With Christmas approaching, most companies will be planning to reward their staff with a celebration and perhaps a gift to mark the end of the year.
When planning such events it’s wise to consider the tax consequences associated with such expenditure. Without doing so, it’s possible to find the business hit with an unexpected FBT bill, which will really dampen the party spirit. To assist you in your planning, we’ve outlined the income tax, Fringe Benefits Tax (FBT) and Goods & Services Tax (GST) consequences associated with entertainment and gifts. There are also some suggestions of tax-effective strategies you may wish to consider to assist in managing costs.
An unplanned expense from a Christmas party is often the FBT payable by you as the employer. Generally, gifts, entertainment and other benefits provided to employees give rise to an FBT liability. For a Small Business Employer (SBE), there is an effective 40 per cent added cost to provide a tax deductible benefit that is subject to FBT, compared to a non-deductible benefit that is exempt from FBT (37 per cent for a non-SBE).
There are, however, various exemptions or reductions available to reduce the FBT liability, including:
• minor benefits, and
• food and drink consumed on the employer’s premises.
The minor benefits exemption applies to benefits provided to each person and to each benefit. This means each employee and their associates can be provided with food and drink to the value of less than $300 (GST inclusive), and each employee and their associates can receive a gift costing less than $300 (GST inclusive), and the employer will not incur an FBT liability.
Minor benefits are still only permitted to be provided on an infrequent and irregular basis. Thus for any employees who regularly and/or frequently receive entertainment benefits, the Christmas party may not qualify as a minor benefit for them. Where the relevant expenditure constitutes entertainment – importantly, if it is an exempt minor benefit – it will not be deductible for income tax purposes and no GST input tax credits may be claimed.
An important proviso for the minor benefits exemption to apply to Christmas parties is that the ‘50-50 split method’ for meal entertainment is not used. If the ‘50-50 method’ is used, all meal entertainment, including the costs of the Christmas party, need to be included in the calculation.
Some practical examples of how the FBT rules apply
An employer holds a staff Christmas party at an inner-city restaurant, which costs $295 per person (including GST). The cost of benefits provided to the employees and their partners will be classified as a minor benefit, i.e. under $300, and will be exempt from FBT (provided the benefits meet the ‘infrequent and irregular’ requirement), but will be non-deductible for income tax purposes and no GST input tax credits can be claimed.
The employer had a particularly successful year and, in addition to the Christmas party, decides to provide each employee with a food hamper valued at $290. Further, as the employer feels that the success has largely been driven by the Sales and Marketing Department, each employee in that department is also provided, on the same day, with a bottle of champagne valued at $80. These gifts are unrelated to the Christmas party.
The cost of the food hampers provided to employees other than those in the Sales and Marketing Department will constitute minor benefits and will therefore be exempt from FBT because they cost less than $300 and there are no associated benefits. As the Australian Tax Office (ATO) accepts that gifts of food or drink that are not consumed immediately are not entertainment, the cost of the food hamper will be tax deductible and GST input tax credits, if applicable, would be available.
Gifts provided to the Sales and Marketing Department, however, will not be exempt from FBT because the cost of the food hamper and the champagne have to be aggregated in deciding whether or not they are minor benefits. As the aggregated cost is more than $300, the benefits will be subject to FBT. Tax deductions will be available, as the champagne and food hamper will not constitute entertainment, and GST input tax credits will be available. However, if the food hamper and the champagne were provided on separate days for unrelated reasons (e.g. Christmas bonus and bonus for best-performing department) such that the benefits are unrelated, both benefits would be exempt from FBT as minor benefits. They would also be tax deductible and GST input tax credits available.
In-house Christmas parties
For most employers, the cost of food or drink consumed by employees on their business premises on working days is exempt from FBT. This FBT exemption does not apply for tax-exempt employers. Accordingly, employers may wish to consider holding their Christmas parties in-house on a working day so that FBT will not be payable. The cost of the Christmas party in these circumstances will, however, be non-deductible for income tax purposes and no GST input tax credits will be available. It is also important to note that this exemption does not extend to the partner and family of the employee. Hence, if the partner and/or family attend, FBT may be payable on their portion.
The employer decides to hold the Christmas party on their premises on a Friday evening and only employees are allowed to attend. In these circumstances, the cost of food and drink consumed at the Christmas party will be exempt from FBT, but is non-deductible for income tax purposes and there are no GST input tax credits available.
The employer decides to hold a Christmas party on their premises on a Friday and partners are also invited. The Christmas party costs $295 per person. The cost of food or drink consumed by the employees and the partners will not be subject to FBT, will be non-deductible for tax purposes, and no GST input tax credits are available.
If the cost of an in-house Christmas party were $310 per head, the amount for partners would be subject to FBT, deductible for tax purposes and GST input tax credits available, because the cost would be greater than $300 and hence would not constitute a minor benefit. However, being provided on business premises on a working day, the amount for employees would be exempt from FBT, non-deductible for income tax purposes and no GST input tax credits available.
For more information, or if you have any questions about this article, you can contact Aaron Street at email@example.com or Andrew Ward at firstname.lastname@example.org,
alternatively visit kpmg.com.au
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