Meal Entertainment FBT: The 50/50 Split and Which Method to Use

Over the last two weeks we covered your own team and the Christmas party and clients, gifts and the footy. This is part three, the machinery underneath both: how meal entertainment is valued for fringe benefits tax, and the one choice that quietly costs small businesses the most.

There are three ways to value it. If you have never chosen one, you are on the default, and for most small businesses that is the right place to be. The businesses that do choose tend to pick the easiest, the 50/50 split, and for many of them that is the expensive mistake.

Prefer to listen? We covered this in The Machinery: How You Value It, and the Trap That Costs the Most, episode 61 of the Aevum Accounting Podcast.

The three ways to value meal entertainment

The actual method is the default. You work out what was spent on your employees and their associates, such as partners, and that share is the fringe benefit. If you cannot split the bill exactly, the ATO accepts a per head split: ten people at dinner, three of them staff and the rest clients, and three tenths is the fringe benefit. The 50/50 split adds up everything you spent on meal entertainment for the year, staff, clients and everyone else, and treats half of it as the taxable value. The 12-week register has you record every occasion for at least 12 continuous weeks, work out the share that went to employees and their associates, and apply that percentage to the whole year.

Why the easy method often costs more

Electing the 50/50 split switches off two exemptions for all of your meal entertainment: the minor benefits exemption and the exemption for food and drink on your business premises. Take a Christmas party for 40 staff that costs $6,600, or $165 a head. On the actual method each benefit is under $300, and as a genuine one-off it can be an exempt minor benefit, so no fringe benefits tax. Elect the 50/50 split and $3,300 becomes the taxable value. At 47% on the grossed-up value, that is about $3,226 of tax. Half the spend becomes deductible, half the GST comes back and the tax itself is deductible, but at the 25% company rate you are still about $1,370 worse off.

When the 50/50 split is the right choice

The 50/50 split saves tax only when most of what you spend on meal entertainment would be taxable staff entertainment anyway, such as regular team dinners out that no exemption covers. It also suits a business feeding so many people that tracking who sat at each table is not realistic. If most of your entertaining is clients, it is the opposite. Under the actual method client meals carry no fringe benefits tax at all, and the 50/50 split drags half of them into it. Spend $10,000 a year, 80% on clients and 20% on taxable staff dinners, and the 50/50 split costs about $1,245 more at the 25% company rate.

The 12-week register keeps your minor benefits

The register takes the most record-keeping, but it has one real advantage. Unlike the 50/50 split, the minor benefits exemption still works under the register, because exempt minor benefits drop out of the percentage you measure. The business premises exemption does not survive it. The register has to cover at least 12 continuous weeks and be representative of the year. A valid register can then be used for that year and the next four, until your meal entertainment spending grows by more than 20% on the first year or you replace it.

The $300 test has a second half

The minor benefits exemption is not "under $300 is free". There are two tests. The benefit must be under $300, and it must be unreasonable to treat it as a fringe benefit. For the second test the law lists five things: 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 is really a reward for work. In the ATO's own examples, vouchers under a formal monthly sales incentive scheme fail, while an occasional voucher for getting a tight deadline over the line passes, even though it is a reward. The $300 applies to each benefit, and there is no annual figure in the law.

What your records need to show

The ATO's list for entertainment records is five things: the date, who received it, the cost, what it was and where it was provided. "Who" means by type: an employee, an associate of an employee or someone else, so record how many of each were there. You do not legally have to name anyone, but naming your own staff helps if you rely on the minor benefits exemption, because that test looks at how often each person has been looked after. A credit card statement with a total on it does not work. "Restaurant, $420" cannot show who was at the table, so there is nothing to split. Photograph the receipt and write on it who was there, the same day.

When the boss pays on a personal card

A director takes the team to dinner, pays on a personal card and is never paid back. If you control the company, you are an associate of it, and a benefit an associate of the employer provides is still a fringe benefit. The usual exemptions still apply, so a modest one-off dinner may come out at nothing. If none fits, the company pays fringe benefits tax on a dinner it never paid for and cannot deduct, and you cannot deduct it either, because it was the company's staff cost, not something you spent earning your own income. The fix is to have the company pay you back, in cash or as a credit to your loan account. Your loan account cannot stand in for your team's contributions, though. Those have to come from the staff themselves.

Is the ATO looking? Entertainment is not on its published fringe benefits tax focus list for employers generally, which is nil returns, employee contributions and cars, and its small business list only mentions work vehicles. It is on the list for privately owned and wealthy groups.

If you would like someone to check which method you are on and whether it is costing you, book a consultation with our team. Our small business accountants in Perth can run your numbers on each method before your next FBT return. If you are already a client, the team will go through it with you at your next catch-up.

The information in this article is general in nature and does not take into account your personal circumstances. It does not constitute specific tax or financial advice. Everyone's situation is different, so we recommend speaking with a qualified professional at Aevum Accounting before acting on anything you have read here.