A member asks:
Can you claim a tax deduction for the cost of holding a couple meeting at a cafe? Paying for their coffee? I hear different answers to this.
I need to begin with full disclosure that neither Sarah or I are accountants, or lawyers, not do we speak on behalf of the Australian Tax Office. I can however quote back relevant parts of the ATO’s website to you to answer this question.
Business expenses are deductions
To start, the ATO does accept that there are expenses to running a business, and these deduct from your business revenue to leave you with a profit which is taxed.
The ATO works it out like this: Assessable income − allowable deductions = taxable income.
Deductions is where we’re at today.
You can claim a tax deduction for most expenses from carrying on your business, as long as they are directly related to earning your assessable income.
And they have three golden rules for deductions:
The expense must have been for your business, not for private use.
If the expense is for a mix of business and private use, you can only claim the portion that is used for your business.
You must have records to prove it.
With these exceptions:
private or domestic expenses, such as childcare fees or clothes for your family
expenses relating to earning income that is not assessable, such as money you earn from a hobby
the GST component of a purchase if you can claim it as a GST credit on your business activity statement.
And where our member and their friends is getting caught up on is the word “entertainment”.
What is entertainment
Without further research you might have a different understanding of what entertainment is, compared to the ATO.
As an employer, you will, from time to time, provide your employees with food and drink, gifts, and possibly leisure activities. This may happen in a variety of circumstances and for a number of different employees and their associates.
One possible entertainment example given on the ATO website is
business lunches with clients
But I would argue that a business lunch is different to a coffee meeting.
The ATO does provide a test for you to determine whether or not an event like a coffee meeting with a client or potential client is entertainment. They suggest asking four questions about the possible entertainment to decide whether it is deductible or not.
The ATO suggests asking why, what, when, and where.
Why are you providing the food or drink for employees?
I want to highlight how most of this test is about employees, of which I guess you are included. But the question asks why. What is the purpose of this coffee meeting? An example given makes this one easy for me:
Providing refreshments to enable the employee to complete the working day in comfort is not generally entertainment.
What type of food or drink is being provided?
The ATO has some sort of sliding scale of elaborateness of food to judge your entertainment by:
The more elaborate a meal, the more likely it becomes that entertainment arises from eating the meal.
When is the food or drink being provided?
The ATO believes that if the possible entertainment is happening while you’re on the clock, it’s unlikely to be entertainment:
Food or drink provided during work time, during overtime or while an employee is traveling for work is less likely to be entertainment.
Where is the food or drink being provided?
The ATO is obviously referencing a traditional business model where there is a place of employment, because the example given says
Food or drink provided off your business premises … is more likely to be entertainment.
So is a coffee meeting entertainment?
I’ll think back to yesterday’s coffee meeting I had with a couple who I am marrying.
I am meeting with the couple with the sole purpose of talking about their wedding which they have hired me to officiate. The entertainment being provided was coffees all round. I am meeting them in met work hours, which honestly, is all day every day right? I have a home office, but it’s generally not an acceptable meeting place for couples. So to meet with couples I am forced to seek temporary meeting places, like cafes.
Is a meeting over coffee a business expense?
I have determined, according to the rules and test laid out by the ATO, that my coffee meeting was not entertainment but a legitimate business expense.
All you have to do now is record the expense.