Client gifts, meals and entertainment: what a sole trader can deduct, and the GST trap in the meals category

What entertainment means

The tax law treats entertainment as food, drink or recreation, and any travel or accommodation connected with providing them. A restaurant lunch with a client, drinks after a meeting, a round of golf, tickets to the football, and a coffee at a café while you talk through a quote are all entertainment. Entertainment is not deductible, and where an expense is not deductible because it is entertainment, the GST on it cannot be claimed either. Both rules switch off together.

The ATO’s test asks why, what, when and where: why is the food or drink provided, is it a light refreshment or a full meal, is it during work time or after hours, on your premises or at a restaurant.

The exceptions that are not entertainment

• Your own meals while travelling overnight for work. A meal on a two-day job in another town is a travel expense, at actual cost with the receipt. Lunch on an ordinary working day is private, wherever you eat it. See travel and accommodation deductions.
• Light refreshments at your own premises. Tea, coffee, biscuits and a sandwich platter for a working meeting in your office or workshop are sustenance, not entertainment. The same platter at a restaurant is entertainment.
• Food that is your product. A caterer’s ingredients, a tour operator’s included lunches and a café’s stock are trading costs.

Client gifts: hamper yes, tickets no

A gift to a client or a referrer is deductible when you give it to produce future income: keeping the relationship or prompting more work. The ATO accepts this for gifts that are not themselves entertainment. A Christmas hamper, a bottle of wine given to take away, flowers, a book, a department store voucher or a branded item are all deductible, and the GST is claimable with a tax invoice. Gifts that are entertainment are not: tickets to a match or concert, a voucher for a restaurant meal, or a bottle opened and shared with the client over dinner.

There is no fixed dollar limit, but the purpose has to be commercial and the amount proportionate. A $60 hamper to each of twenty clients is ordinary marketing; a $2,000 watch to your one client who is also your brother-in-law invites questions. Write the recipient and the reason on the receipt, because a year later a $180 bottle shop line looks personal without it.

If you have employees

Employees bring fringe benefits tax into it. A staff Christmas party or team dinner is entertainment: if each employee’s share is under $300 and it is infrequent, the minor benefits exemption means no FBT, but then no deduction and no GST credit either. Non-entertainment gifts to staff under $300, such as a hamper or a gift card, are the sweet spot: FBT exempt, deductible, GST claimable. Entertainment gifts to staff under $300 are FBT exempt but not deductible.

The GST trap in the meals category

Bookkeeping software, including the automatic kind, tends to put every café, restaurant and bottle shop line into a meals category and, unless told otherwise, treat it like any other taxable purchase: one eleventh to 1B. That is wrong twice over. Your own lunch is private, so it has no place on the BAS at all, and a client meal is entertainment, so its GST is not claimable even though GST was charged. A sole trader who buys lunch at work three times a week and claims the GST is over-claiming a couple of hundred dollars a year. Two habits fix it: mark your own meals as private when you review the month, and keep client entertainment out of the GST claim as well as the deductions.

How FlowFi helps

FlowFi categorises café, restaurant and bottle shop lines from your bank statement so they sit in one place rather than scattered through the quarter, and flags lines for you to confirm before the BAS is built. Mark a line personal and it leaves both the BAS and the deductions; client entertainment should come out of the GST claim the same way, while client gifts categorised as marketing keep their credit.