When is my coffee tax deductible?

It seems great that you’ve now got your new business. Everything with an invoice must be tax deductible, right?

Not quite.

Food and entertainment expenses are one area that can get quite complex and one where a lot of businesses get into trouble. This short note clarifies some of the basics.

What are the basic rules?

The ATO starts by allowing you to tax deduct any expense that is necessarily incurred in carrying on your business. They then exclude certain deductions, including a broad category called “entertainment”. This means a lot of client entertainment isn’t tax deductible (sorry), but there are exceptions to that general rule.

What does the ATO consider entertainment?

The ATO says that entertainment means “entertainment by way of food, drink or recreation or accommodation or travel to do with providing entertainment by way of food, drink or recreation.” They include several examples such as business lunches and social functions.

HOWEVER, there are exemptions (of course) and this is where it gets complex.

Firstly, sustenance is not considered entertainment. For example, providing tea and coffee in the office for your staff is sustenance, not entertainment. Same with a few sandwiches given at a staff training session or morning or afternoon tea. However, adding alcohol to the mix means it is no longer sustenance. So, those Friday night drinks in the office are not tax deductible.

Secondly, some entertainment is subject to Fringe Benefit Tax (FBT). This is a very complex area of tax. Essentially if the business provides entertainment to staff, then they may be liable to FBT. If the entertainment is subject to FBT, then you can tax deduct the whole lot (because FBT requires you to pay additional tax for the benefit provided). To confuse matters even more, FBT is not payable on entertainment for clients.

So when IS a coffee tax deductible?

Luckily, the ATO issued guidance on what they consider entertainment in Tax Ruling 97/17, using the 4 W?s; Why, What, When and Where.

Why is food or drink being provided?

Food and drink being provided for refreshment doesn’t have the same characteristic as that being provided in a social situation, where the purpose is to enjoy oneself.

What type of food and drink is being provided?

Tea, coffee, soft drinks and a light meal are not considered to be entertainment. However, the more elaborate the meal, the more likely it is to be entertainment. Morning or afternoon teas usually won’t be entertainment, however a three course meal at a top restaurant during a working lunch is likely to be entertainment.

When is it being provided?

If provided during work hours, during overtime or on a business trip are unlikely to be entertainment.

Where is it being provided?

If provided at your usually place or work is less likely to be entertainment, but if its supplied at a restaurant, cafe or coffee shop or consumed with other forms of entertainment,

So, is my coffee at the cafe with my client tax deductible? Yes, because the purpose of the meeting is for business.

What about a beer down the pub with a client to go over his business expansion plans? Possibly. One beer, going over a document at the pub might not be considered entertainment.

And a night at the footy in the corporate box? No. Its clearly entertainment and also probably subject to FBT.