Maximizing Your Tax Deductions for Client Entertainment: A Guide to ATO Guidelines for FY23

As we enter the new financial year, it is common for businesses to review their accounting practices and explore ways to maximize their deductions while minimizing their tax liability. Client entertainment and gifts are one area that requires careful consideration, as it is important to understand the Australian Tax Office (ATO) guidelines surrounding tax deductions for these expenses.

While the ATO acknowledges the importance of client entertainment in business, they have specific regulations on what is eligible for tax deductions. Generally, businesses can claim a tax deduction for client entertainment that is directly related to their business and incurred to produce assessable income, including expenses such as meals, drinks, and event tickets. However, accurate records must be kept to demonstrate that these expenses are related to the business.

 

Five steps to consider when claiming client entertainment expenses from ATO

1. Determine what expenses are deductible: The ATO allows a deduction for certain client entertainment expenses, such as meals, drinks, and tickets to events, provided they are incurred in the course of earning assessable income. However, it’s important to note that not all entertainment expenses are deductible, so it’s essential to understand what you can claim before making any claims.

2. Keep accurate records: You need to keep accurate records of all the entertainment expenses you incur, including the date, amount, and nature of the expense, as well as the names and positions of the clients entertained. Records can be kept electronically or on paper and must be kept for at least five years.

3. Ensure the entertainment is for a genuine business purpose: To claim a deduction for client entertainment expenses, the entertainment must have a genuine business purpose, such as building or maintaining business relationships. The entertainment must not be for private purposes, and the ATO may question any expenses that appear to be for personal reasons.

For instance, a small business owner’s expense for taking a potential client to lunch to discuss a business opportunity is likely tax-deductible, as it is directly related to generating assessable income. Conversely, expenses for taking a client to a sporting event would not be tax-deductible, as they are not directly related to business activities.

4. Separate entertainment expenses from other expenses: You need to separate client entertainment expenses from other business expenses to make it easier to claim a deduction for them. This means keeping separate records for entertainment expenses and ensuring that they are not included in other expense categories.

5. Seek professional advice: Claiming client entertainment expenses can be complex, and the rules can change from year to year. Therefore, it’s always a good idea to seek professional advice from a tax accountant or registered tax agent to ensure that you are claiming correctly and maximising your deductions while complying with ATO regulations.

 

50% tax deduction rule

It is important to note that specific limitations apply to tax deductions for certain types of client entertainment. For instance, a 50% tax deduction is allowed for expenses related to entertainment in public settings, such as restaurants or bars. However, expenses for entertainment in private settings, such as a business owner’s home, are typically not tax-deductible.

The 50% rule applies to certain types of client entertainment expenses claimed as a tax deduction. According to this rule, only 50% of the expenses incurred can be claimed as a deduction. The following are some instances where the 50% rule applies:

Meals and drinks: If you entertain clients by providing them with meals and drinks, only 50% of the cost of those meals and drinks can be claimed as a deduction.

Tickets to events: If you purchase tickets to events for the purpose of entertaining clients, only 50% of the cost of those tickets can be claimed as a deduction.

Venue hire: If you hire a venue for the purpose of entertaining clients, only 50% of the cost of hiring that venue can be claimed as a deduction.

It’s important to note that the 50% rule does not apply to all client entertainment expenses. For example, if you give gifts to clients for business purposes, the full cost of those gifts may be deductible, subject to certain limitations. It’s always advisable to seek professional advice from an outsourced accounting firm or registered tax agent to determine which expenses are subject to the 50% rule and to ensure that you are claiming correctly and maximizing your deductions while complying with ATO regulations.

Furthermore, businesses may also claim tax deductions for client gifts, provided that the gift is not excessive or overly lavish and given with the intention of generating future income. The ATO provides guidelines on what constitutes an acceptable gift, such as pens, diaries, and gift baskets. As with client entertainment expenses, accurate records must be kept to support the claim for tax deductions. Stay tuned for our upcoming blog post on client gifts where we delve into the nitty-gritty of tax savings and explore key considerations that you should keep in mind.

For small businesses and SMEs, understanding the ATO guidelines around client entertainment can be challenging. Many business owners are already stretched thin, and managing their accounting and tax obligations can be a significant drain on their time and resources. That’s where outsourced accounting services can be incredibly valuable.

 

How FINTEC can help you minimise tax while managing your finances

An outsourced accounting firm like FINTEC can help small to medium businesses effectively manage their accounting while minimising tax liability. By working with a team of experienced professionals, businesses can access the knowledge and expertise they need to navigate complex tax regulations and maximise their deductions. For example, if a small business owner is unsure whether a particular client entertainment expense is tax-deductible, they can consult with their outsourced accounting firm to get clarity and ensure they’re following the ATO guidelines. The accounting firm can also help the business keep accurate records of their client entertainment expenses, making it easier to claim tax deductions come tax time.

Overall bookkeeping, accounting, and reporting are critical for effective tax planning. These functions provide businesses with a clear understanding of their financial situation, which allows them to make informed decisions that can reduce their tax burden. Outsourcing bookkeeping, accounting, and reporting functions to an accounting firm like FINTEC can offer a range of benefits to businesses. These benefits include improved tax planning, compliance with tax laws and regulations, accurate record-keeping, financial reporting, and cost savings. By outsourcing these functions, businesses can focus on their core operations while ensuring that their financial reporting and tax planning needs are being met by experienced professionals.

FINTEC will proactively manage financials and implement tax savings strategies for its clients by understanding the client’s business, identifying opportunities for tax savings, providing regular financial reporting, proactive communication, and continual learning. By providing more value, attention, and treating the client’s business finances as its own, FINTEC can help small business owners save tax while achieving their financial goals.

As the year-end approaches, it is essential to plan and prepare for your financial future. At Fintec, we understand the importance of making sound financial decisions and achieving your financial goals. Our team of financial experts is dedicated to helping individuals and businesses navigate the complexities of the financial landscape, ensuring that they can make informed decisions that benefit them in the long run. To this end, we offer free consultations to anyone looking for guidance and advice on their financial situation. We’ll work with you to develop a personalized plan that addresses your specific needs and goals, and we’ll be there to support you every step of the way.

Don’t wait until it’s too late, take advantage of this opportunity to get a head start on your financial success in the new year. Contact us today to schedule your free consultation.

March 14, 2023