Fringe Benefit Tax (FBT) Series 4 - Entertainment

In this part of our FBT series, we dive into one of the more confusing and grey areas of fringe benefits. That is "entertainment" including meals, drinks, staff functions, gifts and etc. We will discuss:

• What’s considered entertainment

• When FBT is payable; and

• How you can reduce or avoid the liability.

Let’s break it down.

What Is an “Entertainment” Fringe Benefit?

As an employer, you are providing a fringe benefit if all the following apply:

• You provide food, drink or recreation to your employees or their associates (such as their families).

• The food, drink or recreation is considered entertainment.

• The entertainment is not an exempt benefit.

Entertainment costs include the following additional costs.

• Reimbursement for employee expenses associated with entertainment; and

• Accommodation and travel costs associated with entertainment.

The following situations can be considered as entertainment.

• business lunches with drinks

• parties and staff social functions

• product release functions, reward and recognition functions

• sporting or theatrical events

• gym or sporting club memberships

• holidays and personal travel

Factors Determining Entertainment

The ATO considers the following factors to determine if the food or drink provided to employees is considered entertainment. All factors are relevant but the first 2 ("Why" and "What") are the most important factors.

Factors	Less likely to be entertainment	More likely to be entertainment
Why are you providing the food or drink for employees?	So employees can complete the working day in comfort	In a social situation where the purpose is for employees to enjoy themselves
What type of food or drink are you providing?	Light food and refreshments, no alcohol	Elaborate food or meal, alcohol
When are you providing the food or drink?	During work time or overtime, or while employee is travelling for work	Outside work time
Where are you providing the food or drink?	On your business premises or at the employee's usual workplace	Off your business premises, such as at a function room, hotel or restaurant, or consumed with other forms of entertainment

FBT Valuation Methods for Entertainment

There are two main methods to value entertainment fringe benefits for FBT purposes.

1. Actual Method

   • You keep track of who received the benefit (staff, associates, clients).

   • Only employee-related entertainment is subject to FBT.

   • Clients and contractors do not trigger FBT.

   • This is best for the employers who regularly entertain clients and want to minimise FBT exposure.

     
     

2. 50/50 Split Method

   • You don’t track who received the benefit.

   • 50% of all entertainment costs are subject to FBT, and 50% are not.

   • Easy to apply but can increase FBT, especially if most entertainment is for clients.

   • This is best for simplicity when tracking is difficult.

Exemptions You Can Use to Reduce Entertainment FBT

There are legitimate exemptions available to reduce or eliminate your FBT liabilities.

1. Minor Benefits Exemption

   • This applies if individual benefit is < $300 (GST inclusive).

   • Those benefits must be infrequent and irregular.

   • This can apply to Christmas parties, small gifts, or working lunches.

   • However, if the benefit is regular (e.g. every Friday), it may not qualify.

   • Also this minor exemption does not apply to meal entertainment where you elect to use 50:50 split method for calculating taxable value.

   • Lastly, you are not able to claim GST credits and income tax deduction for the expenses that this minor benefit exemption applies to.

2. Property Benefit Exemption (On Business Premises)

   • FBT does not apply to food or drink if it is provided to and consumed by, current employees on your business premises on a working day.

   • Example: Friday lunch in the office kitchen

How to Reduce Entertainment FBT

Here are practical strategies to help minimise your FBT liability.

1. Use the Actual Method Where Possible: However, please note that you need to track who receives benefits (if most are clients, you avoid unnecessary FBT) and document those events with guest lists or tax invoices noting attendees

2. Keep Benefits Under $300 (and Infrequent): Use the minor benefits exemption to cover staff parties, birthday cakes or small gifts.

3. Hold Events on Business Premises: Provide light meals and non-alcoholic drinks in the office to potentially access the property benefit exemption.

4. Limit Associates' Attendance: Consider offering staff-only events as FBT applies when spouses or family attend staff functions.

5. Split Staff and Client Costs: When entertaining both clients and staff, separate the invoices or itemise costs. This allows better FBT tracking and may reduce assessable value.

Key Takeaways

• Entertainment is a common FBT trap due to its complexity and mixed treatment.

• Choosing the right valuation method and using exemptions strategically can reduce FBT.

• If you're unsure, working with an advisor can help you track and document correctly.

Coming Up in Part 5…

In the part 5 of this series, we’ll look at Living Away From Home Allowances (LAFHA) — what they are, when they apply, and how to manage the strict substantiation rules.

Need help reviewing your entertainment policies or setting up an FBT strategy before year-end? We’re here to help (https://www.goodpca.com.au/contact-us).

Disclaimer

This content is intended as a general guide for GOOD PEOPLE ACCOUNTING SERVICES clients. The information is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice. Although every effort has been made to verify the accuracy of the information contained above, GOOD PEOPLE ACCOUNTING SERVICES disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained on this website or any loss or damage suffered by any person directly or indirectly through relying on this information.