3 Aug 2009
It is bad enough not being able to get a tax deduction for some expenditure – but did you know that there is also a GST issue when this happens? This is the GST double whammy.
Many people will understand that expenses such as penalties, fees paid to a club and entertainment are not tax deductible. (As with most tax things, there are always exceptions.) When the GST law was introduced, the government of the day decided that if you did not get a tax deduction for some expenditure, then you should not also get the GST back, if GST was included in the price. Getting the GST back is what is called claiming an input tax credit.
I will focus on entertainment. Entertainment by way of food, drink and accommodation (connected with the provision of the food and drink) is not tax deductible. However, there are important exceptions to this rule when the entertainment is being provided to employees. So this is where it gets a bit complicated.
If a business pays for some entertainment and there are none of its employees present, the entertainment is not tax deductible and the business cannot claim the GST back (in most circumstances). But when employees are present at a meal that constitutes entertainment, things get a bit tricky. The GST treatment is influenced by your treatment of the expense for fringe benefits tax purposes. It could be the case that the entertainment in respect of the employees could be 100%, 50% or some other percent deductible, depending on what elections you make or not make under the fringe benefits tax law. The extent of the deductibility of the meal entertainment provided to employees determines the extent to which you can claim back the GST in the price.
The problem with this is that the FBT elections may not be made until after your Business Activity Statement (BAS) for a certain period has been lodged. However, those who wrote the GST law thought of this. You are able to make an election for GST purposes so that your BAS can take into account the likely application of the GST law before the fringe benefit tax elections are made.
I suspect that there are many owner operators of businesses that do not know about these laws and just claim the GST back in blissful ignorance.
Wishing you easer business.
John Jeffreys