Some businesses decide to spend more on entertainment expenses than others to keep their clients happy and more willing to give them their business. Client entertainment is often a wise spending decision for businesses as it can make clients feel more valued and important to the business.
But can you list the expenses under your tax deductibles to make it a little cheaper? Keep reading to find out everything you need to know about tax on client entertainment expenses.
What Falls Under Client Entertainment Expenses?
Client entertainment expenses could mean a number of things, including networking opportunities, big parties, golf days, fancy dinners, and more. They’re often factored into the company’s marketing budget because of how influential they can be. For example, if you’re choosing between two companies to go into business with and one offers you sports tickets and a free meal while the other offers no incentive, which are you more likely to go with?
The following is what you can generally consider a business entertainment expense:
- Meals or drinks: Wining and dining your clients is viewed as a business entertainment expense, no matter whether this is during meetings or after work hours
- Event tickets: Buying tickets for sporting events, shows, and other entertainment events will be considered entertainment expenses
- Accommodation: You may pay for clients from out of town to stay the night in your area so they don’t have to worry about travelling on the same day as your meeting, which you can chalk down to an entertainment expense
Businesses who have allocated a section of their marketing budget to this type of entertainment might be wondering if they can claim back on it.
Are Client Entertainment Expenses an Allowable Tax Deduction?
The cost of business entertainment isn’t tax deductible, and you won’t be able to recover GST on anything you spend on client entertainment purposes.
The Australian Taxation Office states specifically that you cannot claim the cost of attending functions or participating in entertainment provided, including food and drink or recreation activities. This includes events, dances, and cocktail parties.
You might be wondering if they’re deductible if you talk exclusively about work or if they’re made compulsory for your employees to attend. Unfortunately, the answer is still no – these business discussions are not deductible expenses.
With that being said, like many tax rules, there are a few exceptions to this rule where client entertainment expenses can be deducted.
Exceptions to the Rule: When is Client Entertainment Deductible?
Once you’ve got a list of your expenses that fall into the client entertainment category, you can determine whether they fall into one of the exceptions to the rule.
Fringe Benefits
Where your entertainment offers fringe benefits to your employees or clients, the exception on deductibility might not apply. This is true to the extent of the Fringe Benefits Tax (FBT) – whatever amount of FBT is offered to employees can be deducted from your client’s entertainment budget.
FBT does have some exempted benefits, so these cannot be deducted from your overall amount. However, as long as FBT covers the entertainment offered, you should be able to deduct it for tax.
In-house Dining Facilities
You might be able to claim for the cost of offering food and drink within working hours to the taxpayer’s employees, provided it’s in an in-house dining facility. This is also true for employees in related companies, and this includes both company’s directors.
However, deductions are not accepted for this if they’ve been offered during parties, receptions, or other types of social functions.
You might be wondering whether you have an in-house dining facility. These include canteens, dining rooms, or similar rooms not open to the public. Boardrooms or meeting rooms are not generally considered in-house dining facilities.
Offering food and drink to your clients from the in-house dining facility is also tax deductible, as long as $30 is included in the taxpayer’s assessable income. When you choose not to include these amounts in your assessable income, the overall total becomes no longer tax deductible.
Seminars
You might be offering seminars to your clients as an incentive to go into business with you, and the money spent on entertainment here might be tax deductible. As long as the food and drink consumed, accommodation, and travel are incidental to the person’s attendance at your seminar (lasting at least four hours), then you should be able to claim on it.
However, tax is not deductible if the seminar is actually a business meeting or designed to promote the business. Client entertainment can be tax deductible at seminars when they’re designed to train or discuss general policy issues relevant to the entire industry.
Still Confused about What Entertaining Clients Means?
When you can’t claim back tax on certain things used to entertain clients, your outgoings can go through the roof if you’re not careful. To make sure what you’re offering is really classed as entertainment, there are a few questions to consider before writing them off as non deductible entertainment expenses.
- Is it being offered for enjoyment or refreshment?
Anything providing entertainment in a social setting is often regarded as entertainment and therefore cannot be tax deductible (unless it fits the exceptions detailed above).
- How fancy is the food and drink?
Cups of tea and biscuits are not considered entertainment, so if you’re offering gentle refreshments you should be able to claim back on these. Entertainment food and drink often includes fancy meals and alcoholic beverages.
- Is it consumed during working hours?
Refreshments offered during working hours are not often characterised as entertainment and therefore a business cost that can be claimed back on.
- Is it being held on the business premises?
Meals consumed on the premises are less likely to be considered as entertainment that can’t be deductible. However, meal entertainment held in a function room, coffee shop, or restaurant is much more likely to be considered entertainment and therefore not deductible.
Final Thoughts
Overall, client entertainment expenses are not tax deductible. This means that wining and dining clients, business lunches, or promotional events with food and drink provided will have to be a non deductible necessary business cost. While there are some exceptions to the rule, most businesses will need to factor their client entertainment expenses into their marketing budgets and shoulder the full costs on their own.
