Entertainment Expenses Basics

Taking a client to lunch feels like an ordinary cost of doing business. Under Australian tax law it usually is not deductible — and that surprises almost every new business owner we meet. Entertainment sits under some of the least intuitive rules in the tax system, and it is one of the accounts the ATO looks at first in a review.

Why entertainment is mostly non-deductible

Income tax law specifically blocks deductions for entertainment — broadly, food, drink, recreation and the travel or accommodation that goes with them. Client lunches, golf days, tickets to the footy: generally no income tax deduction, and no GST credits either, because GST credits follow the income tax treatment. The blocking rule sits over the top of the general deduction rules, so arguing the lunch was really marketing or relationship-building does not change the outcome.

Where FBT enters the picture

Entertainment provided to employees or their associates can be a fringe benefit. If FBT applies and the employer pays it, the cost becomes deductible and GST credits become available to that extent — the tax system essentially swaps one treatment for the other. If the entertainment is exempt from FBT — most commonly as a minor benefit under $300 per person, provided infrequently — there is no FBT, but there is also no deduction and no GST credit.

Food and drink consumed by employees on your business premises on a working day is generally exempt from FBT — think modest Friday drinks in the office — while the same event at a restaurant is treated differently.

For meal entertainment there are different valuation approaches. The 50/50 split method treats half of total meal entertainment as subject to FBT and deductible, and half as neither, regardless of who attended. The actual method follows who actually received what. Which approach suits a business depends on its mix of staff and client entertaining, so this is worth a deliberate choice rather than a default.

A worked example

Suppose a business holds its Christmas party at a restaurant at $90 a head for 10 employees, 10 partners and 5 clients — $2,250 all up. Under the actual method, the cost per employee and partner is under $300 and a party is infrequent, so the minor benefits exemption typically applies: no FBT, but no deduction and no GST credits on that portion. The client portion is never subject to FBT because clients are not employees — and it is non-deductible entertainment. The result many owners find strange: the full $2,250 may attract no FBT at all, yet none of it is deductible — this example is illustrative only, and the outcome changes with the method chosen and the facts.

How to record entertainment properly

• Keep separate ledger accounts — for example, entertainment (non-deductible), staff amenities, and entertainment subject to FBT — rather than one catch-all.
• Note who attended each event and in what capacity: employees, their partners, or clients. This single habit does most of the work at FBT time.
• Do not code entertainment to marketing or travel — it does not change the tax treatment and it makes review harder.
• Keep the invoices; per-head costs decide whether exemptions are even available.

Is the office Christmas party deductible?

Usually not — where the minor benefits exemption applies (broadly, under $300 a head and infrequent), there is no FBT but also no income tax deduction and no GST credits. The treatment shifts if the per-head cost is higher or the employer uses the 50/50 split method.

Is coffee or sandwiches at a work meeting entertainment?

Light refreshments consumed on your premises during work are generally staff amenities rather than entertainment, and are treated as an ordinary deductible cost. The setting and lavishness matter — the same food at a function venue can tip into entertainment.

Can I claim GST credits on client meals?

Generally no. For entertainment, GST credits follow the income tax deductibility, so where a client meal is non-deductible there is no GST credit on it either.