Thanking staff and clients with a gift is common for Christmas and birthdays. What is allowable and tax-deductible and when does FBT apply?
Here is where the difficulty begins!
Tax Determination TD 2016/14 says –
Yes, a taxpayer who carries on a business is entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for an outgoing incurred on a gift made to a former or current client if the gift is characterised as being made for the purpose of producing future assessable income.
Non-Tax-deductible gifts are NOT allowable deductions generally include tickets to attending a theatre, play, sporting event, movie or the like. Holidays and accommodation or admission tickets to an amusement centre are also not allowable. (All entertainment types).
Entertainment expenses are not deductible except in very limited circumstances. This prohibition extends to entertainment in the form of food, drink or recreation. Refer to section 32-5 Income Tax Assessment Act 1997.
Further entertainment expenses by way of food, drink or recreation may be deductible to the extent that these entertainment expenses are incurred in providing a fringe benefit. Refer to section 32-20 Income Tax Assessment Act 1997.
Christmas parties constitute “entertainment benefits” and as such are subject to fringe benefits tax (FBT) to the extent that the expenditure relates to employees or their associates attending the function. Entertainment expenses are not tax deductible, unless the benefit is considered exempt (e.g the “minor benefits” exemption applies). A minor benefit is one that is provided to an employee or their associate (e.g spouse) on an “infrequent” or “irregular” basis, which is not a reward for services and at a cost less than $300 “per benefit” inclusive of GST.
(i) On-site Christmas Party
If you decide to host a Christmas party, holding it on a working day on your business premises is usually more tax effective than holding the party off-site. Where a Christmas party is hosted on-site, expenses such as food and drink (including alcohol) for employees are exempt from FBT (with no dollar limit). However, a tax deduction or GST credit cannot be claimed by the business.
If an employee’s spouse or family member (i.e associates) attends the Christmas party and the cost attributable to each associate is $300 or more inclusive of GST, the business will incur FBT on the associate’s portion of the food and drink. Plus a tax deduction or GST credit can also be claimed. The cost of clients attending the party are not subject to FBT, however no 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, the entire cost is tax deductible, as long as no alcohol is provided and only finger food or a light meal is given. In this situation, the business will not incur 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 associates is each less than $300 inclusive of GST.
However, 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 party are considered separately when applying the $300 minor benefits exemption. For example, a Christmas party is held at a restaurant costing $220 per head. At the Christmas party the 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.
Party expenses – the business will NOT be entitled to claim a tax deduction or a GST credit.
Hamper – a tax deduction and GST credit can be claimed 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 additional FBT-free benefits.
Taxi Travel to and from the Party
Where the business pays for an employee to travel to and 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 and from the Christmas party is part of the meal entertainment benefit. In these circumstances, the taxi travel cannot be viewed separately. The travel cost must be added to the cost per employee in determining whether the $300 taxable value has been exceeded under the minor benefits exemption for the employee or a relative.
(i) Give non-entertainment gifts
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 flowers, alcohol, perfume, gift vouchers and hampers.
When providing staff with occasional gifts of, say, beer or wine, which is not consumed at the workplace (ie. non entertainments gifts) or at a work social gathering, the cost is tax deductible and exempt from FBT up to the $300 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) Avoid giving entertainment gifts
The provision of entertainment gifts has different tax implications (examples include theatre tickets, passes to attend a musical, live play or a movie, tickets to a sporting event or giving a holiday). Where the cost for the employee and their associate is less than $300 inclusive of GST each, FBT is not payable and no tax deduction or GST credit can be claimed.
However, if the cost of an entertainment gift given to an employee or their associate is $300 or more inclusive of GST, 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.
Businesses should 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.
Which benefits provide the best tax outcome?
Generally, it is considered that the best tax outcome for your business this Christmas is to give staff non-entertainment type gifts that cost less than $300 inclusive of GST per staff member, as the cost is fully tax deductible, with no FBT payable and GST credits can be claimed.
Benefits that are exempt from FBT 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.
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