The application of fringe benefits tax (FBT) means that it’s more tax effective to provide staff (including working directors) with non-entertainment gifts (see below) at Christmas rather than hosting a party. This is because such gifts are both tax deductible and FBT free.
This article examines in detail some of the most common benefits provided at Christmas and outlines the various income tax, GST and FBT implications for employers who do not elect to use the 50-50 split method or the 12 week register method.
If an employer, alternatively, elects to use either the 50–50 split method or the 12 week register method for calculating the taxable value of meal entertainment expenditure, the employer would not obtain the benefit of the relevant exemptions outlined in this article (e.g. the $300 minor benefits and business premises exemptions do not apply).
CHRISTMAS PARTIES
Christmas parties constitute “entertainment benefits” and as such are subject to FBT to the extent the expenditure relates to employees attending a Christmas function unless the benefit is exempt, e.g. the “minor benefits” exemption apples. A minor benefit is one that is provided to an employee or their associate (e.g. spouse) on an “infrequent” or “irregular” basis, is not a reward for services, and the cost is less than $300 “per benefit” inclusive of GST.
(i) On-site Christmas party
Holding the Christmas party on the business premises on a working day is usually the most tax effective. Expenses such as food and drink (including alcohol), are exempt from FBT for employees with no dollar limit, but no tax deduction or GST credit can be claimed. However, where employees’ families (i.e. associates) also attend and the cost attributable to each associate is $300 or more inclusive of GST, there is FBT on the associate’s portion of food and drink, and a tax deduction and GST credit can be claimed on that portion. The cost of clients attending the party are not subject to FBT, but no income tax deduction or GST credit can be claimed on their portion of the cost.
Where the Christmas party is held on the business premises on a working day with only employees and clients attending, and only finger food or a light meal and no alcohol is provided, then the entire cost is tax deductible. There is no FBT and a GST credit can be claimed on the entire cost.
(ii) Off-site Christmas party
Christmas parties held off the business premises are exempt from FBT where the cost for the employee and their associate is each less than $300 inclusive of GST but no tax deduction or GST credit can be claimed. The cost of clients attending the party is not subject to FBT, and no tax deduction or GST credit can be claimed on their portion of the cost.
Certain benefits provided to employees at the Christmas function are considered separately when applying the $300 minor benefits exemption. For example, a Christmas party is held at a restaurant costing $220 per head, and at the same time employees are provided with a Christmas hamper (considered a non-entertainment gift), costing $150. Although the total cost per head is more than $300, the provision of both benefits will usually be exempt from FBT under the minor benefits exemption.
For the Christmas party expenses, the business will not be entitled to claim either a tax deduction or a GST credit. However, a tax deduction and GST credit claim should be available on the cost of the hamper as this is not considered to be providing “entertainment”.
Bringing the family along
Employees can make the Christmas party a family affair. Not only will it be a more inclusive experience, the ATO says the $300 minor benefits threshold applies per-attendee, not per-employee, which potentially means more FBT-free benefits.
Taxi travel to and from the party
Where the employer pays for an employee’s taxi travel home from the Christmas party, and the party is held on the business premises, no FBT will apply as the entertainment occurred on business premises. The cost of the taxi fare will be tax-deductible as a minor benefit.
Where the party is held off-site, taxi travel to or from the Christmas function is part of the meal entertainment benefit. In such circumstances the taxi travel cannot be viewed separately, and must be added to the cost per employee of the Christmas function to determine whether the $300 taxable value has been exceeded under the minor benefits exemption for the employee or a relative.
GIFTS
(i) Non-entertainment gifts
As noted above, non-entertainment gifts provided to employees are usually exempt from FBT where the total value is less than $300 inclusive of GST. A tax deduction and GST credit can also be claimed. These include skincare & beauty products, flowers, wine, perfumes, gift vouchers and hampers.
Given that the cost of hosting a Christmas party is not tax deductible (where the $300.00 minor benefit exemption applies) and that occasional gifts under $300 per head are tax deductible and FBT free, for a given dollar spend per employee, it would be more tax-effective for the business to choose tax deductible gifts less than $300 that are not subject to FBT rather to spend the money on a Christmas party costing less than $300 per head which is not tax deductible.
There is an interesting twist with providing staff occasional gifts of, say, beer or wine which is not consumed at the workplace or at a work social gathering. In this situation, if the employee consumes the alcohol at home, the cost is tax deductible and exempt up to the $300.00 limit.
Non-entertainment gifts given to clients and suppliers do not fall within the FBT rules as they are not provided to employees. Generally a tax deduction and GST credit can be claimed for these gifts provided they are not excessive or overly valuable.
(ii) Entertainment gifts
The provision of entertainment gifts has different tax implications (examples include theatre tickets, passes to attend a musical, live play, movie, tickets to a sporting event or providing a holiday). Where the cost for the employee and their associate is each less than $300 GST inclusive, FBT is not payable, and no tax deduction or GST credit can be claimed.
However, if the cost for the employee and their associate of an entertainment gift is each $300.00 or more GST inclusive, a tax deduction and GST credit can be claimed, but FBT is payable. The cost of any entertainment gifts provided to clients is not subject to FBT, and no tax deduction or GST credit can be claimed.
It is important that businesses maintain separate accounts in the general ledger for recording the above transactions to ensure that the correct income tax, GST and FBT treatment is applied.
Reporting Benefits on Employees PAYG Payment Summaries
Where the taxable value of certain fringe benefits provided to employees or their associates exceeds $2,000 in an FBT year (1 April to 31 March), employers must record the grossed-up taxable value of those benefits on employees PAYG payment summaries.
Note that entertainment in the form of food and drink, including benefits associated with that entertainment, such as travel and accommodation is exempt from this reporting requirement even if the minor benefits exemption does not apply (e.g. the cost of a Christmas party held off the business premises is $300.00 or more per employee).
Employee On-costs
Benefits that are exempt from fringe benefits tax are not regarded as taxable wages for payroll tax, superannuation guarantee, and workers compensation purposes which results in a saving of these employee on-costs.
