When you take staff, clients and suppliers out for a meal, small business owners usually pay with the business card, but is this a legitimate business expense?
If you are fostering relationships that will allow you to make more sales (or to maintain income), why wouldn’t the cost of that be tax deductible? Unfortunately, many of these expenses are not deductible but here is a simple list that will walk you through the various possibilities.
What meals can you claim as a tax deduction?
- Meals when you’re travelling
When employees travel for work and stay overnight in rented accommodation, there is a reasonable amount for meal expenses that can be claimed. If the employee has breakfast/lunch/dinner while travelling for work purposes, the expense is tax-deductible and exempt from fringe benefits tax, BUT, you should consider what the ATO determines to be ‘reasonable’ in any given tax year which can be found here.
- Meals supplied as a working lunch
If an employer provides light meals like sandwiches, pizzas and drinks for a working lunch, training session or dinner in the office, the amounts are tax-deductible and exempt from FBT. However, if this meal is more elaborate and includes wine, the meal deduction is likely to be considered entertainment and disallowed by the ATO (i.e. Christmas Party).
- Meals supplied from an in-house cafe or canteen
If the employer has an in-house cafe or canteen and provides meals to employees during the working day, the expenses are tax-deductible and exempt from FBT.
If the employee pays for the meal and is not reimbursed by their employer, the amount is not tax-deductible to the employee as it is considered to be a private expense.
- Snacks and refreshments throughout the day
Most business owners are often on the road visiting clients and stop in for a coffee and/or a muffin between meetings. This is a claimable deduction allowed by the ATO.
General considerations – In detail
When an expense is incurred in running a business, we assume the amount is deductible unless some special tax rule specifically denies the deduction. Meal expenses should be treated differently: assume the amount is not deductible unless you can establish that it is a legitimate business expense. To find this out, go through the following list of question:
Who consumed the meals?
It is necessary to split meals provided to staff and meals purchased for customer, suppliers and other business associates. While the expenses may be deductible if provided to an employee (as you will see in later questions) meals and other entertainment provided to non-employees are not deductible.
Who paid for the meal?
Same as all tax deductions, you need to pay for the meal. The person or business who pays for the meal is the one claiming the deduction. If an employee pays for the meal and their employer reimburses them for the expense, it is the employer that will claim a deduction for the meal, not the employee.
Has Fringe Benefits Tax being paid?
If the employer has supplied meals or other entertainment to an employee and reported these amounts as a fringe benefit and also paid the appropriate amount of fringe benefits tax (FBT) on them, then the amounts can be claimed as a deduction.
Please note that fringe benefits tax is levied at the top marginal tax rate, which in most cases is much higher than the benefit achieved from the deduction.
You can consider the FBT exemption. The Minor and InfrequentFBT exemption allows employers to provide minor (less than $300 per employee) and infrequent (not regular) meal benefits to employees without paying FBT while still claiming a tax deduction.
What type of meal was purchased and why was it purchased?
The type of food and drink provided is very important when determining its deductibility. It is also the intentions (entertainment or just sustenance?).
A rule of thumb is the more expensive and elaborate the items purchased, the less likely they are to be deductible.
When and where was the meal consumed?
Was the meal purchased and consumed during working hours or after hours? Was the meal consumed in your place of work/business or elsewhere? Generally speaking meals on-site during work hours are more likely to be deductible than a restaurant meal after work.
So now…what do you do if you purchase a meal for an employee or business associate that you believe is not deductible?
It’s important to separate in your accounting records the deductible and non-deductible meals. This will ensure that these deductions are not claimed by mistake. Additionally, ensure that the appropriate GST code is used. Many business owners incorrectly claim GST credits on meal expenses which are not deductible.
Disclaimer: The information contained in this article is general in nature and should not be taken as personal, professional or taxation advice. You ought to make your own inquiries and seek independent, professional advice before taking action or relying on any information in this article. As Capital Gains Tax legislation is subject to change, we cannot guarantee the timeliness of the information provided.