Episode #61
The Machinery: How You Value It, and the Trap That Costs the Most
Part three of three, and this is the technical half, where the real money is. There are three ways to value meal entertainment. Most small businesses pick the easy one. For most of them it's the wrong one, and we cover all three, including the twelve-week register almost nobody uses. Mia and Leo are joined by tax strategist Harvey Green. The actual method is the default, so if you've never elected anything, this is what you're on. You work out what was spent on your employees and their associates, either exactly or per head, and pay tax on that. The fifty-fifty split is the popular one. Add up everything you spent for the year, staff and clients together, and pay tax on half. No splitting bills, no counting heads. It's easier, and for a lot of small businesses more expensive, because electing it switches off both the minor benefits and business premises exemptions. Here's what that costs. A party for forty people at six thousand six hundred dollars is a hundred and sixty-five dollars a head. On the actual method it's under three hundred, so no fringe benefits tax at all. Elect the fifty-fifty split and three thousand three hundred dollars becomes taxable, on a party that would have cost you nothing. You do get half the spend deductible and half the GST back, but that's a much smaller number than the tax. The recommendation from the team, for most small businesses with a handful of staff: stay on the actual method, don't elect anything, keep your exemptions. The fifty-fifty split earns its place when you're feeding hundreds of people, or when most of your entertainment goes to clients. It just isn't the default choice people assume it is. On the minor benefits exemption, the way most people describe it is wrong. It is not "under three hundred dollars is free". There are two tests, and the dollar figure is only the first. The second is whether it would be unreasonable to treat it as a fringe benefit, judged on how often you provide it, what it adds up to, and whether it's really a reward for work. A formal monthly incentive scheme fails. A one-off voucher for someone who pulled a deadline out of the fire works. And there's no number in the law where it stops, whatever rules of thumb you've heard. Records: five things per occasion. Date, how many people, whether each was an employee or not, cost, and what and where. Your own people need naming; everyone else just counting. What isn't enough is a credit card statement with a total on it. Then the story. A director takes the team to dinner, pays on a personal card, doesn't get reimbursed, and assumes there's nothing to tax because the company never paid. Wrong. If you control the company you're an associate of your own employer, and a benefit from an associate is still a fringe benefit. The company pays tax on a dinner it never paid for, can't deduct a cost it never incurred, and you can't really deduct it personally either. Nobody gets the deduction. Your loan account helps for your own meal, not the team's, because a contribution has to come from the employee who got the benefit. The fix: reimburse yourself. And on whether the tax office is hunting this: their published focus areas are nil returns, employee contributions and cars. Entertainment isn't on the small business list at all. On the radar, but not the blitz it gets described as. Already an Aevum Accounting client? The team will go through it with you at your next catch-up. Not a client yet? Visit aevumaccounting.com.au to book a session. Shoutout: A massive thank you to Mike for the fantastic 5-star review! Important Disclaimer: The information shared in this episode and description is for general informational purposes only and does not constitute specific tax or financial advice. Everyone's situation is unique, and tax laws are complex. For personalized advice tailored to your specific situation, we always recommend consulting with a qualified professional at Aevum Accounting.
