The Christmas season is underway and a lot of you have booked babysitters months in advance so you can take your staff and business ‘village’ out to celebrate the year that was. Cheers, well deserved!
So what about the tax situation for Christmas parties? Fringe Benefits Tax (FBT) can arise on staff benefits such as these. FBT is a huge topic as every benefit provided to your staff generally constitutes a fringe benefit of some sort.
Very roughly speaking, if the cost of the staff benefit you provide is classified as a fringe benefit, then whatever you spend on the benefit, you’ll pay almost the same amount in FBT to the ATO! There are however some exclusions and exemptions that mean certain benefits like salary and laptops do not attract the extra tax liability – I’ll cover these in articles over the next few months. For now, let’s look specifically at the Christmas parties you are going to provide to your employees and associates (including spouses and children).
Beware these two FBT myths
Firstly, let me remind you of two important points that are often overlooked when we become obsessed with avoiding an FBT liability.
Myth 1: Christmas parties are always tax deductible
The ATO says: The cost of providing a Christmas party is income tax deductible only to the extent that it is subject to FBT. Therefore, any costs that are exempt from FBT cannot be claimed as an income tax deduction.
- If your party comes under the definition of an EXEMPT benefit as explained below, no FBT liability arises and therefore NO TAX DEDUCTION is allowed! The cost of the party will be added back by your accountant for tax purposes. Generally, this is still a more favourable position ‘cashflow wise’ even though you forego the tax deduction.
- If your party is not exempt, you’d claim the full cost of the party as a tax deduction and you’d also get a tax deduction for the FBT you pay because of providing the benefit.
Myth 2: Client entertainment costs are always tax deductible
The ATO says: The costs of entertaining clients are not subject to FBT and are not income tax deductible.
- My clients commonly assume that if they take your clients our for lunch or a drink, or invite them to an event, it’s a normal business expense and deductible for tax purposes – Be careful, this is not the case!
Three main exemptions from FBT for Christmas parties
If you are a regular tax paying business and do not use the 50-50 split method for meal entertainment, there are three main areas that could exempt your business from any FBT implications arising from a Christmas party, as follows:
- Exemption for staff event on business premises
The ATO says: The costs (such as food and drink) associated with Christmas parties are exempt from FBT if they are provided on a working day on your business premises and consumed by current employees.
So if you have your staff Christmas Party at your business premises on a working day – then there is no FBT payable, but no tax deduction for the expense either. Note this exemption only applies for employees, not associates.
- Exemption for parties costing under $300pp
The ATO says: The provision of a Christmas party to an employee may be a minor benefit and exempt if the cost of the party is less than $300 per employee and certain conditions are met. The benefit provided to an associate of the employee may also be a minor benefit and exempt if the cost of the party for each associate of an employee is less than $300.The threshold of less than $300 applies to each benefit provided, not to the total value of all associated benefits.
Make sure the cost of the party is under $300 per person. Generally, if you are only hosting a couple of parties each year, you would fall under the ‘minor and infrequent’ benefit definition and, as long as the cost per head is under $300, there’s no FBT implication but no tax deduction for the expense either.
- Exemption for employee gifts under $300pp
The ATO says: The provision of a gift to an employee at Christmas time may be a minor benefit that is an exempt benefit where the value of the gift is less than $300.
Make sure the cost of the gift is $300 per person. Again, if you are only giving a couple of gifts each year, you would fall under the ‘minor and infrequent’ benefit definition and, as long as the cost per gift is under $300, there is no FBT implication but no tax deduction for the expense either.
FBT – a tricky but important area
Overall, FBT is a tricky area, and has SO many different topics within it. If you are providing any kind of benefit to your employees and you aren’t sure how to classify it, or whether it will attract FBT, send me an email or talk to your accountant.
It’s really important to understand your FBT obligations and prepare for them – the FBT year ends 31 March each year, and generally payment of your FBT liability is due around the end of May (same time as your normal end of year tax liability) – a surprise double-whammy is never a good thing!!
Best wishes for a very Happy Christmas with your family and friends.