and FBT is that if staff can only enjoy company entertainment at set times, the cost is an entertainment expense. Otherwise, if the company provides benefits that are enjoyed or received by employees as a result of their employment, it is classified as an FBT expense.
Lastly, it is important to note that if the expense is not relating to all or part of business activities, it will not be deductible.
For more information about how this may be applicable to your business, reach out to the team at Bellingham Wallace.
Author – Ivana Botica