If you run a small or medium business, you may want to give your employees a party (and even a gift) to thank them for their hard work throughout the year.
But if you’re not careful you may have to give the tax man a gift as well.
While it’s a lovely gesture, you need to look out for levies such as Fringe Benefits Tax (FBT), Income Tax and GST. There’s no separate FBT category for Christmas parties, and you may encounter many different circumstances you may encounter when providing these events for your staff.
Benefits may attract FBT when you provide them:
- to an employee
- to an associate of an employee (i.e. their spouse and/or children)
- to past and future employees (and their associates)
- under an arrangement with a third party to any current employees.
Here’s what you need to consider when it comes to throwing Christmas parties and providing gifts.
Implications for your organisation
Unless your business is tax exempt (in which case you should look at information regarding tax-exempt body entertainment fringe benefits), your Christmas party may have FBT implications. Here’s a guide to help you determine if that’s the case.
Exempt Property Benefits (EPB)
Costs (such as food and drinks) associated with a Christmas party are exempt from FBT if they are:
- held on the business premise or worksite during work hours
- provided to current employees.
If an employee’s associate attends the party, and it’s not otherwise exempt under the minor benefits exemption (MBE), the costs will be a taxable fringe benefit.
What is the Minor Benefits Exemption (MBE)?
The ‘magic number’ (as outlined in the MBE rules) is $300. If each benefit provided is less than this amount it would be FBT exempt providing it:
- was paid to an employee (or associate)
- is ‘infrequent’ and ‘irregular’
- isn’t in connection with a service the individual has provided
Important note: If you use the 50/50 split method for meal entertainment, the meals will be subject to FBT regardless of the amount.
On-premise vs off-premise
You can only claim the costs associated with providing a Christmas party as a tax deduction that are subject to FBT. You can’t claim any costs that are exempt from FBT (under EPB or MBE).
If you have a Christmas party for current employees on your business premises or worksite on a working day, it may well be exempt. However, the cost of associates attending the Christmas party won’t be.
If you have your Christmas parties somewhere other than your business premises (e.g. a restaurant), the associated costs will result in a taxable fringe benefit for employees and their associates (unless the benefits are MBE).
What about gifts?
You need to consider the gifts and benefits you provide to your employee separately to the function itself.
‘Non-entertainment gifts’ (e.g. gift vouchers or a bottles of whiskey that are relatively inexpensive and consumed by the employee in their own time( aren’t considered entertainment and can be treated as an allowable deduction provided they meet the MBE.
But a concert and dinner package at the wineries, a trip to Vanuatu or anything else that “involves a provision of entertainment” isn’t deductible, and will be subject to FBT if the MBE doesn’t apply.
You also need to consider the type of gift you’re giving. If it’s cash, your gift could be treated the same as salary and wages, which may lead to PAYG and superannuation obligations.
For that reason you may prefer your gifts to be non-cash payments, especially if they attracts the “otherwise deductible’ rule.
If your gift is considered an ‘expense payment’, ‘loan’, ‘property’ or ‘residual fringe benefit’, its taxable value would be reduced by the same amount the employee would be entitled to claim in their income tax return. For example, your gift might be:
- self-education expenses
- reimbursement of their phone bill for work purposes
- an Apple watch
- a mobile phone (providing they need it for their job).
The rules regarding FBT can get extremely complex at times, and it’s worth talking to a business accounting specialist before you start making any major purchases. So get in touch with us today so you can enjoy your office Christmas party without having to worry about the tax man.