10th October, 2015
Entertainment and car expenses — these are two common business expenses that I am constantly asked about. Let’s explore an entertainment scenario first:
“I meet with business clients at coffee shops and restaurants. How do I account for these costs in my business?”
In the ever-increasing mobile business world, client and work meetings are often held at cafés and restaurants while drinking and eating. These expenses need to be treated as entertainment costs in your business accounts, and, for tax purposes, you cannot claim back the GST paid.
The expenses are not tax deductible for the client portion of the cost. Only some of the total cost can be claimed as a tax deduction, and only if your business is registered for Fringe Benefits Tax (FBT). I know what you are thinking—I need to “entertain” to assist with marketing and promoting my business. This might be true, but for accounting and tax purposes there are specific rules to adhere to (unfortunately).
It gets tricky when, for example, you have a Golf Day for employees in your business, their partners and the business clients. A Golf Day is a social event and considered entertainment. If the cost for the day for the employees and their partners is less than $300 each, then these costs are considered entertainment, but for tax purposes the business cannot claim the GST paid, cannot claim the expense as a tax deduction, and no Fringe Benefits Tax is payable.
In relation to the business clients’ costs, the expense is classified as entertainment in your business accounts, but you cannot claim the GST paid or claim the expense as a tax deduction.
Yes — if you provide food and drink on your business premises and it is enabling you, your employees and clients to complete the working day in comfort, and it is consumed on your business premises, then this is not entertainment. It only becomes entertainment when it is a social event (if you and the employees are “enjoying” yourselves). So remember: no “enjoying” the coffee and tea — okay?
Does your business own the car? That is, is the registration and insurance of the car in the name of your business? If so, then the business can classify the following as business expenses: car registration and insurances, petrol and servicing costs and even car washes to keep it looking pretty.
The amount of the car expenses, though, needs a little bit more work. If you want to maximise the amount of the car expenses you can claim for your business, then you need to establish a business-use percentage by keeping a logbook over a continuous twelve-week period to substantiate the business kilometers traveled by the car. The log is good for five years, and then you will have to track it again. It is this percentage that you can claim of all the car maintenance expenses, including depreciation and financing the cost of the car. (Note: travel from your home to your work place is not business travel.)
You must reimburse your business for the percentage of the car expenses that is for your private use, or your business may be subject to Fringe Benefits Tax (FBT). Also, your business can only claim the business-use percentage of the GST paid.
So, to keep your accountant happy and the tax man at bay, stick to the above guidelines.