Income tax laws have been around for a long time, with the current income tax legislation essentially drawn from statutes first introduced in 1936 and 1997 (respectively the Income Tax Assessment Act 1936 and Income Tax Assessment Act 1997).
Fringe benefits tax legislation was introduced in 1986 (Fringe Benefits Tax Assessment Act 1986) and the GST legislation dates from 1999 (A New Tax System (Goods and Services Tax) Act 1999).
When it comes to entertainment expenditure, particularly entertainment by way of food or drink, the income tax, FBT and GST laws interact with a semblance of consistency.
When reviewing entertainment expenditure an entity would typically consider the extent to which:
- a GST credit is available;
- the amount may be subject to FBT; and
- whether the amount is available as a deduction for income tax purposes (at least for entities that are subject to income tax).
In this regard, the provisions of the income tax, FBT and GST laws appear to interact consistently.
GST Perspective
Looking at entertainment expenditure from a GST perspective, the question is the extent to which an entity is entitled to claim a GST credit.
Division 69 of the GST law operates in conjunction with the relevant provisions in the income tax and FBT laws regarding entertainment. Based on these laws, to the extent the entertainment expenditure relates to a ‘non-deductible expense’ (as defined for GST purposes) then there is no entitlement to claim a GST credit.
An acquisition is a non-deductible expense if it is not deductible under Division 8 of the ITAA 1997 because of one or more specific provisions. Examples of non-deductible expenses include:
- entertainment expenses to the extent they are non-deductible for income tax purposes as per Division 32 of the ITAA 1997; and
- the 50/50 or 12-week register methods of determining non-deductible meal entertainment expenses as per ss. 51AEA, 51AEB and/or 51AEC of the ITAA 1936.
With regard to Division 32 of the ITAA 1997, to the extent the expenditure is incurred in providing entertainment the amount is non-deductible. Therefore any entertainment expenditure, whether relating to employees or others such as customers and clients, would be non-deductible. However, there are a number of exceptions the main one being that the amount is not treated as non-deductible to the extent the expense is in respect of providing entertainment by way of providing a fringe benefit. As fringe benefits apply to employees (and associates of employees), to the extent the expense relates to providing entertainment to an employee and the amount is also a fringe benefit, the amount will be deductible for income tax.
With regard to the 50/50 or 12-week register methods for meal entertainment expenditure, an entity can make an FBT election to apply one of these methods. Where this is the case, the amount of meal entertainment expenditure that is subject to FBT is based on the method chosen. If the 50/50 method is chosen, then 50% of the meal entertainment expenditure is subject to FBT and accordingly this 50% will be income tax deductible. It then follows that there will be an entitlement to claim 50% of the GST credits.
Practically, for amounts incurred in providing entertainment to an employee:
- the amount is subject to FBT;
- the amount will be deductible for income tax purposes; and
- a GST credit entitlement arises (as the amount is not a ‘non-deductible expense’ as defined for GST purposes).
What about income tax exempt entities?
An exempt entity is essentially a reference to an entity whose income is exempt from income tax.
Subject to the additional comments below for certain charitable and government organisations, where entertainment expenditure is incurred by an exempt entity, these amounts would be non-deductible expenses because the entity is an exempt entity, and not specifically because of the operation of Division 32 of ITAA 1997 or due to the relevant 50/50 or 12-week register elections.
Subsection 69-5(4) provides that:
‘If the entity making the acquisition or importation is an exempt entity, the acquisition or importation is a non-deductible expense if it would have been a non-deductible expense under subsection (3) or (3A) had the entity not been an exempt entity.’
Therefore, to determine the extent to which an exempt entity is able to claim a GST credit, s. 69-5(4) requires the exempt entity to apply the rules as if that entity was not exempt.
Practically, the outcome for such exempt entities (other than certain charitable organisations referred to below) will be the same as for other (taxable) entities.
Special Rules for Certain Charitable Organisations
Where an entity is an exempt entity it is usually because of some specific provision. Therefore, entertainment acquisitions will generally be non-deductible because the entity is an exempt entity and not because of Division 32 of the ITAA 1997.
It is further noted that where a benefit provided to an employee is an exempt benefit it is not a fringe benefit.
Benefits provided to employees of certain charitable organisations, such as public benevolent institutions, public hospitals, public ambulance entities, etc. are exempt from FBT because of s. 57A of the FBTAA. Such exempt benefits are therefore not fringe benefits and would not fall within the exception referred to above.
Therefore where an exempt entity incurs entertainment expenditures which are exempt under s. 57A of the FBTAA, these will retain their character as a ‘non-deductible expense’ for GST purposes. Practically, for such amounts incurred in providing entertainment:
- the amount is an exempt benefit under FBT rules;
- the amount will be non-deductible for income tax purposes; and
- no GST credit entitlement arises.
Summary
Generally, the interaction of the GST, FBT and income tax laws result in the application of the rules as summarised below:
Entertainment expenditure incurred in relation to employees:
- subject to FBT;
- income tax deductible; and
- GST credit available.
Entertainment expenditure incurred in relation to non-employees (i.e. customers, clients, etc.):
- NOT subject to FBT;
- NO income tax deduction; and
- NO GST credit available.
Note: For a more detailed discussion on how GST applies to supplies of fringe benefits, refer to the ATO’s public ruling, GSTR 2001/3.