The countdown to Christmas has begun! Decorations are being put up, and Christmas parties are booked in. It’s common for business owners to take staff out for a Christmas lunch or dinner to celebrate another year and/or give a nice Christmas gift.
Unfortunately, the tax man is Hans Gruber in this Christmas Story (if you know you know)!
As an employer, there are a few things you need to be aware of when planning your Christmas party or employees giving gifts.
Holding a Christmas party at a restaurant for lunch and dinner for your staff is considered an ‘entertainment’ expense for fringe benefit tax purposes.
An entertainment expense is only tax deductible to your business to the extent that you are liable for Fringe Benefits Tax (FBT) on entertainment expenses. Your liability for FBT will depend upon which method you choose to calculate FBT on meal entertainment for the FBT year.
What is Fringe Benefits tax you ask? Fringe benefits is a tax levied on employers who provide non-cash employee benefits (and associates). Examples of such benefits include; Cars, Meals Entertainment, Health Insurance, & Loans.
FBT Exemption – Entertainment Expense
Given it’s the festive season, we do have some good news! An FBT exemption applies for entertainment expenses if the party costs less than $300 per employee.
That sounds great, right? But the ATO always finds a way to ruin Christmas. Entertainment expenses are not tax-deductible unless they are subject to FBT. This means that costs incurred in providing a Christmas party are not generally deductible where the $300 per employee minor benefit FBT exemption applies.
If you’re feeling generous and your Christmas function costs more than $300 per employee, it’s a double-edged sword. You can claim the full cost as a tax deduction if you use the actual method, but you must pay FBT on the entertainment expenses.
But all is not lost. John McClane is here to save the day, but only if you are not too generous! Gifts below $300 are a tax-deductible expense provided they are classified as ‘non-entertainment’. The same rule applies to other special occasions, such as birthdays. As long as these gifts are ‘infrequent’, you can claim a tax deduction for less than $300 for employees, and there is no FBT. Gifts of $300 or more will be subject to FBT but will still be deductible.
If your gift-giving extends to your clients and suppliers, the gifts should still be tax deductible with no FBT liability. The $300 limit does not apply.
One of the most important things to note when planning a deductible gift is to ensure the gift meets the ‘non-entertainment’ classification. Gifts like gift vouchers, a bottle of alcohol, hampers, groceries, games, flowers, beauty products and computers all fit the ‘non-entertainment’ classification.
Gifts considered ‘entertainment’ and therefore not deductible include theatre, concerts, movie or sporting event tickets, and holidays.
Tax implications to keep in mind
The GST input tax credits for the cost of the party or gift can only be claimed in the following Business Activity Statement to the extent that the cost of the party or gift is tax deductible.
The FBT and income tax implications of Christmas parties and gifts can change depending on the cost and types of FBT elections made.