Around 1976 a publisher sent me a book for review. It is the only book I have reviewed without first reading.
It was called “”The Wit and Wisdom of Malcolm Fraser”. His picture was on the front cover, but when you opened it, it was full of blank pages.
Not only vicious, but unfair. Malcolm Fraser, of course, gave us those two gems: “”Life was not meant to be easy” and “”There is no such thing as a free lunch.”
Or perhaps he was not responsible for them, but they were misattributed by some generous sole who had seen the “Wit and Wisdom” book and thought Malcolm at least ought to have a couple of snappy sayings.
Fraser was a bit like Ronald Reagan politically: say one thing and mean another.
Reagan promised he would reduce the deficit by reining in spending so that he could lower taxes. He lowered taxes but just plain forgot to rein in spending, especially military spending.
Fraser said there was no such thing as a free lunch. But under his government businesspeople did in fact get free lunches. They were tax deductible.
Who would have thought the grim Fraser years would be regarded as “”the good old days” of the free lunch.
When Paul Keating became Treasurer he put a stop to that. He ended the tax-deductible entertainment lunch. Now as Prime Minister he has gone a step further. From the beginning of this month, Fringe Benefits Tax will apply to some lunches and an earlier loophole will be closed.
Fraser and the patricians of the Liberal Party had a different attitude to lunch than Keating and the plebians of the Labor Party: pheasant under glass with champagne against pie and sauce. (Or in Adelaide a pie floater and beer, a culinary affront only matched by the staff canteen.)
Keating always attacked the Liberals for allowing tax rorts, asking why should pheasant under glass be tax deductible while the pie and sauce is not. The Liberals said Labor had no idea about the need to entertain and cultivate people if you are in business. Labor MPs tended not to have business backgrounds so thought lunch was not a good way to get things done; number-crunching a deal-making were more effective.
Pre-Hawke-Keating Government entertainment was all tax deductible. Then it became non-deductible unless it was in-house. As usual with any tax system, the lawyers and accountants searched and found loopholes. Business people started to dine in style in-house. Also, private dining became part of salary packaging rather than present-bills-as-you-eat.
The changes put a stop to this. They are quite complicated. Different taxes apply to different situations and the financial outcome for the company different.
Under the new arrangements there are three outcomes.
1. Deductible but subject to Fringe-Benefits Tax: The part of a bill attributable to and employee eating in a restaurant with a client; the whole bill of employee eating with spouse while travelling.
2. Deductible and not subject to FBT: Employees in in-house dining facility even if a client is dining with them (the client’s bill comes under 3); a working lunch (sandwiches etc) on site without alcohol whether it is for employees, self-employed or clients. Once you serve booze, you go to 3; employee dining alone while travelling.
3. Non-deductible and no FBT: The client’s share of the restaurant lunch; the client’s share of a meal in an in-house dining facility; self-employed in an in-house dining facility; employee, self-employed and client’s working lunch at which alcohol is served.
Malcolm Fraser got the epithet “”grim”. That’s nothing on these new rules. The only tax-deductible lunch is the staff canteen; the booze-free lunch or travelling and dining alone. So there is no such thing as a convivial free lunch.
The tax position gets more complex still.
Remember FBT is paid at 48.4 per cent, whereas company tax is paid at 33 per cent. But if a company pays FBT, the FBT amount does not show up as taxable profit. In effect it is itself a tax deduction, just like employees salaries.
Take an example of a lunch bill of $1000.
True, a big lunch, but I need a figure with enough zeros to illustrate the tax point.
If the $1000 lunch is not a deduction, the company pays $330 tax on it. If it is a deduction but the company has to pay FBT, a different result follows. For a start FBT is not struck on the $1000. Rather it is struck on the “”salary sacrifice” value of the $1000. At the top marginal income-tax rate I would have to earn $1930 to get $1000 in hand so I could out on the town. So the government strikes the FBT on the $1930. At 48.4 per cent it comes to $937.
That as we explained is itself a tax deduction, which at the 33 per cent company rate comes out at $283.90. The straight deductible lunch, on the other hand, is worth $330.
I think the intention may have been to make the outcomes equal. As soon as you have unequal outcomes, the tax-minimisation industry gets busy.
Accountants are not very keen on the new rules.
Joseph Carrozzi, tax director, of Arthur Anderson, for example, says the intent of the new rules was fine: to stamp out avoidance through salary packaging of restaurant meals. However, in doing that the government has created kilometres of red tape for smaller businesses.
He argues the new rules favour big businesses which can carry an in-house dinning facility, have accounting staffs to work out the new rules, and have economies of scale to deal with the new forms and instructions to employees. Small businesses will cop extra costs.
He says small businesses will find it too expensive to change their accounting systems, so they will pay extra FBT. He urged businesses to get their employees to document everything: where, what, who and how much, so expenses can be processed under the new arrangement.
Abolishing the free lunch wasn’t meant to be easy.