Did you know that a $70 lunch may only give a tax deduction of $6.13?
How often have you heard a business owner say "It's ok, it's a business expense and I can claim it for tax"? Do they really understand that a $70 lunch or dinner may only provide a tax deduction of $6.13? Would you spend $70 to only get $6.13 back?
Our take home messages are as follows:
- The tax deduction on any business expenditure is only a percentage of that expenditure, not the full amount of the expenditure.
- Don't allow 'tax deductions' to give a misleading incentive to spend money on something that provides no value to your business
- If you wouldn't have spent money in the first place, don't spend it just to get the tax back
- Do consider non-financial factors outside of claiming back tax. Business lunches can result in winning future business from existing clients, new contracts, it may improve customer service and strengthen relationships with existing clients. All these factors provide value to the business owner which can't be measured in tax savings.
Let's look at the $70 lunch or after work drinks more closely; what can the business owner claim back as a tax deduction on expenditure?
If the expense relates to carrying on the business or generating business income the expense is deductible for tax. In this situation the expense of lunch or a few drinks would fall under the entertainment expenditure regime. The entertainment expenditure regime generally contains an element of personal use, so in some cases it is only 50% deductible for tax (it can be 100% in some cases too). We will cover entertainment expenditure in more detail in a future post.
In the example above, if the business owner had lunch with a client at a café, the expenditure is 50% deductible for tax purposes ($35 of the $70).
- If the business is NOT registered for GST, from the $35, and assuming the business owner has a marginal tax rate of 17.5%, the tax deduction is $6.13.
- If the business IS registered for GST, they are entitled to claim the GST on 50% of the expenditure ($4.57 GST claim), PLUS a tax deduction of $5.33 (at a marginal tax rate of 17.5%)
- In summary a GST credit of $4.57 and income tax deduction of $5.33 (total benefit of $9.90)
- Understand more about the difference between GST and Income tax
Evans Doyle Accountants are here to help make tax simple so you can do what you do best in your business. Have more questions around the health of your business? Check out our Free Business Health Check available this month only!
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.