While Santa’s impending arrival means Christmas cheer for many businesses, the tax implications may result in a financial hangover after the Silly Season has passed. Understanding the tax consequences of Christmas parties and gifts can help you get the most from your Christmas budget.
Christmas Parties for Employees
A fringe benefit is a ‘payment’ to an employee but in a different form to salary and wages. It applies to benefits that employers provide to their employees and employees’ associates (eg. partners & children). However when it comes to Christmas parties, there are two main exemptions that could apply.
- Property benefits: costs associated with parties if provided on a working day on your business premises and consumed by current employees (regardless of cost).
- Minor benefits: if the cost of the party is less than $300 per employee or associate, then the benefit may be exempt from FBT. This exemption does not apply to in-house fringe benefits (property or expense payment).
Where the cost of a benefit is over $300 per employee or associate and does not fall under another exclusion, then providing the benefit will be subject to FBT.
Where benefits that are entertainment are provided to employees, they will be deductible only to the extent that they are subject to FBT. Therefore, where an FBT exemption is used (such as the minor fringe benefit exemption), these costs will not be tax deductible.
See the table for a quick summary:
(1) If under $300/head – possible minor benefit exemption
Determining the FBT and tax consequences of Christmas parties
You can choose one of two methods in determining the FBT and tax consequences of providing a Christmas party – 50/50 or Actual.
Actual method – FBT and tax consequences under this method will depend on whether the function is held on-site and who attends the function.
Christmas party held at employer’s premises:
- Food and drink (including alcohol) are exempt from FBT for current employees with no dollar limit, however no tax deduction or GST credit can be claimed.
- Where associates (ie employees’ families) attend, FBT is payable on that portion of food and drink (except where the cost is less than $300 per person) and a tax deduction and GST credit can be claimed on that portion.
- Where non-employees (ie clients/suppliers) attend the party, there is no FBT and no tax deduction or GST credit to claim.
Christmas party held at external venue, ie at a restaurant:
- Where food and drink is provided for employees and associates will be subject to FBT and deductible, unless the cost per head is less than $300 which then there will be no FBT, no tax deduction or GST credit to claim.
- Where food and drink is provided to non-employees, FBT will not apply and no tax deduction or GST credit is available.
50/50 method – Under the 50/50 method, 50% of the total expenditure on food and drink provided at the party will be subject to FBT and tax deductible, irrespective of who attends or where the party is held.
There is neither minor benefit exemption ($300) nor property benefit expense exemption available and employees are not 100% exempt from FBT where parties are held on business premises. Also keep in mind that if this method is used it must also apply to all meal entertainment that is provided to employees and associates throughout the year.
Gifts for Employees
Non-entertainment gifts (such as perfume, gift vouchers, hampers) provided to employees and family members costing less than $300 attract no FBT, however a tax deduction is available. If the cost is greater than $300, then FBT is payable and a tax deduction is allowed.
Entertainment gifts (such as movie, theatre or sporting tickets) given to employees or family members costing less than $300 do not attract FBT and no tax deduction is allowed. If the cost is greater than $300, then FBT is payable and a tax deduction is allowed.
See the table for a quick summary:
(1) If over $300 – FBT payable
Christmas Parties and Gifts for Clients
FBT does not typically apply to Christmas parties and gifts for clients (unless they are an associate of an employee), however a tax deduction may be allowed.
Christmas parties, other entertainment and entertainment gifts provided to clients are not tax deductible.
Gifts that are given to clients that are not classified as entertainment (e.g. movie tickets) but have an enduring benefit (e.g. bottle of scotch, TV), will be tax deductible.
Please contact your local Accru adviser to get the most out of your Christmas budget and ensure the ATO is not your Christmas Grinch!