The Machinery: How You Value It, and the Trap That Costs the Most

Mia: Welcome to the podcast, our newsletter made easy. Please note, this podcast features AI-generated voices for your hosts, Mia Taylor Leo: and Leo Baker, bringing you expert insights from the team at Aevum Accounting. Each week, we're here to help you confidently navigate the ins and outs of Australian tax, whether it's for your individual finances or the complexities of your business. Mia: We'll cut through the jargon to give you strategies for compliance, smart planning, and that ultimate peace of mind. Leo: So, if you're looking to understand your obligations, maximise your financial position, or simply gain clarity on your money matters, you're in the right place. Let's get started with our review of the week! Mia: This one comes from Mike. He says the team are friendly and approachable, that they make the whole tax process simple and stress free, and that they take the time to explain everything clearly and answer any question. Leo: Thank you, Mike. And explaining it clearly is the job today, because this is the technical half and it's where the real money is. Mia: So this is part three. Leo: Part three. We've done your own team, we've done clients and gifts. Today is the machinery. How you actually value all of this, and one decision that quietly costs small businesses thousands. Harvey, take us in. Harvey: Happy to. And I'll give you the punchline first, because it's the most useful thing in the episode. There are three ways to value meal entertainment. Most small businesses pick the easy one. For most of them it's the wrong one. Mia: Start with the three. Harvey: Method one is the actual method. It's the default, so if you do nothing, this is what you're on. You work out what was spent on your employees and their associates, and that's what you pay tax on. Leo: How do you split it? Harvey: Either exactly, if you can identify what each person had, or per head, which is what most people do. Ten people at dinner, three of them employees and the rest clients, three tenths of the bill is the fringe benefit. Mia: And method two? Harvey: The fifty-fifty split. You add up everything you spent on meal entertainment for the whole year, staff and clients and everyone else together, and you pay tax on half of it. No splitting bills, no counting heads. Leo: That does sound easier. Harvey: It is easier. It's also why it's the most popular method with small business, and why so many of them are paying tax they don't need to pay. Mia: And why is that? Harvey: Because electing it switches off your exemptions. Under the fifty-fifty split you cannot use the minor benefits exemption, and you cannot use the business premises exemption, for any of your meal entertainment. Leo: Both of the ones we spent two episodes relying on. Harvey: Both. So the Christmas party we talked about in part one, the one that came out at nothing because every benefit was under three hundred dollars, becomes taxable the moment you're on the fifty-fifty method. Mia: Give us the numbers. Harvey: Take a party that costs six thousand six hundred dollars for forty people. That's a hundred and sixty-five dollars a head. On the actual method, it's under three hundred, the minor benefits exemption applies, and there's no fringe benefits tax at all. Leo: And on fifty-fifty? Harvey: Half of it is taxable. Three thousand three hundred dollars goes into your return, and you pay forty-seven per cent on the grossed-up value of that. On a party that would otherwise have cost you nothing in tax. Mia: That's an expensive shortcut. Harvey: It's the most expensive shortcut in the whole topic. You do get something back, to be fair. Under the fifty-fifty method half your spend is deductible and half the GST is claimable, including on the client half, which you'd never get under the actual method. But that's a much smaller number than the tax. Leo: And method three? Harvey: The twelve-week register. You keep a detailed register for twelve continuous weeks, work out what percentage of your meal entertainment went to employees and their associates, and apply that percentage to the whole year. Mia: Who uses that? Harvey: Almost nobody, because of the record-keeping. But it has one real advantage worth knowing about: unlike the fifty-fifty split, the minor benefits exemption still works under the register. Leo: So what's the recommendation? Harvey: For most small businesses with a handful of staff, stay on the actual method. Don't elect anything. Keep your exemptions. The team at Aevum Accounting would rather you spent twenty minutes a year working out who was at the table than hand back an exemption that's worth far more than the time. Mia: When would the fifty-fifty method actually be right? Harvey: When you're feeding hundreds of people and the admin genuinely isn't possible, or when most of your meal entertainment is taxable staff entertainment anyway, like regular team dinners out that no exemption covers. If most of your entertaining is clients, it's the opposite: the fifty-fifty method drags half of those client meals into fringe benefits tax, and the half deduction you get back doesn't cover it. It's a real choice. It's just not the default choice people assume it is. Leo: One more thing on the methods. Does the fifty-fifty split cover everything? Harvey: No, and this catches people. It covers meal entertainment, meaning food and drink. It never covers recreation. Mia: Meaning what, in practice? Harvey: Meaning if you hire a corporate box or a marquee, there's a separate election that can put that on a fifty-fifty footing. But a round of golf with a client, where you're just paying green fees, never goes into either pool. Green fees aren't facility hire. For the client's round that means no fringe benefits tax, no deduction and no GST credit, and for your own people it's valued as an ordinary fringe benefit, whatever you've elected, unless the minor benefits exemption covers it. Leo: Let's talk about the minor benefits exemption properly, because it's done a lot of work across these three episodes. Harvey: It has, and it's worth being precise, because 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 one. Mia: What's the second? Harvey: Whether it would be unreasonable to treat it as a fringe benefit. And the law tells you what to look at. How often and how regularly you provide it. What it and similar benefits add up to. What else comes with it. How hard it is to value and keep records for. And the circumstances, including whether it helped someone through something unexpected, and whether it's really just a reward for work. Leo: Give us the contrast. Harvey: Take two employers, both handing out sub-three-hundred-dollar vouchers. The first runs a formal monthly incentive scheme, hits targets, voucher every month. That fails. It's frequent, it's regular, it adds up, and it's plainly a reward for services. Mia: And the second? Harvey: The second gives someone a voucher because they pulled a deadline out of the fire, and it's happened twice in two years. That one works, even though it's still a reward, because it's ad hoc and the total isn't substantial. Leo: Is there a number where it stops working? Harvey: Not in the law, and I want to be honest about that, because you'll see numbers quoted. Any rule of thumb you hear is an opinion, not legislation. The closest thing to a real anchor is a court case where around eight thousand dollars of similar benefits in one year was found to be substantial, and even that isn't a safe limit. Mia: So the honest answer is it depends. Harvey: The honest answer is it depends, and if you're anywhere near the edge you get advice rather than guess. Leo: Which brings us back to part one, and records. Harvey: It does, because everything today depends on being able to show what happened. Date, how many people, who they were, what it cost, what it was, where. And what isn't enough is a credit card statement with a total on it. Photograph the receipt and write on it who was there, the same day. Mia: What does the tax office actually want to see? Harvey: Five things per occasion. The date. Who was there, by type, whether an employee, an associate, or someone else, and how many of each. What it cost. What it was. And where it happened. Leo: Do we need names? Harvey: Legally, no. The record has to show who was there by type, your staff, their partners or family, and everyone else, and how many of each. Naming your own people is still worth doing if you're relying on the minor benefits exemption, because that test looks at how often each person has been looked after. You don't have to identify every client at the table, just how many there were. Mia: And the thing that isn't enough? Harvey: A credit card statement with a total on it. That's the single most common gap we see, and it's what turns a defensible position into an indefensible one. If the only record is "Restaurant, four hundred and twenty dollars", there's nothing to apportion. Leo: Right. Now the story you promised. Harvey: The story. This one comes up more often than you'd think. A director takes the team out to dinner, pays for it on their personal credit card, and doesn't get reimbursed. The thinking is that the company never paid for anything, so there's nothing to tax. Mia: And that's wrong. Harvey: That's wrong. If you control the company, you're an associate of your own employer, and a benefit provided by an associate of the employer is still a fringe benefit. It doesn't matter whose card it was. Leo: So the company pays tax on a dinner it never paid for. Harvey: On the staff portion, it can. The usual exemptions apply whoever paid, so a modest one-off dinner might come out at nothing. But if no exemption fits, the company carries the tax. And here's the part that really hurts. The company can't deduct a cost it never incurred. And you can't deduct it personally either, because it was the company's staff cost, not something you spent earning your own income. Mia: So nobody gets the deduction. Harvey: Nobody gets the deduction, and unless an exemption applies, the company still gets the tax bill. The only silver lining is that the fringe benefits tax itself is deductible to the company. But you've paid for dinner twice. Leo: What about putting it through the director's loan account instead? Harvey: That's the other version, and it's better. Crediting your loan account for the dinner is really the company paying you back on credit, so now the company has paid, and the staff meals are treated like any other staff entertainment. The loan account can also carry your own contribution towards your own meal, if you've agreed it up front. Journal entries are fine, the tax office accepts them where there's a genuine obligation both ways and an agreement to set off, made at the time, not as a fix after the year has closed. Mia: But it can't be the team's contribution? Harvey: No. An employee contribution has to be paid by the person who received the benefit, or by the employee whose partner or family member received it, out of after-tax money. Your loan account isn't your team's contribution. You can't pay their share for them and call it a contribution. Leo: What's the fix? Harvey: Reimburse yourself. Put the dinner through the company properly, take the money back, and treat it like any other staff entertainment. It's cleaner, it's often cheaper, and it's what the records will support. Mia: Before we finish, is the tax office actually looking at this? Harvey: I'd be measured about it. What they've published as their focus areas for fringe benefits tax, for employers generally, are nil returns, employee contributions and cars. Their small business list only mentions work vehicles. Entertainment isn't on either. Leo: But it's on a list. Harvey: It's on the list for privately owned and wealthy groups, where they say they look for entertainment claimed as a deduction without the fringe benefits tax being reported, and for entertainment dressed up as sponsorship or advertising. So it's on the radar. It's just not the blitz it sometimes gets described as. Mia: Let's recap the series. Entertainment isn't deductible unless you pay fringe benefits tax on it, and if an exemption applies you lose the deduction too. Leo: Feeding your own team in your own office is the one clean win. Clients and referral partners get nothing. Gifts are the good news, as long as they aren't entertainment. Mia: And on the machinery: stay on the actual method unless someone has done the sums and shown you otherwise. Leo: Keep records that show who was at the table, by type, and how many of each. And reimburse yourself rather than being generous with your own credit card. Mia: If you'd like someone to look at what you've been coding as entertainment and tell you whether you're on the right method, head to aevumaccounting.com.au and book a session. Leo: Or head to aevumaccounting.com.au. And if you're already a client, the team will go through it with you at your next catch-up. Mia: Before we go, a quick but important reminder. The information shared today is for general informational purposes only, and does not constitute specific tax or financial advice. Leo: Everyone's situation is unique, and tax laws are complex. For personalised advice tailored to your situation, we always recommend consulting with a qualified professional. Mia: Until next time, stay savvy, stay proactive... Harvey: And reimburse yourself!