Food and drink your business buys for employees is deductible when it is light refreshment consumed on your business premises during working hours, such as tea, coffee, fruit, biscuits and sandwiches. It is not deductible when it amounts to entertainment, which covers client lunches, restaurant meals, staff social functions and, in most cases, alcohol.

That single distinction, staff amenities on one side and entertainment on the other, decides thousands of dollars of deductions in a typical small business every year. It is also one of the most commonly mishandled areas we see when we take on a new client, usually because the whole grocery receipt has been coded to one account without anyone asking what the food was for.

I am Mina Baselyous, a Certified Practising Accountant (CPA), Chartered Tax Advisor (CTA) and Registered Tax Agent in Melbourne. This guide sets out exactly what you can claim, what you cannot, and the practical factors that make a claim more likely to stand up.

What are staff amenities?

Staff amenities are the everyday consumables a business provides so its people can work comfortably: tea, coffee, milk, sugar, bottled water, fruit, biscuits, nuts, bread and spreads kept in the office kitchen. Because they are refreshment rather than hospitality, they sit outside the entertainment rules and are deductible in full.

The word “amenities” is doing real work here. It signals food provided so staff can get through the working day, not food provided as an occasion. That is the line the entire area turns on.

The general rule: entertainment is not deductible

Division 32 of the Income Tax Assessment Act 1997 contains a general prohibition. Section 32-5 says that to the extent you incur a loss or outgoing in respect of providing entertainment, you cannot deduct it under section 8-1, subject to the exceptions in Subdivision 32-B. Entertainment includes entertainment by way of food, drink or recreation.

The critical point, and the one most business owners miss, is that providing food and drink does not automatically amount to entertainment. The Commissioner says so directly in Taxation Ruling TR 97/17, which remains the ATO’s main public ruling on entertainment by way of food or drink. Whether a given purchase is entertainment is a question of fact, decided on an objective analysis of the circumstances.

The four-factor test the ATO actually applies

TR 97/17 sets out four factors for deciding whether food or drink is entertainment: why it is provided, what is provided, when it is provided and where it is provided. The ruling states that no single factor is determinative, but that why and what are the more important two. Most people only remember when and where.

Why the food is provided

This is a purpose test. Food provided for refreshment does not generally have the character of entertainment. Food provided in a social setting, where the point of the gathering is for people to enjoy themselves, does.

What food is provided

Morning and afternoon teas and light meals are generally not entertainment. The more elaborate the food becomes, the more likely it is that it crosses over. A tray of sandwiches is not the same as a catered three-course lunch, even in the same room on the same day.

When the food is provided

Food provided during work time, during overtime, or while an employee is travelling is less likely to be entertainment, because it is usually there for a work purpose. A staff social function held during work time is still entertainment, so timing alone does not save it.

Where the food is provided

Food provided on your business premises or at the employee’s usual place of work is less likely to be entertainment. Food provided in a function room, hotel, restaurant, cafe or coffee shop, or consumed alongside other entertainment, is more likely to be.

In practice, says Mina Baselyous (CPA, CTA, Registered Tax Agent), the mistake we see most is a business owner relying on “it was on the premises” as if that settles it. It does not. Premises is the weakest of the four factors, and it will not rescue a catered function.

What you can claim

The following are generally deductible, and generally carry no fringe benefits tax when consumed by employees on your business premises on a working day. This is the category the ATO describes as food or drink consumed by employees on your business premises.

• Tea, coffee, milk, sugar and bottled water for the office kitchen.
• Fruit, nuts, biscuits and snacks kept for staff.
• Bread, spreads and sandwich ingredients for staff lunches on site.
• Morning and afternoon teas provided during working hours.
• Light working lunches, such as sandwiches brought in for a meeting that runs through lunchtime.
• Meals provided to employees working genuine overtime, on site.

What you cannot claim

These are entertainment. The deduction is denied by section 32-5, and where no fringe benefit arises there is no offsetting relief. Coding them to “staff amenities” in your accounting software does not change their character.

• Client lunches and dinners, wherever they are held.
• Restaurant and cafe meals as hospitality rather than travel.
• Christmas parties, staff drinks and social functions.
• Tickets to sporting events, concerts and corporate boxes.
• Alcohol in most settings, discussed below.
• Elaborate or catered meals, even on your own premises.
• Your own groceries as a sole trader, discussed below.

Alcohol: the general rule and the one real exception

Alcohol is generally entertainment and generally not deductible. TR 97/17 explains that consuming alcohol usually has social connotations and affords diversion or amusement, which gives it the character of entertainment. There is, however, a narrow category where alcohol is incidental to a larger work-related activity.

The clearest example in the ruling is an employee travelling on a business trip who has an evening meal at a restaurant accompanied by some wine. The Commissioner’s view is that the employee is travelling in the course of employment, the meal is of a type normally consumed at home, and it is impractical to suggest that drinking wine in those circumstances changes the nature of the meal. That meal, wine included, is not meal entertainment and is deductible.

Read that exception narrowly. It covers wine accompanying a meal while genuinely travelling for work. It does not cover a bar tab, drinks with a client, or a night out that happens to occur while you are away from home.

Travel, meals and the travel diary

Meals you buy while travelling overnight for business are deductible as travel expenses rather than being denied as entertainment. The substantiation rules are where these claims usually fail, and there is one threshold every business owner should know.

Section 900-20 of the Income Tax Assessment Act 1997 requires you to keep travel records if your expense is for travel that involves being away from your ordinary residence for six or more nights in a row. The travel may be within or outside Australia. In plain terms, once a trip runs past five nights you need a travel diary.

A travel record means recording each business activity: what it was, the day and approximate time it started, how long it lasted and where it happened. Write it as you go. Reconstructing a diary months later, after the ATO asks, is exactly the situation the rule exists to prevent.

Why your business structure decides the answer

This is the part that catches people out, and it is the single most important thing in this article. The staff amenities treatment works because the food is provided to employees. If nobody is an employee, the reasoning collapses and the food is a private expense.

The ATO’s position is explicit. For fringe benefits tax purposes, an employee includes a current, future or past employee, a director of a company, and a beneficiary of a trust who works in the business. The ATO then states that if you are a sole trader or a partner in a partnership, you are not an employee, and benefits you provide to yourself are not subject to FBT.

• Company. You are a director, so you are an employee for these purposes. Amenities provided to you on the business premises can be treated the same as for any other staff member.
• Trust. If you are a beneficiary who actually works in the business, the same reasoning applies.
• Sole trader or partnership. You are not an employee of anything. Food for your own consumption is private and not deductible, no matter where you eat it.

One further trap worth naming. If you operate through a company or trust but take only dividends or trust distributions and never draw a salary or director’s fees, whether you are a current employee for these purposes becomes far less clear. If your structure relies on that point, have it reviewed rather than assumed. Our guide to business structures in Australia explains how the entities differ.

The $300 minor benefit trap

Many business owners know that a minor benefit under $300 can be exempt from FBT. Fewer realise that where meal entertainment is exempt as a minor benefit, it is no longer a fringe benefit, so the exception in section 32-20 does not apply and the income tax deduction is denied. You get the FBT exemption and lose the deduction.

The minor benefits exemption in section 58P of the Fringe Benefits Tax Assessment Act 1986 requires the notional taxable value to be less than $300, together with a test of how infrequently and irregularly similar benefits are provided. The ATO confirms that entertainment may be exempt from FBT where it is a minor benefit, taxi travel, or food or drink consumed by employees on your business premises (ATO guidance, last updated 12 January 2023).

The practical consequence is that a modest Christmas party can be FBT free and non-deductible at the same time. That is not a mistake in the law, it is how the two systems interact. If you want the deduction, the answer is usually to keep the spend inside genuine staff amenities rather than to chase the exemption. Our guide on how to minimise fringe benefits tax works through the trade-offs.

Factors that increase the likelihood you can claim

Beyond the four factors themselves, there are practical things that make a claim far more defensible. In our experience working with Melbourne business owners, these are what separate a deduction that survives review from one that does not.

• Keep it light. Tea, coffee, fruit and biscuits are unarguable. The more elaborate the food, the weaker the position.
• Keep it on site. Consumed on your business premises on a working day is the strongest fact pattern available.
• Keep it for employees. The moment clients are in the room, that portion is entertainment.
• Use a separate account code. Code staff amenities away from entertainment in your ledger, so the two never blur.
• Keep the receipts and note the purpose. A receipt that says who the food was for and why takes minutes and settles the question later.
• Split mixed purchases. If one shop covers office supplies and your own groceries, split it at the point of entry, not at year end.
• Do not salary package it. The on-premises exemption does not apply to food or drink provided under a salary packaging arrangement.
• Write the travel diary as you go for any trip of six nights or more.

These habits cost almost nothing to build and they hold up. The ATO’s current focus on the boundary between personal and business spending makes them more valuable than they used to be, as we cover in our article on the ATO crackdown on personal versus business deductions.

Where this sits in the bigger picture

Food and drink is a small line in most profit and loss statements, but it is a good test of whether a business is being run tightly. A business that codes its amenities correctly is usually a business that has its structure, its records and its advice in order.

If you want the full picture of what else is available to you, start with our complete guide to small business tax deductions in Australia, and read it alongside our overview of fringe benefits tax in Australia, since the two systems have to be read together.

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