Tax Implications on Meals, Gifts, Travel and Entertainment

The correct record-keeping determination and tax implications when dealing with both customers’ and employees’ meals, gifts, travel and entertainment expenses are some of the most challenging accounting tasks.

Accurately treating these expenses can be quite confusing as these transactions have complex implications on various taxes (FBT, GST and Income Tax) as well as on Payroll, STP Reporting, Workers’ Compensation and Payroll Tax.

In this blog article, we undertake the challenging task of determining the accurate type of expenses, tax implications and ATO reporting requirements and clarify the role and responsibility of Business Owners, Bookkeepers and Accountants for these transactions.

Record-Keeping

This article provides several examples of the expense accounts businesses should set up in the Chart of Accounts when dealing with these expenses.

Although, after assessing the nature of these transactions, the Business Tax Advisor may decide to move some to the Balance Sheet, during the year, any meal, gifts and entertainment costs should be coded as expenses and appear on the company’s Profit and Loss. Particularly when this report is designed to determine the business profitability at a management level.

Tax Deductibility

This blog article assesses where these expenses are income tax deductible and GST creditable and when they may pose a fringe benefits tax (FBT) risk.

• Income Tax-deductible (or assessable) > whether the expense can be claimed as a tax deduction;
• GST creditable > whether the GST can be claimed on the Business Activity Statement;
• FBT Risk > whether the expense may require the business to register and pay Fringe Benefits Tax.

Fringe Benefits Tax

Whilst most small businesses are familiar with the concept of Income Tax deductibility and GST, Fringe Benefits Tax is more foreign, as Tax Agents try to prevent their small clients from dealing with FBT.

Without going into the complexity of FBT, it is important to clarify what a Fringe Benefit is and where Fringe Benefits Tax may apply.

The simplest way to describe a fringe benefit is to define it as a non-monetary payment an employer gives to an employee. The following list represents some of the most commonly provided fringe benefits:

• Allowing an employee to use the company car for personal use;
• Paying for an employee’s private car park at work;
• Giving an employee a discounted loan or forfeiting the loan outstanding balance;
• Paying the employee’s rent or utility bills;
• Paying the employee’s gym or social club membership;
• Paying the employee’s childcare or school fees;
• Giving benefits under a salary sacrifice arrangement (except for Superannuation);
• Providing entertainment or gifts to an employee.

Fringe Benefits Tax is payable by the Employer on the provision of these benefits, and it amounts to 47% of the taxable value of such benefits.

This article explores the risks and exemptions applicable solely to the provision of gifts and entertainment to employees.

Roles and Responsibilities

It is also important to identify the correct roles and responsibilities when dealing with the correct record-keeping and tax assessment for these transactions.

• Business Owner > The business owner’s responsibility is to provide the correct source documents (Tax Invoices) to their bookkeeper/BAS Agent. Furthermore, when dealing with certain events, such as Christmas Parties, working recreational activities, lunches and dinners, provide additional information to their bookkeepers, including:
  • number of employees attending the activity/event, whether customers and suppliers also attended, whether employees’ spouses/partners were invited (in this case, provide a headcount of employees’, employees’ spouses/partners and customers/suppliers who attended the event);
  • The location where the event took place; and
  • the time the event took place (whether during office hours or outside of office hours).

All of these details are essential to determine the correct record-keeping and tax determination of both meals and entertainment expenses.

• Bookkeeper/BAS Agent > The responsibility of the BAS Agent is to:
  • code these transactions to the correct expense account;
  • make the correct GST determination; and
  • flag any FBT risk for the Tax Agent (by providing as many details as possible in the transaction notes);
• Accountant/Tax Agent > The responsibility of the Tax Agent is to:
  • determine whether the expense is business or personal;
  • if deemed as a business expense, whether it is income tax deductible;
  • and finally, assess the FBT implication for these expenses.

Meals’ Costs and Allowances

The ATO identifies Meal Allowances as Allowances to reimburse employees’ expenses. The way meal allowances are reported to the ATO through STP, and whether they are subject to PAYG and Superannuation varies depending on the circumstances in which the meal allowance is paid.

Meal Allowances during Ordinary Time Earnings

If an employer chooses to pay a meal allowance to their employees to cover the cost of their lunch whilst they are out of the office, this allowance must be paid through payroll. As the Income Tax Assessment Act does not acknowledge the cost of lunch during working hours as a tax-deductible expense when meal allowances are paid to cover lunch consumed during work time, employers should report them as Other Allowances (OD) – Non-Deductible (ND). PAYGW and Super apply to these payments. The cost of these Allowances must also be included in both the employer’s Workers’ Compensation Annual Declaration and Payroll Tax.

Overtime Meal Allowances

Some Awards require employers to pay employees a meal allowance when they work over a certain number of overtime hours. The Award also stipulates the amount of the overtime meal. The employer can pay the amount set by the Award or a higher amount. However, the ATO sets a threshold each year as a reasonable tax-deductible amount.

When the Overtime Meal Allowance is paid:

• up to the ATO annual threshold > the amount is not reported through STP. PAYG and Super do not apply; The cost of the Overtime Meal Allowance is also exempt from the employer’s Workers’ Compensation Annual Declaration. However, it must be included in the Payroll Tax calculation;
• above the ATO annual threshold > the full value of the allowance is reported through STP as Overtime Meal Allowance (MD). PAYG and Super apply. The full value of the allowance is also included in both the employer’s Workers’ Compensation Annual Declaration and Payroll Tax.

Overnight Travel Meals and Incidental Costs

When an employee travels for work and needs to stay overnight, the employer has a few options to cover the cost of both meals and incidentals:

1. Reimbursing the cost of meals and incidentals > the employee must submit receipts for any costs incurred for meals and incidentals. The employer can record the cost of these expenses as travel costs and claim the GST credit when the costs are incurred in Australia (and GST applies to the purchase type). No GST credits apply to purchases made overseas;
2. Paying a daily (per diem) allowance for meals and incidental > the ATO publishes a document that includes the reasonable amount of meals and incidental daily allowances applicable to Australian Capital cities, regional centres and other Countries. When the allowance is paid:
   • up to the ATO reasonable amount for the relevant location > the amount is not reported through STP. PAYG and Super do not apply. The Allowance is not included in the Employer’s Workers’ Compensation Annual Declaration;
   • above the ATO reasonable amount for the relevant location > the amount is reported through STP as Travel Allowance (RD). PAYG and Super both apply. The full amount of the allowance must be included in the Employer’s Annual Workers’ Compensation Declaration.
     When the allowance is paid for international travel, the employee must keep a travel diary for any trips lasting over 6 days.
     In relation to Payroll Tax, employers must include the difference between the daily allowance paid to the employee and the reasonable daily rate applicable to Hobart.

Living Away From Home Allowance (LAFHA)

A Living-Away-From-Home Allowance (LAFHA) is payable to an employee where:

• the employee’s duties require them to live away from their normal residence;
• some or all of the allowance is to compensate the employee for non-deductible additional expenses and other disadvantages caused by living away from their normal residence.

Living Away From Home Allowances are paid to employees via Accounts Payable (or through payroll, an expense reimbursement). Therefore, no PAYG or Super apply. LAFHA is also income-tax deductible. However, Fringe Benefits Tax applies to this allowance.

Meals paid for work events

Employers can cater meals for work events, such as conferences, meetings, training workshops or seminars. The cost of the catering can include both employees and customers. The cost of these meals is both income tax deductible and GST creditable and can be recorded as a Light Refreshments expense. It is also exempt from Fringe Benefits Tax, Workers Compensation and Payroll Tax.

Meals paid for recreational work events

When employers cater meals for recreational work events, such as birthdays, anniversaries and parties, these costs are considered by the ATO as entertainment expenses. These will be covered further in this article.

Flights and Accommodation

The correct record-keeping determination and tax implications applicable to the cost of Flights and Accommodation paid by a business for employees and customers/suppliers vary depending on the circumstances in which the Flights and Accommodation are paid for.

Overnight Travel Accommodation (Australia only)

When an employee travels for work and needs to stay overnight in Australia, the employer has a few options to cover the cost of accommodation:

1. Purchasing the accommodation costs directly > This is treated as a normal purchase via Accounts Payable. The Accommodation invoice can be coded to a Travel and Accommodation expense account. The expense is both income tax deductible and GST creditable;
2. Reimbursing the cost of accommodation > the employee must submit the Hotel Tax Invoice to get a reimbursement. The employer can record the cost of the expense as travel costs and claim the GST credit. The expense is also income tax deductible;
3. Paying a daily (per diem) allowance for accommodation> the ATO also includes the reasonable amount for daily accommodation allowances applicable to Australian capital cities and regional centres in the same document as meals and incidentals. When the allowance is paid:
   • up to the ATO reasonable amount for the relevant location > the amount is not reported through STP. PAYG and Super do not apply. The allowance is not included in the Employer’s Workers’ Compensation Annual Declaration;
   • above the ATO reasonable amount for the relevant location > the amount is reported through STP as Travel Allowance (RD). PAYG and Super both apply. The full amount of the allowance must be included in the Employer’s Annual Workers’ Compensation Declaration.
     In relation to Payroll Tax, employers must include the difference between the daily accommodation allowance paid to the employee and the reasonable daily accommodation rate for Hobart.

Overnight Travel Accommodation (International)

When an employee travels for work and needs to stay overnight overseas, the employer has the following options to cover the cost of accommodation:

1. Purchasing the accommodation costs directly > This is treated as a normal purchase via Accounts Payable. The Accommodation invoice can be coded to a Travel and Accommodation expense account. The expense is income tax deductible; however, no GST applies to overseas purchases;
2. Reimbursing the cost of accommodation > the employee must submit the Hotel Invoice to get a reimbursement. The employer can record the cost of the expense as travel costs. The expense is income tax deductible; however, no GST applies to overseas purchases;
3. Paying a daily (per diem) allowance for accommodation> the ATO does not provide reasonable daily accommodation allowance rates outside of Australia. Therefore, if an employer chooses to pay a daily accommodation allowance, the amount is reported through STP as Other Allowances (OD) – General (G1). PAYG applies; however, this allowance is exempt from Superannuation. The Employer’s Annual Workers’ Compensation Declaration and Payroll Tax must include the value of these allowances.

Travel Flights (Domestic and International)

When an employee travels for work and needs to fly to the work location, the employer has the following options to cover the cost of the flights:

1. Purchasing the flights costs directly > This is treated as a normal purchase via Accounts Payable. The Flight invoice can be coded to a Travel and Accommodation expense account. The expense is income tax deductible; GST only applies to domestic flights;
2. Reimbursing the cost of flights> the employee must submit the Flight Invoice to get a reimbursement. The employer can record the cost of the expense as travel costs. The expense is income tax deductible; GST only applies to domestic flights;

Flights and Accommodation paid for work events

When an employer requires an employee to attend an event, such as conferences, meetings, training workshops or seminars, and attendance at this event involves both flights and accommodation. The cost of flights and accommodation is income tax deductible and GST creditable for events held in Australia. It can be recorded via Accounts Payable as Travel and Accommodation expenses. The expense is exempt from Fringe Benefits Tax, Workers’ Compensation and Payroll Tax.

Flights and Accommodation paid for recreational work events

When businesses pay for recreational work events, such as birthdays, anniversaries and parties, and attending these events involves both flights and accommodation by employees and/or customers/suppliers. The ATO considers these costs as entertainment expenses. The correct treatment and tax implications for these costs will be covered further in this article.

Gifts

Gifts can be a common occurrence for some businesses. Gifts may be purchased for employees and/or customers and suppliers for a variety of reasons: Christmas, Birthdays, Anniversaries, or to express gratitude. The correct record-keeping and tax treatment of these gifts change depending on the following factors:

• the type of gift;
• the recipient of the gift;
• the value of the gift;
• the frequency with which the gift is provided to the same recipient.

It is important to identify the type of gift purchased. From an FBT perspective, there are three types of gifts: regular gifts, marketing gifts and gifts with a nature of entertainment.

Standard Gifts
Standard gifts include:

• • hampers;
  • bottles of alcohol;
  • gift vouchers;
  • flowers;
  • nick nacks;
  • perfume

When standard gifts are purchased for customers/suppliers these transactions can be coded as a clients’ gifts expense account. These expenses are both income tax deductible and GST creditable. No FBT applies to these purchases.

When these items are purchased for employees (or their partners/family members), the gift value must be under $300 (inclusive of GST). These expenses are both income tax deductible and GST creditable. FBT applies to any gifts purchased for employees whose value exceeds $300.

Marketing Gifts
Marketing gifts include any branded item (such as stationery, bags, water bottles etc.). These gifts can be given to employees, their family members, as well as customers and suppliers. These purchases can be coded as Marketing expenses. Income tax and GST can be claimed on these transactions. No FBT applies to these purchases.

Entertainment Gifts
Entertainment gifts include:

• • tickets to movies, plays, sporting activities and other events;
  • holiday airline tickets;
  • restaurant meals.

The ATO considers these purchases as entertainment expenses. The correct treatment and tax implications for these costs will be covered further in this article.

Entertainment

Most businesses incur some entertainment expenditure, whether in the form of food, drinks, amusement or other recreational activities. When entertainment expenses occur, the challenge is determining what portion of these expenses may be subject to FBT, Income Tax or GST.

Entertainment is defined in Section 32-10 of the Income Tax Assessment Act 1997 as”entertainment by way of food, drink or recreation; or accommodation or travel to do with providing entertainment by way of food, drink or recreation”.

The FBT, Income Tax and GST implications vary depending on who, where and when entertainment is provided.

Customer/Supplier entertainment

Entertainment provided to customers and suppliers must always be coded as a Non-Income tax deductible and non-GST creditable expense. FBT never applies to entertainment provided to customers and suppliers. It includes the following:

• recreational activities (parties, drinks, lunches and dinners) held on business premises during both business hours and after hours;
• recreational activities (parties, drinks, lunches and dinners) held off business premises during both business hours and after hours;
• entertainment gifts (tickets to movies, plays, sporting activities and other events, holiday airline tickets etc
• flights and accommodations purchased to provide any of the entertainment activities listed above.

Employees Entertainment

When entertainment is provided to employees and their spouses or family members (defined as associates), determining the correct record-keeping determination and tax implications is more challenging. Entertainment provided to employees include:

• recreational activities (parties, drinks, lunches and dinners) held on business premises during business hours only when associates, customers and/or suppliers are also invited;
• recreational activities (parties, drinks, lunches and dinners) held off business premises during both business hours and after hours;
• entertainment gifts (tickets to movies, plays, sporting activities and other events, holiday airline tickets etc
• flights and accommodations purchased to provide any of the entertainment activities listed above.

Employees’ entertainment does have a high FBT risk. However, those businesses whose only FBT risk takes place when providing gifts and entertainment to their employees can take advantage of two very important exemptions in the Fringe Benefits Tax Assessment Act.

Property Exemption
The ATO states that a recreational activity held on business premises, during business hours, and reserved exclusively for employees is not deemed entertainment. Therefore, this type of recreational activity can be coded as a Light Refreshment expense. It is Income Tax deductible, GST creditable and fully exempt from FBT.

Minor Exemption
Any provision of entertainment where the cost per head is less than $300 (inclusive of GST) is exempt from FBT, providing that these benefits are not provided regularly. Unlike the property exemption, these transactions must be recorded as employees’ entertainment expenses. These expenses are not income tax deductible nor GST creditable.

Therefore, when employers organise any activities deemed by the ATO as employees’ entertainment (as listed above), they should always ensure they keep the cost of these activities to no more than $300 per head to avoid registering and paying FBT. However, when employers provide employees separate benefits that are connected with each other (such as a meal, a night’s accommodation and taxi travel), the $300 threshold applies separately to each benefit. Benefits provided to associates also apply separately from employees.

Entertainment provided to employees, associates, customers and suppliers at the same time

When a business organises an event where employees, associates, customers and suppliers are all attending, the ATO provides a few methods to record this expense.

Actual Expenditure Method
This is the only viable option for businesses that wish to avoid paid FBT. The business must count the total number of employees, associates, customers and suppliers who attended the event. The cost of running the event is then divided equally across each attendee type. FBT is exempt if the cost per head is under $300.

50/50 Split Method
When the business wishes to apply this method, FBT registration is required. The cost of running the event is allocated 50% as clients’ entertainment expenses (non-tax deductible and non-GST creditable) and 50% as employees’ entertainment, where FBT is payable on this portion. However, once a business is registered for FBT, the portion of employees’ entertainment becomes tax deductible and GST creditable.

Conclusions

Recording and identifying the correct tax implications for meals, travel, gifts and entertainment expenses is a huge undertaking. Although our Blog Article may provide sufficient explanations for each transaction type, we understand this can still be challenging to remember. To further help with this topic, we have also created a summary Factsheet that can be used as a reference guide whenever a business needs to deal with one of these transactions.

ECA – Factsheet Meals Gifts and Entertainment v12.2023

The ability to correctly record, identify tax implications and flag FBT risks when dealing with complex transactions like meals, gifts, and entertainment is what makes a skilful bookkeeper stand out from their competition.

Evolution Cloud Accounting is more than a team of bookkeepers that can just handle standard data entry. Our skill set spans across complex transactions and tax compliance. We are here to help our clients achieve their business goals and 100% compliance.

Contact us and check how we can help your business grow.

References

https://www.legislation.gov.au/Details/C2021C00304

https://www.ato.gov.au/law/view/document?docid=TXR/TR9717/NAT/ATO/00001#:~:text=Where%20a%20meal%20falls%20within,the%20more%20general%20sections%20dealing

http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s32.10.html#:~:text=(b)%20accommodation%20or%20travel%20to,business%20discussions%20or%20transactions%20occur.&text=*%20social%20functions.

https://www.ato.gov.au/law/view/pdf/pbr/td2023-003.pdf

https://www.ato.gov.au/businesses-and-organisations/hiring-and-paying-your-workers/fringe-benefits-tax/exemptions-concessions-and-other-ways-to-reduce-fbt/minor-benefits-exemption