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Is that client coffee deductible? What about the lunch meeting at a restaurant or the bottle of wine you gifted as a thank-you? The ATO have specific rules regarding what’s considered a deductible expense and what falls under the category of entertainment, which can get a bit tricky…

In this blog post, we’ll break down the key elements of the Australian tax system related to deductibility of meeting expenses, and the rules around food, coffee, and alcohol.

General Principle of Deductibility
The basic rule of thumb is that a business expense is deductible if it is incurred in the course of running your business and directly relates to generating assessable income. (This is outlined in the Income Tax Assessment Act 1997). However, when it comes to food, drinks, and entertainment, the ATO applies stricter guidelines.

What is Considered Entertainment?
According to the ATO, “entertainment” involves providing your clients, employees, or associates with food, drink, or recreation. The key distinction is that if the expense is primarily social in nature, it falls under entertainment and is generally not deductible.

Expenses that typically fall under entertainment include:

Taking a client out to lunch or dinner at a restaurant
Hosting a cocktail evening or drinks after work
Tickets to a concert or sporting event
Parties or celebrations
If the primary purpose of the gathering is to entertain or socialise, it’s unlikely to be considered a deductible expense, and GST credits may not be claimable either.

When is Food and Drink Deductible?
There are certain situations where expenses on food and drink can be considered deductible. The ATO makes allowances in cases where the expense is directly related to running your business and not entertainment. These scenarios can include:

Meals consumed during business travel (such as when you’re away from home overnight for work)
Coffee or light snacks during a business meeting, provided it takes place at your office or another business setting, rather than a restaurant or café
Catering for a business meeting or seminar (in a work environment)
In these cases, the expense is seen as incidental to the work being conducted, and the main purpose is business-related, not entertainment.

The Coffee Conundrum
Coffee meetings are a common scenario, especially for small business owners. The ATO views meetings held over coffee differently depending on the context.

Coffee in the office: If you have a meeting with a client or colleague in your office and offer them coffee or tea, this is considered a deductible expense.
Coffee in a café: If you’re buying coffee for a client in a café or other public place, this is where it becomes trickier. The ATO often sees this as entertainment unless it’s clearly linked to business discussions. If it’s a casual catch-up or social conversation, it’s unlikely to be deductible.

How do I prove a business meeting!?
To clearly prove the link between buying coffee for a client in a café and business discussions, you should maintain thorough documentation that supports the business nature of the meeting. Here are some steps you can take:

Meeting Agenda: Prepare a formal agenda or outline of the topics to be discussed during the meeting. This can help demonstrate that the meeting was planned with a business purpose in mind.
Meeting Notes: Take detailed notes during the meeting that highlight the business discussions and any decisions or actions agreed upon. This can serve as evidence that the meeting was focused on business matters.
Attendee List: Keep a record of who attended the meeting, including their names, positions, and the organisations they represent. This can help establish the professional context of the meeting.
Business Purpose Statement: Include a brief statement explaining the business purpose of the meeting, such as discussing a project, negotiating a contract, or exploring a business opportunity.
Receipts and Invoices: Retain receipts or invoices for the coffee purchase, and annotate them with the date, location, and purpose of the meeting. This can help substantiate the expense as a business-related cost.
Calendar Entries: Use calendar entries to schedule the meeting, including details about the business purpose and participants. This can provide additional evidence of the meeting’s intent.

By maintaining comprehensive records and documentation, you can strengthen your case that the coffee purchase was directly related to business discussions and not merely a social or entertainment expense.

Alcohol: Where Does it Stand?
Alcohol is a grey area in the tax world, especially when mixed with entertainment. Here’s what you need to know:

Alcohol consumed during a social event (e.g., a dinner with a client) is treated as entertainment and is not deductible.
If alcohol is served as part of a work function or client event, this also falls under entertainment and is not deductible.
The deductibility of alcohol provided at a business meeting or event can be a nuanced area. Generally, the cost of providing food and drink, including alcohol, at a business meeting or event may be deductible if it is directly related to earning assessable income. However, it is important to consider the context in which the alcohol is provided. If the alcohol is part of a meal or event that is considered entertainment, it may not be deductible under the general deduction provisions. The ATO have specific rules regarding entertainment expenses, and these can often be non-deductible. The key is to determine whether the expense is considered entertainment or a legitimate business expense

The FBT Factor: Fringe Benefits Tax
Employers should also be aware of the implications of Fringe Benefits Tax (FBT) when providing food, drink, or entertainment to employees or clients. FBT can apply to entertainment expenses when benefits are provided to employees or their associates (such as family members). This adds an extra layer of complexity because, while FBT is payable by the employer, the associated expense may not be tax deductible.

To reduce your FBT liability, you can:

Provide meals or drinks that are not considered entertainment, such as meals provided while an employee is travelling for business.
Limit the provision of entertainment to ensure it’s occasional, and not a frequent or habitual occurrence.
Opt for less formal, lower-cost settings where the focus is clearly on business, rather than entertainment.

Practical Tips for Managing Meeting and Entertainment Expenses
Here are a few tips to ensure you’re handling your meeting, coffee, and entertainment expenses correctly:

Keep detailed records: Ensure you keep receipts and clearly note the purpose of each expense. Write down who attended, the purpose of the meeting, and whether it was business or social in nature.
Use separate accounts: If possible, try to separate entertainment-related expenses from general business expenses, to simplify your record-keeping and reporting to the ATO.

The deductibility of meeting-related expenses, including coffee, food, and alcohol, largely depends on whether the expense is considered business-related or falls under the ATO’s definition of entertainment. While business meetings and work-related travel may allow for certain deductions, social events or entertainment-oriented gatherings are generally not deductible.

By understanding the distinctions and keeping clear records, you can ensure that you’re making the most of allowable deductions and staying on the right side of the ATO’s guidelines.

If in doubt, get in touch!