The ATO has announced its annual warning to employers planning their staff Christmas parties and FBT tax implications. Hosting these events are a Fringe Benefits Tax (FBT) minefield. The warnings are timely as we head into the Christmas party season and many small businesses shout their staff to celebrate the year that was.
This article explores the tax consequences of Christmas for your business including entertainment and gifts for your employees, customers and suppliers alike.
What happens if I hold a Christmas party for my employees?
If you organise a Christmas function for your staff somewhere not your workplace, the cost of providing the party would normally be treated as a fringe benefit, with fringe benefits tax (FBT) payable by the employer. However, provided the cost per employee is less than $300, no FBT will be due. This is because of the “minor benefits exemption”. This exemption also applies if spouses or partners come along to the party.
The minor benefits exemption applies to each benefit provided. What that means in practice is that if you’re feeling generous and spend $290 per head on the party and then give a gift to each employee valued at a further $250, then both expenses are free of FBT. However if you spend more than $300 per head on the party, the whole lot will be subject to FBT, not just the excess.
The costs (such as food and drink) of a Christmas party are exempt from FBT if they are provided on a working day on your business premises and consumed by current employees. If spouses or other guests of employees are entitled to attend, there could be an FBT liability unless the cost is covered by the minor benefits exemption mentioned above.
Employers must keep all records for the entertainment-related benefits you provide, including records of how you calculated the taxable value of the benefits. In particular, you should keep records showing:
- the amount spent on each employee
- when and where the celebration is held
- who attends – is it just employees or are partners, clients or suppliers also invited?
- the value and type of gifts provided.
If your business also covers the cost of taxi fares to and from the festivities, these costs will count as part of the $300 per head limit if the function is off-site but will be exempt from FBT if the party is at your premises. The bad news is that if the cost of your Christmas party is exempt from FBT, it isn’t tax deductible for income tax purposes. Nor can the business claim GST credits for the costs incurred.
Confusingly, even though gifts to employees are also covered by the FBT exemption, they generally are tax deductible and a GST credit can be claimed.
None of this generally impacts the employee’s own tax position. They can enjoy themselves knowing that the tax consequences usually fall to the employer.
What if I invite my clients and suppliers?
If you hold an event for clients and suppliers, there is no FBT (which is only relevant where a benefit is provided to employees and their associates) but the costs aren’t income tax deductible. This is because the provision of entertainment isn’t tax deductible.
If you give gifts to clients and suppliers, you can generally claim a tax deduction for the cost of those gifts where the gift is given with a view to generating future income in the business. So, if you give a festive gift of a decent bottle of alcohol to your best customer, with a view to building goodwill which leads to more sales next year, the cost is tax deductible.
Your business can’t claim a deduction for gifts of capital items, such as a piece of technology (a tablet computer for instance) nor can you claim a deduction if the gift is for private purposes.
The difference between a gift such as a bottle of wine and the provision of entertainment, such as taking the client to a bar and consuming it in the bar) can be grey, particularly where the gift is, for example a voucher for a meal in a restaurant or a theatre show. Talk to your Arabon accountant if you’re not sure whether you’re giving a gift or providing entertainment.
As you can see, Christmas can be a tax headache for small businesses if you’re not careful and educated about FBT. Follow the advice above and you should be able to avoid an unwelcome Christmas tax bill but remember the information above is general in nature so if you’d like specific advice, contact your Arabon accountant to discuss or follow this link to the ATO website.