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Ruling

Subject: Entertainment expenses

Question 1

Are the costs directly associated with providing food and beverages at the event deductible?

Answer

No

Question 2

Are other costs incurred in holding the event that are not associated with providing food and beverages deductible?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

You run a business

Each year you hold an event where people view your products and may make purchases. At the event you supply wine and finger food.

You send out invitations to the guests you would like to attend the event.

If a member of the public happens to drop by the event you welcome them to attend.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 32-5

Income Tax Assessment Act 1997 Section 32-10

Income Tax Assessment Act 1997 Section 32-45

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, relate to the earning of exempt income or are excluded by another provision of the taxation legislation.

Section 32-5 of the ITAA 1997 does not allow a deduction under section 8-1 of the ITAA 1997 to the extent that a loss or outgoing is incurred in respect of providing entertainment.

Entertainment is defined in section 32-10 of the ITAA as being:

(1)(a) entertainment by way of food, drink or recreation; or

(1)(b) accommodation or travel to do with providing entertainment by way of food, drink or entertainment.

(2) You are taken to provide entertainment even if business discussions or transactions occur.

Subsection 32-10(2) of the ITAA 1997 provides examples of what is and what is not entertainment. Entertainment includes business lunches and social functions.

Taxation Ruling TR 97/17 discusses the Commissioner's view on entertainment by way of food or drink. Paragraph 18 of TR 97/17 states:

In most cases the mere provision of food or drink satisfies the entertainment test. It is only a narrow category of cases where the mere provision of food and drink does not amount to entertainment for the purposes of Division 32 of the ITAA 1997.

The provision of alcohol, on its own or in conjunction with food, generally implies that entertainment has been provided. This is because the consumption of alcohol has social connotations and therefore provides or affords diversion or amusement (paragraph 64 of TR 97/17).

You held an event where you supplied your guests with food and alcoholic beverages. The guests also had the opportunity to view and purchase your products at this event.

You are considered to be providing entertainment to the invited guests at the event by way of the provision of food and drinks in a social setting under section 32-10 of the ITAA 1997.

Exceptions to section 32-5 of the ITAA 1997

Item 4.3 in section 32-45 of the ITAA 1997 does not stop you deducting expenses where you provide entertainment to promote or advertise to the public a business or its goods or services. However, the exception does not apply if some people have a greater opportunity to get the benefits of the entertainment than ordinary members of the public have.

In this case, the guests that attend your event are personally invited. While you have advised that members of the public are welcome to attend if they happen to drop by the exhibition, they are not personally notified of, or invited to, the event. It is considered that the invitees of the event have a greater opportunity to get the benefits of the entertainment than ordinary members of the public. Accordingly, the exception contained in item 4.3 in section 32-45 of the ITAA 1997 does not apply.

Under item 4.2 of section 32-45 of ITAA 1997 a deduction is allowed for the costs of providing or exhibiting the entity's products or services provided the costs are incurred to promote those products or services to the public. Even though an event may involve entertainment, the direct costs incurred in promoting the products or services are generally deductible. The costs associated with the entertainment, for example food and drinks, are not deductible unless the entertainment is available equally to all of the public.

The purpose of the event was to exhibit your products. The event involved entertainment by way of the provision of food and drink and in accordance with section 32-5 of the ITAA 1997, the expenses specifically associated with the provision of the food and drink or another other type of entertainment are not deductible.

However, in your case the exception contained in item 4.2 of section 32-45 of the ITAA 1997 will apply to allow a deduction for the other costs of the event, not associated with the provision of food and drink, for example venue hire and lighting costs. This is because these expenses are incurred in promoting your business products through the exhibition of those products. Accordingly, where the costs incurred in holding the preview do not specifically relate to the provision of food, drinks or another type of entertainment, you are entitled to a deduction for these costs under section 8-1 of the ITAA 1997.

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