1 Are the expenses incurred in purchasing coffee, drinks and/or light meals deductible expenses under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Yes. Question 2 Are the expenses incurred in purchasing coffee, drinks and/or light meals creditable acquisitions under Division 11 of the A New Tax System (Goods and Services Tax) Act 1999? Answer Yes. This ruling applies for the following periods : Year ending 30 June 20XX Year ending 30 June 20XX Year ending 30 June 20XX Year ending 30 June 20XX Year ending 30 June 20XX The scheme commences on: 1 July 20XX
You are registered for GST. The operation of your business involves meetings with clients. You operate the business from a home office which does not have an appropriate space for work meetings. Your home office is located in D location which is a considerable distance for clients and potential clients your business works with to travel to. Your employees travel to ABC location to have meetings with clients in cafes. The meetings are related to the operation of your business and are not social in nature. Food and/or drinks are provided to your employees and occasionally to clients during business meetings. The type of food and drink provided is light snacks, light meals, coffee, tea and soft drinks consistent with morning or afternoon tea.
Income Tax Assessment Act 1997 section 8-1 Income Tax Assessment Act 1997 section 32-5 Income Tax Assessment Act 1997 section 32-10 A New Tax System (Goods and Services Tax) Act 1999 section 11-5 A New Tax System (Goods and Services Tax) Act 1999 section 11-15 A New Tax System (Goods and Services Tax) Act 1999 section 11-20 A New Tax System (Goods and Services Tax) Act 1999 subsection 69-5 (1) A New Tax System (Goods and Services Tax) Act 1999 section 195-1
Question 1 Summary The expenses incurred in purchasing coffee, drinks and/or light meals do not have the character of entertainment and as such, the expenses are deductible under section 8-1 of the ITAA 1997. Detailed reasoning Section 8-1 of the ITAA 1997 allows a deduction for any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income; or it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, paragraph 8-1(2)(d) of the ITAA 1997 denies a deduction for an expense under section 8-1, to the extent that another section of the ITAA 1997 prevents you from deducting it. Section 32-5 of the ITAA 1997 provides that you cannot deduct the costs of providing entertainment under section 8-1 of the ITAA 1997. 'Entertainment' is defined in section 32-10 of the ITAA 1997, which states: (1) Entertainment means: (a) Entertainment by way of food, drink or *recreation; or (b) Accommodation or travel to do with providing entertainment by way of food, drink or *recreation. (2) You are taken to provide entertainment
even if business discussions or transactions occur. The phrase 'entertainment by way of food, drink or recreation' is not further defined in the income tax legislation. Taxation Ruling TR 97/17 Income tax and fringe benefits tax: entertainment by way of food and drink relates to food and drink provided to employees. It contains principles that can be used to establish whether the provision of food and drink constitutes entertainment. The ATO takes the view that only the provision of food and drink that has an element of entertainment satisfies the definition, based on the ordinary meaning of entertainment, which in this context is 'amusement'. However, in most cases the mere provision of food and drink satisfies the 'entertainment' test. It is only a narrow category of cases where the mere provision of food and drink does not amount to 'entertainment' for the purposes of Division 32 of the ITAA 1997. To determine whether the provision of food or drink constitutes entertainment requires an objective analysis of all the circumstances surrounding that provision. Paragraph 23 of TR 97/17 provides the following relevant factors: (a) Why
is the food or drink being provided. This test is a 'purpose test'. For example, food or drink provided for the purposes of refreshment does not generally have the character of entertainment, whereas food or drink provided in a social situation where the purpose of the function is for employees to enjoy themselves has the character of entertainment. (b) What food or drink is being provided. As noted above, morning and afternoon teas and light meals are generally not considered to constitute entertainment. However, as light meals become more elaborate, they take on more of the characteristics of entertainment. The reason for this is that the more elaborate a meal, the greater the likelihood that entertainment arises from the consumption of the meal. For example, when an employer provides morning or afternoon teas or light meals, that food or drink does not usually confer entertainment on the employee. By contrast, a three course meal provided to an employee during a working lunch has the characteristics of entertainment. The nature of the food itself confers entertainment on the employee. (c) When
is the food or drink being provided. Food or drink provided during work time, during overtime or while an employee is travelling is less likely to have the character of entertainment. This is because in the majority of these cases food provided is for a work-related purpose rather than an entertainment purpose. This, however, depends upon whether the entertainment of the recipient is the expected outcome of the provision of the food or drink. For example, a staff social function held during work time still has the character of entertainment. (d) Where is the food or drink being provided. Food or drink provided on the employer's business premises or at the usual place of work of the employee is less likely to have the character of entertainment; refer to the reasons in (b) and (c) above. However, food or drink provided in a function room, hotel, restaurant, cafe, coffee shop or consumed with other forms of entertainment is more likely to have the character of entertainment. This is because the provision of the food or drink is less likely to have a work-related purpose.
Paragraph 24 of TR 97/17 provides that no one factor will be determinative however, paragraphs (a) and (b) carry greater importance. Application to your circumstances In your case, the provision of food or drink is during business meetings at cafés with clients and potential clients of your business. The food and drinks are provided predominantly to employees, and occasionally to the clients. It is not provided in a social setting, or for the purpose of the employees enjoying themselves. It is considered that the purpose of the provision of food and drink does not have the character of entertainment. The type of food and drink provided is light snacks, light meals, coffee, tea and soft drinks. These types of food and drink are generally not considered to confer entertainment. The provision of food and drink occurs during business meetings in an employee's 'day of work' in City A. Because the food and drinks are provided during work time, and for a work related purpose, it is less likely to have the character of entertainment.
The provision of food and drink occurs in cafés in the greater City A area. This factor means that it is more likely to have the character of entertainment. However, in your case, you have demonstrated a work-related purpose, and have also stated that the reason the meetings are held in cafes is due to an unsuitable business premises for hosting meetings with clients. Conclusion After considering the facts in your case, it is considered that the provision of light snacks, light meals, coffee, tea and soft drinks to your employees and occasionally clients of the business, do not constitute entertainment. The expenses are necessarily incurred in carrying on your business for the purpose of gaining assessable income. Therefore, the expenses are deductible under section 8-1 of the ITAA 1997. Question 2 Summary The expenses incurred in purchasing coffee, drinks and/or light meals are creditable acquisitions under Division 11 of the A New Tax System (Goods and Services Tax) Act 1999. Detailed reasoning Generally, an entity makes a creditable acquisition under section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) where:
• the entity makes an acquisition; and • the acquisition is made for a creditable purpose; and • the supply of the thing is a taxable supply; and • the entity provides or is liable to provide consideration for the supply; and • the entity is registered for required to be registered for GST. You are registered for GST; therefore, you have made a creditable acquisition under section 11-5 of the GST Act. Section 11-15 of the GST Act provides that an entity makes an acquisition for a creditable purpose to the extent that it is acquired in carrying on an enterprise and doesn't relate to supplies that are input taxed (e.g. residential premises and financial supplies). Section 11-20 of the GST Act states that any entity which makes a creditable acquisition is entitled to the input tax credit for that acquisition. As you carry on an enterprise and as the consideration is received from supplies, it directly relates to their enterprise. The acquisitions such as light snacks, light meals, coffee, tea, and soft drinks for the meetings, are made for a creditable purpose.
Section 69-5 of theGST Act provides: (1) An acquisition is not a creditable acquisition to the extent that it is a non-deductible expense. (2) An importation is not a creditable importation to the extent that it is a non-deductible expense. (3) An acquisition or importation is a non-deductible expense if it is not deductible under Division 8 of the ITAA 1997 because of one of the following: ... (f) Division 32 of the ITAA 1997 (Entertainment expenses); (3A) An acquisition or importation is also a non-deductible expense to the extent that it is not deductible under Division 8 of the ITAA 1997 because of one of the following: (a) section 51AEA of the ITAA 1936 (Meal entertainment - election to use the 50/50 split method); (b) section 51 AEB of the ITAA 1936 (Meal entertainment - election to use the 12 week register method); (c) section 51 AEC of the ITAA 1936 (Entertainment facility - election to use the 50/50 split method). ... (5) This section has effect despite section 11-5 detailed above. Section 195-1 of the GST Act provides the meaning of non-deductible expense has the meaning given by subsections 69-5 (3) and (3A) detailed above. Further section 69 -
5(3)(f) of the GST Act disallows any entitlement to input tax credits for acquisitions and importations for providing entertainment to clients rather than employees. However, to the extent that the acquisitions and importations are made in providing entertainment to employees and are otherwise creditable, Division 69 will not deny those entitlements. Therefore, you are entitled to claim input tax credits under section 11-20 of the GST Act for those expenses incurred on the coffee, drinks and light meals that do not have a character of entertainment, and only to the extent that they are deductible under Division 8 of the ITAA 1997.