Edited version of your written advice

Authorisation Number: 1051237471365

Date of advice: 15 June 2017

Ruling

Subject: Entertainment expenses

Question 1

Are the expenses incurred in purchasing coffee, drinks and/or light meals deductible expenses under Division 8 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Are the expenses incurred in purchasing coffee, drinks and/or light meals creditable acquisitions under Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes

Relevant facts and circumstances

You are registered for goods and services tax (GST) and you operate a business that provides services.

Your business is currently earning income from the services provided and part of the process of generating income involves several business based meetings with prospective clients and customers.

These business meetings usually take place in a café. The meetings are not social in nature. The meetings usually involve two to three people.

You typically purchase coffee, soft-drinks and/or light meals consistent with a morning or afternoon tea during these meetings. The expenses you incur for the provision of coffee, soft-drinks and/or light meals are minimal.

Relevant legislative provisions

Income Tax Assessment Act 1997

Section 8-1

Section 32-5

Section 32-10

Section 32-25

A New Tax System (Goods and Service Tax) Act 1999

Section 11-1

Section 11-5

Section 69-5

Section 195-1

Reasons for decision

Summary

Based on the information provided, it is considered that the coffee, drinks and/or light meals that you purchase at your business meetings do not have the character of entertainment and as such, the expenses are deductible under Division 8 of the ITAA 1997.

Detailed reasoning

Section 8-1 of the ITAA 1997 allows a deduction for all expenses to the extent they are incurred in producing assessable income. However, paragraph 8-1(2)(d) of the ITAA 1997 denies a deduction under section 8-1 to the extent that another section of the ITAA 1997 prevents you from deducting it.

Of relevance to this case is section 32-5 of the ITAA 1997 which provides that you cannot deduct the costs of providing entertainment under section 8-1 of the ITAA 1997.

The word 'entertainment’ is defined in section 32-10 of the ITAA 1997. It states:

(1) Entertainment means:

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

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

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

(* An asterisk denotes a defined term in section 995-1 of the ITAA 1997)

However, section 32-25 of the ITAA 1997 provides that you are not prevented from claiming a deduction for entertainment expenses if one of the exceptions in Subdivision 32-B of the ITAA 1997 applies. These exceptions include certain employer expenses such as when an employer provides food and drink at the business’s premises to employees for morning or afternoon tea or in an in-house dining facility.

Based on the information provided, none of the exceptions in Subdivision 32-B of the ITAA 1997 would apply in your circumstances. Therefore, it is necessary to determine if the coffee, soft-drinks and/or light meals that you provide constitutes entertainment.

Of relevance to this case is Taxation Ruling TR 97/17 Income tax and fringe benefits tax: entertainment by way of food and drink. Although TR 97/17 relates to food and drink provided to employees, the principles it contains can be used to establish when the provision of food and drink constitutes entertainment.

The phrase 'entertainment by way of food, drink or recreation’ is not defined in the ITAA 1997. However, paragraph 15 of TR 97/17 provides that this phrase must be construed to refer to bodily and not mental gratification. In addition, paragraph 19 of TR 97/17 provides that the provision of light meals such as finger food, provided in the context of a working lunch is not considered to be entertainment.

As explained in paragraph 23 of TR 97/17, certain factors must be taken into account when assessing whether the provision of food or drink constitutes entertainment. These factors are:

(a) Why is the food or drink being provided. This test is a 'purpose test'. For example, food or drink provided for the purposes of refreshment does not generally have the character of entertainment, whereas food or drink provided in a social situation where the purpose of the function is for employees to enjoy themselves has the character of entertainment.

(b) What food or drink is being provided. As noted above, morning and afternoon teas and light meals are generally not considered to constitute entertainment. However, as light meals become more elaborate, they take on more of the characteristics of entertainment. The reason for this is that the more elaborate a meal, the greater the likelihood that entertainment arises from the consumption of the meal.

For example, when an employer provides morning or afternoon teas or light meals, that food or drink does not usually confer entertainment on the employee. By contrast, a three course meal provided to an employee during a working lunch has the characteristics of entertainment. The nature of the food itself confers entertainment on the employee.

(c) When is the food or drink being provided. Food or drink provided during work time, during overtime or while an employee is travelling is less likely to have the character of entertainment. This is because in the majority of these cases food provided is for a work-related purpose rather than an entertainment purpose. This, however, depends upon whether the entertainment of the recipient is the expected outcome of the provision of the food or drink. For example, a staff social function held during work time still has the character of entertainment.

(d) Where is the food or drink being provided. Food or drink provided on the employer's business premises or at the usual place of work of the employee is less likely to have the character of entertainment; refer to the reasons in (b) and (c) above. However, food or drink provided in a function room, hotel, restaurant, cafe, coffee shop or consumed with other forms of entertainment is more likely to have the character of entertainment. This is because the provision of the food or drink is less likely to have a work-related purpose.

Following on from this, paragraph 24 of TR 97/17 provides that no one factor will be determinative however, paragraphs (a) and (b) carry greater importance.

In your case, it is concluded as follows:

● The provision of food or drink is for the purpose of refreshment incidental to a business meeting. The food or drink is not provided for the purpose of entertainment and does not take place in a social setting.

● The food or drink being provided is usually coffee, soft-drinks and/or a light meal. These items have the character of morning or afternoon teas rather than lunch or dinner. The cost of these items is minimal. As such, these items are not considered to be elaborate.

● Provision of the food or drink during work hours is indicative of a non-entertainment expense. However, the provision of food or drink at a café is more likely to have the character of entertainment.

After weighing up all of the facts, it is considered that the coffee, drinks and/or light meals that you purchase at your business meetings do not have the character of entertainment and as such, the expenses are deductible under Division 8 of the ITAA 1997.

However, if the provision of the food and drinks is more elaborate than just refreshments the character of the expenses will be entertainment. For example when a meal would constitute lunch rather than a snack. Alternatively, where the purpose of the business meeting changes, for example, to celebrate an achievement. In other words, expenses incurred in the provision of food or drink beyond coffee, soft-drinks and/or light meals will not be deductible under Division 8 of the ITAA 1997.

Question 2

Summary

The coffee, drinks and/or light meals that you purchase at your business meetings are only creditable acquisitions if they are not a non-deductible expense under the ITAA 1997.

This means that if the expenses are deductible under Division 8 of the ITAA 1997, you will be entitled to claim an input tax credit for the GST included in these expenses.

Detailed reasoning

Section 11-1 of the GST Act provides that you are entitled to input tax credits for any creditable acquisition you make.

Section 11-5 of the GST Act states:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered, or *required to be registered.

(* An asterisk denotes a defined term in section 195-1 of the GST Act)

However, subsection 69-5(1) of the GST Act provides that an acquisition is not a creditable acquisition to the extent that it is also a non-deductible expense under the ITAA 1997.

Section 195-1 of the GST Act provides that 'non-deductible expense’ is defined by subsections 69-5(3) and (3A) of the GST Act. Paragraph 69-5(3)(f) of the GST Act provides that an acquisition is a non-deductible expense if it is not deductible under Division 8 of the of the ITAA 1997.

As determined in Question 1 above, the coffee, drinks and/or light meals that you purchase at your business meetings do not have the character of entertainment and as such, the expenses are deductible under Division 8 of the ITAA 1997.

Therefore, you are entitled to claim the input tax credits in relation to your expenses as they are deductible under Division 8 of the ITAA 1997.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).