Meal Entertainment – How to reduce your fringe benefits tax (FBT) bill
Fringe benefits tax (FBT) is separate to income tax and is imposed only on employers.
It is applied to the value of non-cash benefits provided by an employer that are paid in place of wages or salary to an employee (or their associate).
Meal entertainment is one of the most common benefits and typically arises from the provision of food or drink. The FBT payable by an employer on the taxable value of meal entertainment can be significant. However, you may be able to reduce your FBT payable, or even eliminate it completely, by applying various exemptions.
The most commonly used methods for calculating the value of meal entertainment, along with two of the most valuable exemptions, are discussed below:
Actual method: Under the actual method, the employer needs to allocate each item of expenditure between that provided to the employee (or their associate) and that provided to non-employees for example clients, contractors and suppliers. This involves additional record keeping, however, FBT is only paid on the portion of the benefit that relates to employees.
Further, under the actual method, there are certain FBT exemptions which, if applicable, can reduce the FBT payable such as the minor benefit exemption and property benefit exemption.
Minor benefit exemption: Under this exemption, in brief, if the benefit is provided infrequently and irregularly and the taxable value of the minor benefit is below $300 per employee (per event) it may be exempt from FBT. As a rule of thumb, meal entertainment benefits are deemed to be infrequent and irregular if they are provided to an employee no more than 10 times in a given FBT year. Meal entertainment applies predominantly to the provision of food or drink to employees that is not consumed on the employer’s business premises.
Example of minor benefits: The employer holds a Christmas function and the cost is less than $300 per head. The employees also receive gifts of less than $300 each at the party. They are both considered separate benefits, a Christmas party is both minor and infrequent and as each benefit is less than $300, they are both exempt minor benefits.
Property benefit exemption: An exemption is available for food and drink provided to an employee and consumed on the employer’s business premises on a working day (for example Friday night drinks).
Importantly, these exemptions do not apply where the employer elects to use the 50/50 split method to calculate the taxable value of meal entertainment. This means that the employer may end up paying FBT on meal entertainment which would otherwise have been exempt if using the actual method.
50/50 split method: The 50/50 split method only requires the employer to keep a single record of entertainment expenditure. 50% is considered to relate to employees and the remaining 50% is deemed to relate to non employees. Therefore, the taxable value of meal entertainment is 50% of the total entertainment provided to all persons. While this method is easier to administer, it can result in a significantly higher FBT bill.
How you can save:
So, how can this benefit you in real-life? Well, many of our clients go to the effort of maintaining records which detail/dissect the number of employees and non-employees attending dinners at restaurants, social functions and other similar events. Some even maintain separate entertainment ledger accounts for employees and non-employees and apportion each item of expenditure accordingly. This information enables us to apply the actual method to calculate their FBT and, in doing so, we may be able to save them a significant amount. Recently, I was able to reduce one client’s FBT bill by $8,976 this year and $14,065 last year simply by using the actual method which enabled us to access FBT exemptions which would not have been available had we used the 50/50 split method.
To conclude, many employers choose to use the 50/50 split method for valuing meal entertainment purely because of its simplicity and reduced compliance costs. However, the actual method of valuing entertainment should be given additional consideration because it allows access to exemptions which are not available under the 50/50 split method and can significantly reduce your FBT bill.
– Maree Candy, Senior Accountant
If you’d like to know more about how you could reduce your fringe benefits tax bill please contact our diverse team of specialists at Lawrence.
Contact us today for an obligation-free chat about a review of this in your business.
This article is general information only. It does not give business, accounting, taxation, financial planning or other professional advice or service. It does not consider your specific situation, objectives or needs and if personal advice is required, a detailed analysis of your particular circumstances would need to be sought. Please see our Privacy and Disclaimers page for further information.