Next time you grab a coffee or a meal at your local cafe between back-to-back client meetings and think about claiming this as an expense because you are self-employed and it’s just part of your work day, think again. Inland Revenue has confirmed that these expenses are not deductible for self-employed taxpayers in all but very limited circumstances.
As per my previous post, there are over 37 pages to interpret Statement IS 21/06 – Income Tax and GST - Treatment of Meal Expenses. So, below is a simplified version for you
While certain meal expenses may have a business-driven purpose, a tax deduction is not allowed where the cost is a private expense for the taxpayer. Food is a private expense for a self-employed person due to the need to 'eat to stay alive', therefore the meal costs for the individual self-employed taxpayer are primarily considered not deductible.
Exception
An exception is made for costs where the private element is incidental to a wider business purpose. For example, when entertaining a client, the self-employed person’s costs are treated as initially deductible along with the cost of the client’s meal. However both elements are subject to 50% non-deductibility under the entertainment rules.
| Scenario | Are the costs tax deductible? | |
| Self-employed individual incurs costs for own meals | No | |
Self-employed individual incurs costs for meals for self and an employee | Likely outcome is that only the costs relating to the employee are deductible; entertainment or FBT rules may also apply. However, if the purpose for the cost is primarily business (such as a team celebration), the private element may be considered incidental. | |
Self-employed individual pays for meals of employee while employee is working out of town | Yes | |
Self-employed individual incurs costs for meals for self and a client | Private element may be incidental and all costs deductible but subject to the entertainment rules. | |
Self-employed individual pays for meals for self while working out of town | No, except in very limited circumstances such as where there are no practical or realistic alternatives for meals (e.g., where a supermarket is not nearby and it is unrealistic for the individual to prepare their own meals). The costs on top of what the individual would typically spend may be deductible. | |
Company incurs costs for meals for employees (including shareholder employees) and/or clients | Yes, entertainment or FBT rules may also apply. |
The moral of the story here is that it is crucial for affected taxpayers to keep accurate records of the purpose of any food and drink related costs so that they can be correctly classified for tax purposes.