When can you Eat, Drink, Be Merry and Claim GST?

As a business owner in Australia, you know that a firm grasp of GST (Goods and Services Tax) regulations is essential to keeping your business compliant and avoiding costly mistakes.

One area that often causes confusion is whether you can claim GST credits on entertainment expenses.

The short answer is no – you can not claim GST on entertainment expenses…

But while that sounds clear at first, you may start to wonder whether an activity should be classified as entertainment or another activity that does allow GST to be claimed.

Let’s explore when you can and can’t claim GST, and what it means for your business bookkeeping.

What Constitutes Entertainment?

First, let’s clarify what the Australian Taxation Office (ATO) defines as entertainment. Entertainment involves providing food, drink, or recreation, including activities such as:

• Business lunches and dinners
• Staff social functions, like Christmas parties
• Tickets to sporting or cultural events
• Recreational trips (e.g., a company-paid holiday)

These activities are solely intended to provide enjoyment or amusement, and the ATO has specific rules regarding the GST treatment of these expenses.

The GST Rule on Entertainment Expenses

According to the ATO, you cannot claim GST credits for expenses that are classified as entertainment.

This rule applies even if the entertainment is provided for business purposes.

The rationale behind this is to prevent businesses from gaining a tax advantage for expenses that are considered personal in nature, even if they have a business context.

Determining Business vs. Entertainment Expenses

To help determine whether an expense is a business expense or entertainment, consider the 4W Rule: Why, What, Where, and When. It’s not just one question that decides it all, but the balance of your answers to all four questions.

• Why: Why did you do it? Was it for a social reason or business? Taking a client out to lunch for a meeting is a solid business reason. Taking out a friend is not.
  
  
• What: What did you have? Was it purely functional or lavish? Sandwiches, muffins, and coffee suggest a business meeting. A lavish four-course meal with plenty of alcohol does not. Alcohol, in particular, weakens your claim in the eyes of the ATO.

   

• Where: Where did you do it? If the food and drink are consumed on your business premises, it supports your claim that the expense is a business cost. Being at a restaurant or café is still okay, but you need the When to back you up.

   

• When: When did you do it? If the expense is incurred during business hours, it supports your claim of a business expense. If it’s at night, it’s less convincing.

Consider your answers to all four questions carefully. Your Why and What are key. Without strong reasons and context for these, it’s likely an entertainment expense. However, your Where and When shouldn’t entirely weaken your Why and What. All four answers should align and make sense together. 

Common Misunderstandings

Many business owners believe that because entertainment expenses are incurred during the course of business, they should be eligible for GST credits.

However, the ATO is quite clear on this matter. Here are a few scenarios where confusion often arises:

• Client Meetings Over Lunch: Even if you’re discussing business matters, the cost of the meal is considered entertainment.

• Employee Social Functions: Events like Christmas parties or team-building activities fall under entertainment, and GST cannot be claimed on these expenses.
• Business Event Tickets: If you purchase tickets to take clients to a sports game or concert, these are considered entertainment expenses.
  

Exceptions to the Rule

While the general rule is that you cannot claim GST on entertainment, there are some exceptions:

• Light Meals and Refreshments: Simple meals like sandwiches or snacks provided during a business meeting may not be considered entertainment. However, the line can be blurry, so it’s best to seek advice or refer to the ATO guidelines.

• Travel Expenses: If the entertainment is part of a travel allowance, different rules might apply. It’s important to check specific scenarios with a tax professional.

We are not Amused

Certain scenarios allow GST to be claimed because the main purpose of the activity is not entertainment.

Just one example would be when items are purchased to create video content – if it’s necessary to have food and drink on set and in the shot, you might be in the clear to assign these as production expenses and claim the GST.

It’s always best to speak to an expert regarding your specific circumstances.

Record Keeping and Documentation

Keeping meticulous records is essential.

If your business incurs entertainment expenses, ensure they are clearly documented and categorised correctly in your financial records.

This practice not only aids in compliance but also helps in case of an ATO audit.

Our team at Dollars + Sense specialises in business bookkeeping, helping you navigate complex regulations and keep your financials in top shape.

Navigating the ins and outs of GST and entertainment expenses can feel daunting, but having someone in your corner who knows the rules is crucial for your business’s financial well-being.