Why “we talked business” doesn't determine deductibility
You take a client to lunch to discuss a genuine business opportunity.
Surely that's a legitimate business cost. According to the ATO, in most cases, it isn't — and the reasoning trips up a lot of otherwise careful business owners.
The short answer
Entertainment — broadly, food, drink or recreation provided in a social setting — is generally not tax-deductible, regardless of whether business was genuinely discussed. Where it involves your employees, it can also trigger Fringe Benefits Tax. The main exceptions are food and drink that's clearly sustenance rather than entertainment, and situations already captured and taxed through FBT.
Why “we talked business” doesn't change the answer
This is the most common misconception. The ATO's test isn't whether business was discussed — it's whether the food or drink has the character of entertainment: a restaurant meal, a function, alcohol, a social occasion. A client lunch at a restaurant is entertainment even if the entire conversation was about the deal on the table.
What generally is and isn't entertainment
| Generally NOT entertainment (may be deductible) | Generally IS entertainment (usually not deductible) |
|---|---|
| Light refreshments — tea, coffee, morning tea — on your business premises during work hours | A restaurant or café meal with a client, even if business was discussed |
| A working meal provided during a genuine training session or long business seminar | Alcohol provided in almost any circumstance |
| Food or drink provided to an employee travelling overnight for work | Tickets to a show, sporting event or similar recreational activity |
| Meals provided in a staff dining facility as part of ordinary operations | A staff Christmas party or social function |
Why the location and setting matter so much
Onsite, during work hours, without alcohol, tends to read as sustenance rather than entertainment. Offsite — particularly a restaurant or venue — tends to read as entertainment, regardless of the business purpose behind it. This single distinction explains most of the confusion business owners run into: the same conversation, held in a meeting room with coffee versus at a restaurant with wine, can land on completely different sides of the deductibility line.
Where FBT comes into it
If you provide entertainment to employees, it may be a fringe benefit — taxed under FBT rather than claimed as an ordinary deduction. There's a minor benefits exemption for small, infrequent benefits, generally under $300 per employee, that would be unreasonable to treat as a formal fringe benefit — an occasional team lunch may fall within this, but a regular pattern of client or staff entertaining generally won't.
Entertaining clients specifically — as opposed to employees — doesn't attract FBT, but it's also very rarely deductible, since it remains entertainment either way.
A simple example
A consultant takes a prospective client for coffee at a café to discuss a proposal — generally not deductible, because it's offsite and has the character of hospitality, even though it's just coffee. The same consultant provides coffee and light snacks to that same client during a meeting held at their own office — this is far more likely to be treated as ordinary business sustenance, not entertainment.
A quick self-check
Is the food or drink being provided on my business premises, during work hours, without alcohol?
Would a reasonable observer describe this as a working meeting, or a social occasion?
If employees are involved, could this be a fringe benefit — and if so, does the minor benefits exemption genuinely apply?
Am I claiming these costs consistently, in a way I could clearly explain if asked?
When should you get professional help?
you regularly entertain clients or staff and want to understand the tax treatment properly;
you're not sure whether a specific recurring cost counts as entertainment or genuine sustenance;
your business may have FBT obligations you haven't previously registered for; or
you want your expense categories set up in your accounting software to reflect this distinction correctly.
Continue learning
→ What Is Fringe Benefits Tax — and When Does a Small Business Need to Think About It?
→ Travel Expenses — When Is Business Travel Tax-Deductible?
→ What Business Expenses Can I Claim as a Tax Deduction?
SKC Accounting | Knowledge Centre | Knowledge Guide 057
Last reviewed: August 2026
General information only. This guide does not take into account your individual circumstances and is not a substitute for professional accounting, taxation, legal or financial advice.