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minor benefit rule

Tax Deduct a Business Lunch

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How to tax deduct a business lunch. Or breakfast meeting. Or morning and afternoon tea. Or dinner.

Tax Deduct a Business Lunch

Most accountants will tell you that you can’t tax deduct a business lunch, nor a breakfast meeting, nor morning or afternoon tea, nor a business dinner. It is all entertainment. And hence not deductible.

And they are right. BUT…..

There are 5 back doors – FIVE – wide open – that allow you to claim a tax deduction nevertheless.

Backdoor #1   The 4W Test

This is the biggest door of all. Think garage door. And this door exist thanks to TR 1997/17. You have probably never heard of this tax ruling and will never again. But it is your best chance to claim a tax deduction for a meal.

TR 1997/17 allows you to tax deduct a meal if the expense passes the Why, What, Where and When test. So let’s call it ‘The 4W Test’.

If the Why, What, Where and When indicate that the dominant purpose of the meal was business, then it doesn’t count as entertainment.

The Why and What carry the most weight. You must get those right. And then you need at least one more – the Where or the When – or even better both.

WHY did you have it? Taking a client out to lunch means business. Taking out a friend doesn’t.

WHAT did you have? Something purely functional like sandwiches and coffee means business. A three-course meal doesn’t. 

WHERE did you have it? Business premises means business. Off site weakens your argument, but doesn’t kill it if the When supports your argument

WHEN did you do it?  During business hours means business. At night doesn’t.

So if your meal ticks at least 3 boxes, it is a business expense and hence not entertainment. And so it is tax deductible.

Backdoor #2    Sustenance

If you have a simple meal on business premises without alcohol, the ATO will count it as sustenance as long as it is finger food. Think of  a working lunch in the board room with sandwiches and tea, a morning tea in the staff room with muffins and coffee or an all-nighter at your desk with pizza and coke.

Sustenance doesn’t count as entertainment, but is a business expense, hence tax deductible.

Backdoor #3    FBT

If you pay FBT for an expense – any expense – then you can tax deduct that expense even if it is entertainment.

So whenever you pay FBT for a meal, you can tax deduct that portion of the expense that was subject to FBT.

Backdoor # 4    Sudiv 32-B

And then there is another door but a really tiny one. Certain entertainment expenses are tax deductible thanks to exceptions listed in Subdiv 32-B..

This subdivision is long and confusing with tricky details and a long list of exceptions. So we run a real risk of boring you with this one.

So below we have just listed a few to give you an idea, but please email or call if you want to try and fit through this tiny door.

You can tax deduct a meal if it falls under certain employer, seminar, promotion and advertising or other expenses. There is also a specific exception for businesses in the entertainment industry. 

If you provide a lunch in an in-house dining facility, that expense might be tax deductible per s32-30.  The same might apply to food or drink that would be subject to FBT but is not due to certain exemptions in the FBT Act. If you provide a business lunch at a seminar that lasts 4 hours or more, you can deduct these entertainment expenses per s32-35.  If you provide a lunch to promote or advertise your goods or services – a product lunch for example – you may be able to claim a deduction per s32-45, but only if ordinary members of the public have an equal chance to attend your event.

Back Door # 5    Travel

And then there is travel. All bets are off when it comes to travel. When you travel, you can have as lavish a meal as you like and it still counts as a business expense. Just stay off the booze. Alcohol and business don’t mix in the eyes of the ATO.

GST

If your lunch is tax deductible for income tax purposes, then you can also claim the input tax credit in your BAS. But if it isn’t, then you can’t

GST just follows what you do for income tax. Whatever is tax deductible as a business expense, gives you an input tax credit (as long as it is a taxable supply).

 

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Disclaimer: numba does not provide specific financial, legal or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax or legal advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

 

Super Contributions

Super Contributions

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You can contribute to your super – but how much and when depends.  Super contributions come with a lot of strings attached.

Super Contributions

There are three ways to grow your super:

1 – Contributions;
2 – Investment income;
3 – Transfers from another super account.

Investment income and transfers are relatively straight forward. They are what they are. Just make sure the investment income is at-arm’s-length.

But contributions come with a lot of ifs and whens. There is a mandatory and a voluntary part. Contributions are either concessional or non-concessional. And there are caps, work-tests and age limits.

Mandatory Contributions

It is mandatory for your employer to make minimum superannuation contributions on your behalf whenever they pay you $450 or more (before tax) in a calendar month. This is the superannuation guarantee (SG).

And it applies to all adult employees – full-time, part-time or casual – no matter your age with two exceptions.  While under 18, you must work more than 30 hours per week in addition to the $450 before you qualify. The same applies if you work in a domestic setting, for example as a cleaner or nanny.

The current SG rate is 9.5% but set to increase by 0.5% increments until it hits 12% from 1 July 2025 onwards.

Your employer has to pay 9.5% of what you usually earn each month, so your salary for your usual hours of work plus anything extra you usually get – for example commission, bonus, shift loadings or allowances. The official term is ordinary times earnings (OTE). Your OTE doesn’t include overtime.

Your SG entitlement is capped at $5,250.65 per quarter for 2019/20, equivalent to an OTE of $55,270. This is the maximum super contribution base (MSCB). Even if you earn significantly more, your employer only has to pay super up to the MSCB.

If your employer doesn’t pay your SG on time, they have to pay the superannuation guarantee charge (SGC) which consists of your SG payments plus penalties and interest.

Your employer’s SG payments count as a concessional contribution and so trigger a 15% contribution tax upon arrival in your super fund.

Voluntary Contributions

In addition to your employer’s SG payments, you can make additional contributions into super. You don’t have to, but you can. Voluntary contributions are also referred to as personal contributions.

They can be in cash or in-specie. A cash contribution is just a bank transfer. An in-specie contribution is when you transfer ownership of an asset. In-specie contributions are usually limited to SMSFs. Government, industry and retail funds are unlikely to accept in-specie contributions. 

Once you hit 65, you can only make voluntary contributions, if you work at least 10 hours per week, averaged over 30 consecutive days. So over 30 consecutive days you must work at least 40 hours. This is the dreaded super work test.

Once you hit 75, you can’t make any more voluntary contributions – even if you pass the work test – apart from the down-sizer contributions. 

Voluntary contributions are either concessional or non-concessional contributions.

Concessional Contributions

You can contribute up to $25,000 each year before-tax. Before-tax means that somebody claims a tax deduction, either you or your employer. This is called a concessional contribution.

Your employer’s SG payments count towards this cap, but you can use up any remaining cap space with additional personal contributions and claim a tax deduction. If you don’t use up the cap space in one year, you can use it over the following five years as long as your TSB is below $500,000.

Any concessional contributions will trigger a 15% contribution tax upon arrival within your super fund. If your total income plus super contributions exceed $250,000, then your concessional contributions will trigger an additional 15% Div 293 tax.

Non-Concessional Contributions

You can contribute up to $100,000 each year after-tax. After-tax means that neither you nor your employer claim a tax deduction, so this is called a non-concessional contribution.

Spouse contributions you receive count as non-concessional since they trigger a tax offset but not a tax deduction as such.

If you want, you can contribute 3-years’ worth of contributions in one hit. So instead of contributing $100,000 each year, you could contribute more in one year and then contribute less in the following two years, so that all up you don’t contribute more than $300,000 over 3 years.

Once your total superannuation balance (TSB) – so everything you have in super – hits $1.6m, you can’t make any more non-concessional contributions.

Non-concessional contributions don’t trigger any tax upon arrival in your super funds. 

So this is a short overview of what you can contribution when and how. If you get stuck, please call or email us. There might be a simple answer to your query.

 

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Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

superannuation

Superannuation

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Superannuation is for your retirement. You pay less tax to save more for later.

Superannuation

When you are old and no longer work, you hopefully have enough savings, superannuation or the age pension to live comfortably. But will you?

Saving for your retirement is tough – low wage growth, high marginal tax rates, HELP/HECS debt, mortgage, young kids, you name it – and so you probably won’t get far with this one.

Qualifying for the age pension is also tough and likely to get worse, since our current system is not financially sustainable for generations to come.

And so that means your super is all you will have left – unless you want to rely on family and friends, charity and welfare or crime and begging.

That is a lot of heavy lifting for your super to do. And so there are tax concessions to help you.

Less Tax

Your super comes with three tax concessions. You pay 15% tax on any income within super while in accumulation, 0% tax within super while in pension and 0% tax when you cash your super past 60 or 65 years of age.

This is what super is about. If these tax concessions didn’t exist, very few would consider contributing more than they absolutely have to.

Super Rules

Super comes with nice tax concessions, but also with not-so-nice strings attached. Especially four areas have the legislator’s full attention. How much goes into your super. What happens inside. How much moves into pension mode. And how much comes out. 

How Much Goes In

What goes into your super is called a contribution. There is a mandatory and a voluntary part. The mandatory part affects your employer. The voluntary part just you. 

It is mandatory for your employer to pay a superannuation guarantee (SG) on your behalf whenever they pay you $450 or more (before tax) in a calendar month. The current SG rate of 9.5% is applied to your ordinary earnings capped at the maximum super contribution base, which is $55,270 per quarter in 2019/20. These payments count as concessional contributions.

In addition to your employer’s SG payments, you can voluntarily make additional contributions into super (before-tax or after-tax) as long as you are below 65. Between 65 and 75 you can make voluntary contributions if you work at least 10 hours per week. 

Before-tax means that somebody receives a tax deduction – this is called a concessional contribution. Your concessional contribution is capped at $25,000 per year and triggers 15% or 30% tax upon arrival in your super fund.

After-tax means no tax deduction – so this is a non-concessional contribution. Your non-concessional contribution is capped at $100,000 per year and only possible while your superannuation balance (TSB) – so everything you have in super – is below $1.6m. Non-concessional contributions don’t trigger any tax upon arrival in your super fund.

What Happens Inside

What happens inside is all about investment rules. Your super is yours but you can’t do with it whatever you want. There are six rules that are to protect your super – from you and your Part 8 associates. They are especially relevant for self-managed super funds (SMSF) since an SMSF gives you plenty of opportunity for chummy deals with your mates.

You must pass the sole purpose test and act at arm’s length. You must keep in-house assets below 5% of total assets.  And you must neither acquire assets from related parties, nor acquire or hold assets for personal use, nor borrow money unless it is through a limited recourse borrowing arrangement (LRBA).

How Much Moves Into Pension Mode

How much moves into pension mode is all about transfer balance accounts and caps. Since funds in pension mode enjoy 0% tax, there is a cap on how much you can move into pension mode. That cap is $1.6m at the moment, but will increase with time.

What Comes Out

And how much comes out is all about conditions of release and benefit payments. The big draw-back of super is that you can’t access it for a very long time, usually until you hit 60 or 65. There are ways to access it earlier but those will cost you a fair bit of tax.

Super Fund

Your super is for your retirement. To keep it safe over all those years, it needs to go into a separate entity – a superannuation fund, also called a super fund.

You can join a government, industry or retail fund. Or you can set up your own superannuation fund – called a self-managed superannuation fund (SMSF).

A super fund consists of trustees and members. Trustees mange the fund and are the legal owners of any super assets, but hold these on behalf of members. 

In an SMSF, you as the member are also a trustee – either an individual trustee or a director of the corporate trustee.

And so this is a very short overview of superannuation. Super is a complex topic and a highly regulated area. Please call or email us if you get stuck. There might be a simple answer to your question.

 

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Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

minor benefit rule

Minor Benefit Rule

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The minor benefit rule is the one exception that turns a non-deductible contribution into a deductible one. 

Minor Benefit Rule

When you make a donation and you pay way more than the minor benefit you get back, then you obviously did this to support the charity. And that should be rewarded through a tax deduction. This is the essence of the minor benefit rule.

The tricky point is what makes a benefit a minor benefit. What means minor? That is the point the entire rule evolves around.

Recap

Here is a quick recap in case you haven’t read Tax Deductible Donation.

A donation is either a gift or a contribution. A gift is tax deductible if it meets the six conditions listed in s30-15 ITAA97 and TR 2005/13.

A contribution is usually not tax deductible, but there are two exceptions – the general deduction in s8-1 ITAA97 and the minor benefit rule. 

The general deduction in s8-1 (1) ITAA97 allows you to claim a tax deduction whenever you pay for something to gain assessable income. To get brand exposure or to buy donor data for example.

The minor benefit rule in s30-15 ITAA97 allows you to claim a tax deduction for a contribution if your contribution qualifies as a tax deductible gift without being a gift and – in addition – meets five other conditions.

Minor Benefit Rule

For your contribution to be tax-deductible after all, it needs to pass two tests. It needs to pass the test for a tax deductible gift. That is the first test. Let’s call it the gift test.

But instead of being a gift – the first condition for being a tax-deductible gift – it needs to pass the additional five conditions of the minor benefit rule. This is the second test.

Gift Test

The contribution needs to be LIKE a tax-deductible gift …apart from the fact that it isn’t a gift. So it must meet all the conditions a gift has to meet per s30-15 ITAA97 and TR 2005/13, except the first one about receiving nothing in return. Roughly speaking, a gift is tax deductible if it meets the following conditions. It must be

1 – a gift – skip this one – a contribution fails this one by definition;
2 – of money or property;
3 – of sufficient value;
4 – made voluntarily;
5 – with a tax receipt;
6 – to a recipient with DGR status.

This is the first test.

Minor Benefit Rule

The second test is passing the minor benefit rule. To pass the minor benefit rule:

1 – You must be an individual and not a company, trust or partnership.
2 – The event must be a fundraising event or charity auction.
3 – If you claim the price of a ticket, you can only claim up to two tickets.
4 – You must only receive a minor benefit in return for your contribution.
5 – The relevant charity must run less than 15 events of this type per year.

Minor 

The core essence of the minor benefit rule is that the benefit you receive is only…MINOR. The thinking is that if you get way less than you paid for, then you must have done this to support the charity. And that should be rewarded with a tax deduction. 

But what is a minor benefit? A benefit is minor if it is worth $150 or less and you pay at least 5 times more than what it is worth. So there are two criteria – market value and payment.

Market Value

The market value of the benefit must be $150 or less. 

This is important. It means that whenever you buy something at a charity auction worth more than $150, the auction item won’t qualify as a minor benefit. The same applies to the tickets for a fundraising event. If it is worth more than $150, no minor benefit.

But remember this is not about what you actually pay for the ticket or item. It is about what it is worth – the market value of your ticket to the event. And the market value of the auction item you successfully bid for.

Payment

You must pay at least 5 times more than its market value.

And this is just as important. It means that if the venue charges $100 per head, then you must pay at least $500 for the ticket for it to qualify as a minor benefit. And if an auction item is worth $50, you must pay at least $250 for it.

The argument is that if you pay 5 times more for what it is worth, you clearly pay the money for other reasons than the benefit you get back. Your intentions are clearly altruistic.

How To Determine Market Value 

A benefit is worth its market value, which is what you would have had to pay for the same good, service or event on the open market. And if there is nothing else like this, then a similar or comparable good, service or event (price or market comparison).

And if it is impossible to make a reasonable price or market comparison, then the market value is assessed based on cost. Take the actual cost plus notional costs plus a certain profit margin and you get the market value (cost-based approach). 

So the value of a benefit is assessed based on market value or cost. Since it is the charity issuing the receipt, they are the ones that need to ultimately work this out. 

Subsidised Benefits

What happens if some benefits are subsidised and the charity didn’t actually pay for these? Makes no difference. Any benefit is assessed based on its market value or cost, even if part or all of the benefit was actually subsidised by another donor.

Let’s say a donor picked up the tap at the charity Gala dinner. So the charity only had to pay $50 per meal, but not the additional $60 per head for free drinks. What is the market value of the benefit received? The answer is $110.

Or another donor donated a range of items for the charity auction. The minor benefit rule still uses the actual market value, despite the fact that the charity paid nothing for these items.

Even if everything was donated – venue, meals, drinks, MC and auction items – it would still be the market value of all this that would go into the calculation. The fact that the charity didn’t pay for some of the benefit doesn’t change the market value or notional cost of that benefit.

Free Event

What happens if attendees don’t pay for the ticket to attend and are just asked for a donation, which they are free to make or not?  Then the entire payment is a donation and hence tax deductible as such. In this case you don’t need to worry about the minor benefit rule.

Splitting

The charity can’t split the ticket into event and gift. It can’t say $150 of the ticket is for the Gala dinner and the other $350 are a gift. Para 149 in TR 2005/13 is very clear on that one,

Para 149: Where DGRs conduct fundraising events such as celebrity dinners, gala events, $1,000-a-plate dinners, and so on, the price of a ticket cannot be notionally split between the value of the material benefit received, that is, the meal, and the amount which represents a gift. Where attendees are to pay a given sum of money in order to attend a function, no part of that sum can be considered a gift. This is so even where the cost of attendance is well in excess of the value of the meal received.

But the charity can charge the meal at market value and then ask for a donation. Para 151 in TR 2005/13 even suggests that,

Para 151: However, a fundraiser can offer tickets to a function for an amount which approximates its market value, and solicit additional optional donations from potential attendees. The ticket cost will not be deductible as a gift. However, the additional optional donations will be tax deductible.

Example

After all this, let’s do an example. 

Let’s say there is a Gala dinner followed by a charity auction, which Bob attends. Bob pays $500 for the dinner worth $100 and he successfully bids $1,000 for a golf bag worth $100 and $500 for wine worth $50.

In that case Bob can claim 3 deductions. He can claim $400 for the ticket, $900 for the purchase of the bag and $450 for the purchase of the wine. 

FBT

And last but not least, just in case it confuses you. FBT also has a minor benefit rule. But it is a case of same name – different rule. The minor benefit rule for FBT purposes has nothing to do with the minor benefit rule for contributions to charities.

For FBT purposes, benefits that are less than $300 in notional taxable value count as minor benefits and hence are exempt from FBT. But that is FBT land and has nothing to do with tax deductible contributions.

 

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Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

Tax Deductible Donation

Tax Deductible Donation

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When can you claim a tax deduction for a donation you make? What makes a donation a tax deductible donation?

Tax Deductible Donation

The short answer is: You can claim a deduction, if you have a tax receipt from an entity with DGR status that says it is a tax deductible donation.

The long answer is more complicated and goes like this: A tax deductible donation is either a tax deductible gift or it is a contribution that falls under s8-1 or the minor benefit rule.

If a charity has given you a receipt that says tax deductible gift, you can stop here. You got your tax deductible donation.

But if the charity hasn’t given you a receipt yet and there is a question mark whether you will, then the following is for you.

Donation

A donation is any money or property you voluntarily give to a charity – be it a gift or a contribution. 

DONATION = GIFT + CONTRIBUTION

If you get nothing in return, your donation is a gift. If you get anything in return, your donation is a contribution.  

So every donation of money or property is either a gift or a contribution. Gift v contribution – that is the terminology the legislator uses in Div 30 ITAA97. The problem is that the ATO doesn’t. They talk about ‘gifts or donations’ in D9 of an Individual Tax return as well as on their website. Messy terminology. Don’t let that confuse you. The end result is the same.

Tax Deduction

Why does it matter whether your donation is a gift or a contribution? It matters for tax purposes. It matters if you want to claim a tax deduction since different rules apply depending on whether something is a gift or a contribution.

Gift

A gift is tax deductible if it meets the conditions listed in s30-15 ITAA97 and TR 2005/13. There are many fine nuances in these rulings, but roughly speaking, a gift is tax deductible if it meets six conditions. It must be

1 – a gift;
2 – of money or property;
3 – of sufficient value;
4 – made voluntarily;
5 – with a tax receipt;
6 – to a recipient with DGR status.

Contribution

A contribution is not deductible since you receive something in return. You are basically buying something, even if it is for a bad price. And so there is no tax deduction. But … there are two exceptions – the general deduction in s8-1 ITAA97 and the minor benefit rule. 

General Deduction s8-1

The general deduction in s8-1 (1) ITAA97 allows you to claim a tax deduction whenever you pay for something to gain assessable income. To get brand exposure or to buy donor data for example.

Minor Benefit

Whenever you get a benefit in return, you didn’t give a gift. But if this benefit is so minor in comparison to what you pay – if you pay way above market value – then you must have done this to support the charity.  

The dinner and auction was just the side show. It is a minor benefit in comparison to what this is about. This is the reasoning behind the minor benefit rule.  

Minor Benefit Rule s30-15

The minor benefit rule in s30-15 ITAA97 allows you to claim a tax deduction for a contribution if your contribution passes two tests.

The contribution needs to be LIKE a tax-deductible gift …apart from the fact that it isn’t since you received something in return. So it must meet all the conditions a gift has to meet apart from being a gift. That is the first test.

The second test is that the benefit must be minor. To pass there are five conditions about you, the charity and the event.

# 1    Individual

You must be an individual. Only individuals can claim a tax deduction under the minor benefit rule, but companies, trusts and partnerships can’t. 

# 2   Fundraising Event or Charity Auction

The minor benefit rule only applies to fundraising events and charity auctions. So it doesn’t apply – for example – to the cost of merchandise you buy through a charity website.

# 3    Tickets

If you claim the price of a ticket, you can only claim up to two tickets. 

# 4   Less Than 15 Similar Events

The charity running the event must run less than 15 events of this type per year.

# 5   Minor Benefit

This is the big hurdle. Whether a benefit is a minor benefit depends on its market value and what you pay for it.

The benefit you get must be worth $150 or less. And what you pay must be at least 5 times more than what you paid. These are the two deciding factors – market value and what you pay.

Market Value

The market value of the benefit must be $150 or less. If it is worth more than $150, no minor benefit. So if the ticket or auction item is worth more than $150, it doesn’t qualify as a minor benefit. 

But remember this is not about what you actually pay for the ticket or item. It is about what it is worth – the market value of your ticket to the event. And the market value of the auction item you successfully bid for.

What you Pay

You must pay at least 5 times more than its market value.

And this is just as important. It means that if the meal is worth $100 per head, then you must pay at least $500 for the ticket for it to qualify as a minor benefit. And if an auction item is worth $50, you must pay at least $250 for it.

The argument is that if you pay 5 times more for what it is worth, you clearly pay the money for other reasons than the benefit you get back. Your intentions are clearly altruistic.

—–

Here is more about the minor benefit rule. If you get stuck, please call or email us. There might be a simple answer to your question.

 

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Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.