The entertainment rules are extremely complicated. The simplest method of accounting Entertainment is the ’50/50 method’. However, this may not be the most tax effective. The other two methods are the ‘Actual method’ and ’12 week register method’.
To give you an example of how the 50/50 method applies, if you incurred $1,100 (including GST) on customer lunches or dinners for the year and applied the 50/50 method, the possible outcomes would be as follows:
- $550 would be non-deductible for income tax and not subject to FBT (this represents the portion relating to customers);
- The company would be entitled to a $50 GST input tax credit (it can claim back on its BAS)
- $550 being the GST-inclusive amount relating to employees (including directors and associates of employees) is subject to FBT. $500 of this is deductible to the company for income tax purposes.
- FBT is generally calculated as follows: $550 x 2.0647 x 46.5% = $528
- FBT is tax-deductible. Therefore, the overall income tax deduction is $500 + $528 = $1,028. At 30% tax rate, the company receives a $308 tax benefit.
- Therefore, the net after-tax cost to the company from incurring $1,100 in entertainment = $1,100 + $528 – $308 – $50 = $1,270
- Therefore, in this example, there is an additional cost of $170 or 15.5%.
- If a shareholder on the top marginal tax rate (46.5%) was to pay $1,100 in entertainment out of their after-tax income, this would require them to draw a dividend of $1,485 which is even greater than the company paying the expense.
- However, if the shareholder was only in the 31.5% tax bracket the cost would be closer to $1,125 (less than if the company paid it).
Important: If it is deductible for income tax, the GST included in that amount is generally allowed as a input tax credit (claimable on the BAS).
Refer to the following two publications for a more detailed overview of the meal entertainment rules.
“Fringe benefits tax (FBT) – A guide for employers” http://www.ato.gov.au/businesses/content.asp?doc=/content/fbt_guide.htm
“Fringe benefits tax for small business” http://www.ato.gov.au/businesses/content.asp?doc=/content/33353.htm
The above advice is intended as a guide only. Please contact Eclipse Accounting Group if you require additional information or clarification on any issues or rules.