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When Is Food, and Recreation Considered Entertainment?
When Is Food, Drink, and Recreation Considered Entertainment?
Understanding when food, drink, and recreational activities qualify as "entertainment" is essential for every company, business, and employer. It's great to pick up the tab for a nice meal or a fun outing for the team, but did you know that these activities can impact your business's tax obligations if declared incorrectly? So, when do ordinary perks, like a work lunch or gym membership, cross the line into entertainment? Let's dig into the factors that define entertainment and some common scenarios where these perks can become taxable benefits.
The Basics
Generally, food, drink, and recreation perks become entertainment when provided in a social or leisure context rather than as necessary support for completing a workday. According to the ATO, the following criteria must apply for these perks to qualify as entertainment:
- The food, drink, or recreational activity is provided for enjoyment, not just sustenance.
- The activity is outside the regular work environment, perhaps off-site or after hours.
- The perk is not part of an exempt benefit package, meaning it doesn't fall under exclusions like meals for sustenance or on-premises canteen food.
Defining Entertainment Through Specific Factors
To determine if food, drink, or recreation qualifies as entertainment, employers need to consider the "why," "what," "when," and "where" factors.
- Why: If you provide food so employees can enjoy themselves (e.g., a team-building lunch), it's likely considered entertainment. However, providing coffee and light snacks to keep employees comfortable during a busy workday is not.
- What: The type of food and drink matters. Alcohol and elaborate meals lean toward entertainment, while simple snacks and non-alcoholic drinks do not.
- When: Timing is essential. Food provided outside work hours, like a weekend gathering, is more likely considered entertainment.
Where: If the perk occurs off-premises—such as at a restaurant or hotel—it's more likely to be entertainment. Meals on business premises typically don't fall under entertainment in a work cafeteria.
Is Recreation Entertainment?
Recreation that qualifies as entertainment includes leisure activities. A few examples that would fall under this category include:
- A company-paid round of golf
- Gym or sporting club memberships for employees
- Theatre or movie tickets for employee outings
- A weekend trip for staff to a resort
The Tax Implications of Entertainment
When food, drink, or recreation is classified as entertainment, the employer may be subject to fringe benefits tax (FBT). However, FBT classifications fall into one of four fringe benefit categories depending on the circumstances. Correctly categorising expenses ensures compliance and avoids unintended tax liabilities - examples below:
- Expense Payment Fringe Benefit: When an employer reimburses an employee for entertainment-related expenses, like theatre tickets.
- Property Fringe Benefit: When the company directly provides food or drink.
- Residual Fringe Benefit: For entertainment-related accommodations or transport.
Tax-Exempt Body Entertainment Benefit: When a tax-exempt employer (such as a charity) provides entertainment.
Know When a Perk is More Than a Perk
While some perks, like on-premises coffee, don't trigger tax implications, others, like off-site team dinners or gym memberships, can. Understanding these distinctions can simplify tax compliance for employers, ensuring that those perks designed to celebrate and support employees can avoid unforeseen liabilities down the road. For professional advice on this and any other taxation related topic, contact our Ascent Accountants team.
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