Coalition’s proposed $20K meal entertainment tax deduction – practical issues

On 19 January 2025 the Opposition Leader, Peter Dutton announced a proposal to introduce a capped tax deduction of $20,000 per year for business-related meal and entertainment expenses. Small businesses with an annual turnover of less than $10 million will be eligible and alcohol will be excluded from the policy. The new measure will run for an initial two years, with expenses tax deductible up to the cap and exempt from fringe benefit tax (FBT). The new measure aims to  cut red tape and provide ‘dual benefits’ for small businesses and the hospitality industry which should benefit from increased activity.

Current state of play

As with most tax matters, the devil is in the detail.

Under the current law, for taxable entities, the provision of entertainment by way of food and drink (otherwise known as ‘meal entertainment’) to employees is generally subject to FBT unless the minor benefit exemption applies. Where expenditure is subject to FBT it is tax deductible and GST credits are available.

Again, as a general rule, where meal entertainment is provided to both employees and non-employees (for example clients) only that part of the entertainment that relates to employees is subject to FBT and deductible. The non-employee component, although FBT free (ignoring use of the meal entertainment rules), is non-deductible.

The taxable value of meal entertainment is based on actual expenditure, unless the employer elects to calculate their meal entertainment fringe benefits under specific meal entertainment rules (the 50:50 method, or the 12-week register method).

Food for thought…

Exactly how the policy would reduce ‘red tape’ is unclear, although the tax treatment of entertainment is messy so anything that assist would be welcome. For example, will a tax deduction be tied only to entertainment that would otherwise have been denied deductibility, for example, by way of the minor benefit exemption? Or does the policy proceed on the assumption the minor benefit exemption would not have applied?

A minor benefit is exempt from FBT if it is both less than $300 in notional taxable value and it would be unreasonable to treat the benefit as a fringe benefit having regard to the nature, frequency and regularity of the benefit provided. If the tax deduction is tied only to entertainment that meets the minor benefit criteria, the more frequently and regularly meal entertainment benefit is provided, the less likely it will qualify as a minor benefit. Additionally, the minor benefit exemption does not extend to meal entertainment fringe benefit calculated under the 50:50 method.

From a GST perspective, the ability to claim GST credits on meal entertainment generally aligns with the FBT treatment of the benefit. If the expenditure is subject to FBT, then the associated GST is claimable. Again, how GST credit entitlements will apply to expenditure covered by the cap is presently unclear, however it is expected (hoped) GST credits will be available despite no FBT payable.

It also remains to be seen how tax-exempt entities will be accommodated under the new policy. Since these entities do not pay tax, they will not benefit from the tax deduction and are currently subject to FBT on entertainment under specific ‘tax exempt body entertainment’ rules. Tax-exempt body entertainment generally cannot access the minor benefit exemption except in limited circumstances.

While the proposed capped tax deduction aims to benefit small businesses and the hospitality industry, several uncertainties remain regarding its practical implementation. Key questions include how the policy will interact with existing FBT exemptions, the treatment of GST credits, and whether tax-exempt entities will receive any accommodations. Clarification on these aspects will be crucial to determining the policy’s effectiveness in reducing red tape and providing meaningful support to businesses.

——-