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Ruling

Subject: drinks/light meals - entertainment expenses - deductibility

Questions and Answers

1. Is the payment for a light meal and/or beverages during a business meeting at a café, a tax deductible expense for your portion?

Answer: No

2. Is the payment for a light meal and/or beverages during a business meeting at a café, a tax deductible expense for the client's portion?

Answer: No

3. Is the input tax credit on the expense able to be claimed for the taxpayer's portion and the client's portion of the expense?

Answer: No

This ruling applies for the following period

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commenced on

1 July 2011

Relevant facts

You operate a business as a sole trader. The business does not employ staff. You currently rent a small office space to run your business.

The current office space is not large enough, nor is it suitable for you to meet with clients and you regularly meet with your existing clients and potential clients at cafés to have business meetings.

You will pay for beverages (for example coffee) and possibly a light meal at the completion of the meeting, for both yourself and the client. Alcohol will not be included. The meeting will be conducted within standard business hours.

The average spend per meeting is approximately $35 (actual spend for the 2011 financial year ranged from $7.90 minimum to $61.80 maximum per meeting).

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

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) Section 69-5

Reasons for decision

Summary

The expense relating to your portion of the food or drink is not deductible as it is not incurred in gaining or producing assessable income or necessarily incurred in carrying on a business, but is private or domestic in nature.

The expense relating to the clients portion of the food or drink is not deductible as it is considered to be meal entertainment and non-deductible under Division 32 of the Income Tax Assessment Act 1997 (ITAA 1997).

No GST input tax credits can be claimed on these expenses for food or drink. Under section 69-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), an entity is not entitled to claim input tax credits for the GST in certain expenses that are non-deductible for income tax purposes. These expenses include entertainment expenses that are non-deductible under Division 32 of the ITAA 1997.

Detailed reasoning

Expense for your portion

Section 8-1 of the 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, or relate to the earning of exempt income.

Expenditure on the daily necessities of life (e.g., food and drink) are generally a private expense and are not incurred in gaining or producing assessable income.

The issue of the deductibility of meals was considered by the Full Federal Court in FC of T v. Cooper (1991) 21 ATR 1616; 91 ATC 4396 where Hill J stated (ATR at page 1638; ATC at page 4415)

For the Commissioner, it was submitted that, except in a rare case, the essential character of food was always private. Exceptions for the cost of entertainment (now excluded from deduction legislatively) and for meals taken while the taxpayer was away from home on a business activity, were acknowledged.

Food and drink are ordinarily private matters, and the essential character of expenditure on food and drink will ordinarily be private rather than having the character of a working or business expense. However, the occasion of the outgoing may operate to give to expenditure on food and drink the essential character of a working expense in cases such as those illustrated of work-related entertainment or expenditure incurred while away from home.

The reference to 'expenditure incurred while away from home' is a reference to the situation where a taxpayer must travel away from home at least overnight for the purposes of their employment. Where a taxpayer is required to travel for work purposes the cost of meals may be deductible.

The taxpayer must however be travelling for work purposes. For example: an office worker attending an interstate conference or an 'on road' salesman.

You cannot be considered to be travelling for work as you are completing your business duties at the café in the town of your business and using the café in default of your office. Your circumstances do not change the essential character of the expense as private or domestic in nature.

The expenditure incurred by you on your portion of the food or drink is not incurred in gaining or producing assessable income or necessarily incurred in carrying on a business, but is private or domestic in nature. The cost of your portion of the food or drink consumed by you is therefore not deductible under section 8-1 of the ITAA 1997.

Expense for client's portion

The provision of food or drink at a café may be entertainment as defined in subsection 32-10 of the ITAA97.

You can make an objective analysis of all the circumstances surrounding the provision of food or drink, using the Commissioner's view in Taxation Ruling TR 97/17: Income Tax and FBT: entertainment by way of food or drink and its addendum.

In making a determination of whether the food or drink provided to the employee results in the entertainment of that person, an employer should consider paragraph 7 of TR 97/17. It lists four factors that need to be considered when determining whether the provision of food and drink constitutes entertainment. These factors are:

· why the food or drink is being provided

· what type of food or drink is being provided

· when is that food or drink being provided, and

· where the food or drink is being provided.

Paragraph 18 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 or drink does not amount to 'entertainment' for purposes of Division 32 of the ITAA 1997.

Paragraph 24 refers to the tests in determining entertainment:

No one of the above factors will be determinative; however, paragraphs (a) and (b) are considered more important. The application of the above factors results in the determination of whether the food or drink amounts to meal entertainment.

In determining, whether the employer has provided entertainment by way of food or drink, the four factors listed in TR 97/17 are considered:

· Why is the food and/or drink being provided?

The food is provided as refreshment or for the convenience of the client. The meeting between you and your clients is to facilitate business discussions in a social or convivial atmosphere.

· What type of food and/or drink is provided?

Items consumed are usually coffee, tea, juice, sandwiches, toast or light lunch. The average spend per meeting is $35.00 with a maximum of $61.80. The maximum spend does appear to be substantial. You have stated that there is no alcohol or three course meals.

· When is food or drink being provided?

The business meetings occur during normal business hours.

· Where is the food or drink provided?

The food or drink being provided is consumed at cafes in the area in which you conduct your business.

The food or drink may not provide entertainment in itself depending on the extent of the meal, but it is the setting in which it is consumed that turns the food or drink into the provision of entertainment. That is, entertainment is provided by way of food or drink, in a social situation at a cafe, despite business discussions taking place.

IT 2675 income tax and fringe benefits tax: morning and afternoon teas, light meals and in-house dining facilities, states that these refreshments provided at the employer's business premises will not be entertainment by way of food or drink. The difference in your case is that these refreshments are consumed off the business premises, which characterises it into entertainment by way of food or drink.

Moreover, as per the table and addendum provided in TR 97/17 at (b)(1), food or drink consumed off the employer's premises, at a social function or business lunch, by clients, is meal entertainment by way of food or drink.

The fact that there are limited facilities at your business premises for meeting clients does not change the character of entertainment by way of food or drink.

No deduction is allowable for the expense for the client's portion of the food or drink.

GST input tax credits

An entity that is registered for GST is entitled to input tax credits for the GST included in the price of things that it acquires for the purpose of carrying on its enterprise.

However, under section 69-5 of the GST Act, an entity is not entitled to claim input tax credits for the GST in certain expenses that are non-deductible for income tax purposes. These expenses include entertainment expenses that are non-deductible under Division 32 of the ITAA 1997.

No input tax credits can be claimed on the cost of food or drink for these business meetings with clients at the café.