Entitlement to GST credits for entertainment expenditure is subject to the interplay of the FBT and income tax deduction provisions. We explore whether GST credits are available where entertainment expenditure is incurred in holding functions available to the general public.
We have previously published an article that looks at the interaction between GST and FBT in terms of entertainment expenditure. That article focussed on how the tax provisions generally apply to entertainment, and specifically looked at how the GST and FBT rules draw from the income tax deductibility rules in Division 32 of the ITAA 1997 where the amount is a fringe benefit.
By way of recap, we noted:
‘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 terms of non-deductibility under the income tax laws, we further noted:
‘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.’
As noted in the above quote, one of the main exceptions to Division 32 applying is where the expenditure results in a fringe benefit arising (found in section 32-20 of the ITAA 1997).
However, there are also other exceptions (via section 32-25 of the ITAA 1997) for specific types of entertainment expenditure:
- section 32-30: employer expenses;
- section 32-35: seminar expenses;
- section 32-40: entertainment industry expenses;
- section 32-45: promotion and advertising expenses; and
- section 32-50: other expenses.
In this article we will explore expenses incurred in ‘providing or exhibiting your business’s goods or services if you incur the loss or outgoing to promote or advertise those goods or services to the public’ (referred to in Item 4.2 of section 32-45).
By way of example, entities may host functions or community events. Sometimes the events may be casual (e.g. inviting a guest speaker to give a talk) whereas other events may be more formal (functions, lunch or dinners).
It is not uncommon for some of these events to be made available to the general public, and such events may include entertainment by way of food and/or drink.
As income tax exempt entities are not generally concerned with the income tax deductibility, the key issue is usually whether the entity is able to claim GST credits for the expenses incurred at such functions.
By way of summary, a GST credit is generally available where the entity makes the acquisition in carrying on its enterprise, and holds a tax invoice. However, section 69-5 of the GST Act denies a GST credit for an amount to the extent the expenditure is denied as a deduction under Division 32 of the ITAA 1997. In this regard, the income tax deductibility question may be relevant.
As referred to above, where the expenses are incurred in ‘providing or exhibiting your business’s goods or services if you incur the loss or outgoing to promote or advertise those goods or services to the public’, Item 4.2 of section 32-45 applies and the expense would effectively be deductible under Division 32 of the ITAA 1997.
Note: 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. Subsection 69-5(4) of the GST law 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 tax exempt. Practically, the outcome for such exempt entities will be the same as for other (taxable) entities.
(We further note that Item 4.2 refers to ‘providing or exhibiting your business’ goods or services’, and the definition of business is defined broadly, including ‘any profession, trade, employment, vocation or calling, but does not include occupation as an employee’. In this regard, Item 4.2 would apply to any business activities carried on by tax exempt entities, but may also extend to other activities (e.g. entities subject to the NTER regime where income tax provisions are notionally applied.)
Therefore, where entities hold functions, and provided that:
- attendance at such functions are made available to the general public;
- attendees are not required to pay to attend;
- meet the terms of Item 4.2 (as referred to above),
the expenses would not be entertainment, no income tax deduction would be denied under Division 32 of the ITAA 1997, and GST credits would be available.
We note that in addition to attendees from the general public, we expect that employees will also attend. In this regard, to the extent employees attend the event this should not stop the GST credits from being available on the portion of the expenses that relate to the employees to the extent a fringe benefit has been provided. The entity will, however, need to consider whether such expenses are subject to FBT.
This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. It is not intended to be, nor should it be relied upon as, a substitute for professional advice. TaxEd Pty Ltd and any person connected with its production disclaim any liability in connection with any use.