BUSINESSTAX TREATMET OF MEAL EXPENSES
Tax treatment of meal expenses (IS 21/6 published on 7/7/2021)
Summary: This statement discussed the tax treatment of meal expenses in various situations for self-employed businesses and ones other than self-employed. The judgment is major on whether the expenditure was of private nature. The GST input tax treatment of below should follow the same as of the income tax deductibility, that is, in the case that the mean expenses were of a private nature for income tax purposes (non-deductible), it would also not be deductible for GST purposes.
SCENARIO A: SELF-EMPLOYED
Generally, meal expenses incurred by a self-employed person are non-deductible due to their private nature.
It is not affected even in the case that the meal took place during a business trip, and he/she was away from home and could not prepare his/her own meal. This is because, for a self-employed person, the meal would have taken place even if the travel had not been required.
The only exception is where the income-earning process of the self-employed person requires extra meal expenses.
In the case that the trip was in partially privately nature, he/she would be able to claim only 50% of entertainment expenses. Section DD4(1) (limitation rules which allow business travel expenditure to be fully deductible) may not apply for a self-employed person with the consideration of the private limitation.
For details, please contact your accountant.
SCENARIO B: ALLOWANCE TO PAID-EMPLOYEES
Generally, an amount that an employer pays on behalf of an employee for a mean when he/she is working overtime is exempt income for the employee, but deductible for the business.
“Meal” in this case includes:
- Food and drinks that the employee consumes as part of a working meal
- Food and drinks that the employee consumes at a training course/conference
- Food and drinks that the employee consumes when their employment duties require them to travel in the performance of those duties (with a maximum of the three-month time limit)
- Light refreshments in the form of snack foods such as biscuits and fruit, or liquid refreshments such as tea, coffee, water, or similar refreshments in the same situation as above (no time limit applies)
A travel “on work” refers to the travel while performing work. This does not include the travel from home to work or after work has finished.
SCENARIO C: EMPLOYER PAYING FOR MEALS FOR THEMSELVES AND AN EMPLOYEE
The “employee portion” will be deductible when the meal was business-related, while the “employer’s meal” will normally not be deductible because it is regularly found to be private.
If the meal was in any kind of partial private nature, 50% of entertainment expenses can be deducted unless in some situation (i.e., light refreshment on premises during work time, food and drinks consumed during an employment-related activity such as business trip) where the limitation rules can be applied.
The tax treatment in this scenario shall be discussed case by case. Please contact your accountant.
SCENARIO D: CLOSELY HELD COMPANY
A closely held company is a self-employed person operate through a company. Considering that a company is a separate legal entity it can deduct the meal cost as an allowance/reimbursement for its employee if it was for work. The only difference is that although the expenses can be deductible for the business, the allowance received by the shareholder-employee may be subject to income tax or FBT in some situations. (Private meal should still not be considered in this case.)
SCENARIO E: A LOOK-THROUGH COMPANY
The general deduction rules allowed for a normal company would most likely not apply for an LTC as the deduction for the owner of an LTC would be private in nature because the income and expenses of the company are treated as those of the owners. Similar treatment should be considered as of a self-employed person.
Please note that the above does not constitute specific tax advice and only intends to be a general advice. If you require specific advice related to your situation, please reach out to our tax consultant using the ‘contact us’ option.
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