Is There Such A Thing As A Tax-Free Lunch?

Under the proposed policy, small businesses will be allowed to spend up to $20,000 per year on entertainment and receive a tax deduction.

Let’s break down what this all means.

Entertainment is explicitly mentioned as not tax-deductible in the Tax Act, except when subject to Fringe Benefits Tax. For example, if you took your staff out for a lavish lunch and spent $1,100, this would be subject to Fringe Benefits Tax (and thus, it would be tax-deductible). However, if you took your clients out to lunch and spent the same amount, the amount that applies to your clients would not be subject to Fringe Benefits Tax and would not be tax-deductible.

Let’s make it a little more complicated – if you have a ‘business meeting’ with a light lunch, that is tax-deductible. This is because the ATO (through their interpretation of the act) determine the lunch as ‘mere sustenance’. However, if you add a second course or alcohol to the lunch, it is then designated as entertainment.

The proposed new policy allows any meals, regardless of how many courses, to be tax deductible with no FBT (but only if no alcohol is included with the meal).

If the circumstances allow for the policy to pass, you could potentially take yourself out to lunch each day (with up to $400 per week at your disposal) and receive a tax deduction for it.

At this point, lunch or dinner without alcohol is definitively deductible, but there are no clear instructions if, for example, a bottle of wine is ordered with that lunch or dinner. There are multiple ways the ATO may instruct on what to do if this occurs, but until the policy clears its thinking, this will need to await more information.

With such scarce detail readily available, advising on this proposed policy’s impact on your business is challenging.

However, it is important to recognise that this is currently only a general announcement contingent on the Liberal Party winning the election (and that the policy would still need to be approved as legislation by the houses of parliament).

Until the circumstances align and more details are released, make sure to abide by the current legislation with regard to lunches. While there may be no such thing as a free lunch, we can assist you with ensuring that you are meeting your tax obligations. Why not start a conversation with us about your FBT-related queries and questions?