Let me entertain you!

I cannot believe we are close to the end of a calendar year already which means… Christmas is just around the corner! Those who know me know Christmas is my favourite time of the year. As the festive season begins and our office plans our annual Christmas celebrations, I was thinking entertainment expenses are very tricky. It is commonly assumed that if you spend money in relation to your business, it must be deductible right? Read on and I will tell you more about what can make entertainment expenses deductible for your business.

What is an entertainment expense?

During the year, you may want to provide your employees with food and drink, gifts and fun activities. All of these come under as entertainment expenses for the business.

What are some common entertainment expenses?

There are plenty of examples of entertainment expenses. The most common ones I see in pharmacy are:

· Christmas parties

· Gifts – Christmas, birthday, farewells, baby, etc.

· Staff amenities

· Morning and afternoon teas

· Team lunches and dinners

· Food and drinks provided during training

· Bonus/reward and recognition functions

· Coffee and lunch meetings

What are some of the important aspects of entertainment expenses?

For something that seems like an innocent deduction, it can affect various tax items. These include:

1. Deductibility: Entertainment expenses are deductible in your accounts (profit and loss statement) if there is a connection of the expense with your business. For accounting purposes, it may be deductible however the taxable deduction may beg to differ.

2. FBT (Fringe Benefit Tax): FBT is a tax paid by a business owner on certain benefits that they have provided to their employees and/or family members and can be for current, future and past employees. In relation to entertainment expenses, it is important to consider the following questions:

Who, What, When, Where and Why the entertainment expense has come about.
Do any exemptions apply? A common exemption is the minor benefits exemption where the entertainment value is less than $300 GST inclusive per employee and the entertainment expenses is not frequent and irregular.
Maintain appropriate records if FBT applies to you.

3. Income Tax: Unless the entertainment is subject to FBT, entertainment expenses are generally non-deductible for tax purposes. Light refreshments on business premises for sustenance is not treated as an entertainment expenses and are deductible for tax purposes.

4. GST (Good and Services Tax): GST should only be claimed if FBT is applicable and if income tax deductible (i.e. light refreshments consumed on business premises).

I don’t want you to feel discouraged that not all entertainment expenses may not be deductible, so you shouldn’t spend the money. You also need to consider as a business owner that your employees are an integral part of your business. Some owners may choose to reward and have functions together to bond their team and boost workplace morale however at the end of the day it is up to your discretion if you want to provide any entertainment expenses for the business.

Because the Christmas cheer has gotten to me early, I have created a quick summary of common entertainment expenses and the tax related treatment for them. As usual, please consult with your accountant first to see if entertainment expenses are applicable to you and what the correct treatment should be for your business.