1st March 2017
FBT and Entertainment
As the end of the Fringe Benefits Tax year is approaching, we thought you may appreciate some tips on how to reduce your FBT liability.
One area in which employers may find themselves with a significant FBT liability is meal entertainment. This often happens because employers may not realise that they are in fact providing entertainment to their staff.
It is important to understand what constitutes entertainment. Entertainment has a somewhat broad definition, however will generally include food and drink provided in a social setting, such as business lunches in restaurants and even Friday night drinks at the office.
The best way to reduce the taxable value of meal entertainment fringe benefits is to understand how to properly identify those benefits and how to value them.
The ATO offers three methods for the valuation of meal entertainment fringe benefits, all of which offer unique advantages and disadvantages:
– The Actual Method
– The 50/50 method
– The 12 week register method
The 50/50 Method
This method is arguably the simplest method to use, as it requires little record keeping. Essentially, under this method, 50% of all meal entertainment expenses are treated as taxable fringe benefits provided to employees. 50% of the GST credits on the expenses may be claimed, and 50% of the expense is treated as tax deductible expenditure. The other 50% is treated as client entertainment, on which no GST credits or income tax deductions can be claimed.
While this method may be simple, it does not offer some of the generous concessions that may be available under alternative valuation methods. It may also be disadvantageous to use this method of the actual staff-related portion of the entertainment expenses is significantly lower than 50%.
The Actual Method
One simple way to reduce your FBT liability is to adopt the ATO’s “Actual Method” for calculating the taxable value of meal entertainment. Under the Actual Method, employers must keep track of the portion of each entertainment expense that related to clients, and the portion that related to staff. Whilst the record keeping requirements may seem onerous, the following concessions could potentially apply:
– The Minor & Infrequent benefits exemption
– The Property Benefit exemption.
12 Week Register method
This method involves maintaining a register of all entertainment provided, whether it be to staff, their associates or clients, during a continuous twelve week period. The taxable portion will be calculated by dividing the value of staff meal entertainment by the total meal entertainment expense over the twelve week period.
The advantage of this method is that, provided that the relevant conditions are met, the register may be valid for up to five years. This reduces the employer’s record-keeping obligations. The minor benefits exemption can also apply, thereby reducing the value of the meal entertainment fringe benefits.
However, the property benefits exemption does not apply under this method. Therefore any meal entertainment provided on the employers premises, such as Friday night drinks in the boardroom, will be subject to FBT.
Worked Example: Business dinner at a restaurant for five clients and one employee at $350 per head. The employer is a small company and is eligible for the reduced income tax rate of 28.5%.
|50/50 method||Actual method||12 week Register (Assume employee portion of 20%)|
|Amount subject to FBT||$1,050.00||$350.00||$420.00|
|Income tax treatment||50% deductible||Actual portion deductible||Register percentage deductible|
|GST treatment||50% claimable||Actual portion claimable||Register percentage claimable|
|Net cash position||50/50 method||Actual method||12 Week Register method|
|Cost of entertainment||($2,100.00)||($2,100.00)||($2,100.00)|
|Cost of FBT||($1,104.27)||($368.09)||($441.71)|
|Entertainment deduction – tax effect||$272.05||$90.68||$108.82|
|FBT deduction – tax effect||$314.72||$104.91||$125.89|
|Net cash effect||($2,522.05)||($2,240.68)||($2,268.82)|
As demonstrated by the worked example, each valuation method will yield a different result for the employer. If you’d like to know more about which method is best for your business, please contact us.
This article is general in nature and should not be relied upon in making decisions. We strongly recommend you seek advice prior to making any decisions.