The tax and FBT issues associated with holding a Christmas party and/or providing certain gifts to staff and clients/customers at this time of the year are complex.
This article examines the tax implications of holding a Christmas party (on the business premises or off-site) and also providing employees (including working directors) and contractors with Christmas gifts.
An assumption in the examples provided below is that the business has not elected to use either the ‘50-50 split’ or ‘12 week register’ methods for FBT purposes.
CHRISTMAS PARTIES
Christmas parties constitute "entertainment benefits" and to the extent that the expenditure relates to employees or their associates attending the function, the expenses may be subject to fringe benefits tax (FBT) unless an exemption (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 (inclusive of GST) “per benefit”.
Entertainment expenses are not tax deductible unless they are subject to FBT. This means that expenses incurred in providing a Christmas party are not generally deductible where the minor benefit FBT exemption applies.
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Christmas party held on the business premises on a working day
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Scenario
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Tax implications
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Current employees only attend
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No FBT as it is an exempt property benefit regardless of the cost
No tax deduction
No GST credits
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Current employees and their associates attend at a cost of $180 per head to the employer
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For employees – No FBT as it is an exempt property benefit. No tax deduction and no GST credits
For associates – No FBT as the GST inclusive cost is less than $300 per head (minor benefits exemption). No tax deduction and no GST credits
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Current employees, their associates and some clients attend at a cost of $365 per head to the employer
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For employees – No FBT as it is an exempt property benefit. No tax deduction and no GST credits
For associates – FBT applies as the GST inclusive cost per head is more than $300. Claim tax deduction and GST credits
For clients – no FBT, no income tax deduction and no GST credits
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Christmas party held off the business premises
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Scenario
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Tax implications
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Current employees only attend at a cost to the employer of $195 per person
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No FBT as the GST inclusive cost is less than $300 per head (where the minor benefits exemption applies). No tax deduction and no GST credits
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Current employees and their associates attend at a cost to the employer of $195 per person
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No FBT as the GST inclusive cost is less than $300 per head (where the minor benefits exemption applies). No tax deduction and no GST credits
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Current employees, their associates and clients attend at a cost to the employer of $365 per person
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For employees & associates – FBT applies as the GST inclusive cost is more than $300. Claim tax deduction & GST credits
For clients – no FBT, no income tax deduction and no GST credits
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Current employees and their associates attend at a cost to the employer of $195 per person. Employees also provided with a hamper (non-entertainment gift) costing $150 per person *
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Party Costs - No FBT (where the minor benefits exemption applies), no tax deduction and no GST credits
Hamper Costs – No FBT (where the minor benefits exemption applies), claim tax deduction and GST credits
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* Non-entertainment benefits provided to employees at the Christmas party, such as a hamper, are considered separately when applying the $300 minor benefits exemption. Although the total cost per person is more than $300, each benefit should be considered separately under the minor benefits exemption.
Taxi travel to and from the party
Any benefit arising from taxi travel by an employee is exempt from fringe benefits tax FBT if the travel is a ‘single trip’ beginning or ending at the employee's place of work.
Accordingly, where the business pays a taxi fare (including ride-sourcing travel) 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 is also tax-deductible and GST credits can be claimed.
Where the party is held off-premises, 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.
PROVISION OF GIFTS
Generally, it is considered that the best tax outcome for businesses is to give employees non-entertainment type gifts that cost less than $300 (inclusive of GST) per employee as the cost is fully tax deductible, with no FBT payable and GST credits can be claimed. The gifts at Christmas parties are usually exempt from FBT because they are not provided on a frequent or regular basis, and the gift is not provided to the employees wholly or principally as a reward for their services rendered.
Unlike non-entertainment gifts, gifts classified as entertainment, including recreation, are non-deductible and GST credits cannot be claimed. A tax deduction and GST credits can only be claimed on entertainment or recreation gifts where Fringe Benefit Tax applies. This means that while the minor and infrequent exemption could still apply for entertainment and recreation gifts costing less than $300 (GST inclusive), tax deductions and GST credits can only be claimed where FBT applies to entertainment and recreation gifts.
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Type of gift
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Gifts to employees and their family
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Gifts to clients, suppliers, consultants and contractors etc.
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Non-entertainment gifts
Christmas hamper
Bottle of wine or spirits
Gift vouchers
Flowers
Other similar type gifts
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Subject to FBT unless considered a minor benefit
Minor benefit is a gift costing less than $300 (GST inclusive) per person and provided infrequently
Gift GST inclusive cost $250 per person
No FBT, claim tax deduction and GST credits
Gift GST inclusive cost $320 per person
FBT applies, claim tax deduction and GST credits
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No FBT, claim tax deduction and GST credits
No FBT, claim tax deduction and GST credits
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Entertainment gifts
Theatre or musical tickets
Movie Tickets
Tickets to sporting events
Flights and accommodation for holiday
Membership to a club
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Subject to FBT unless considered a minor benefit.
Minor benefit is a gift costing less than $300 (GST inclusive per person and provided infrequently
Gift GST inclusive cost $250 per person
No FBT, no tax deduction and no GST credits
Gift GST inclusive cost $320 per person
FBT applies, claim tax deduction and GST credits
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No FBT, no tax deduction and no GST credits
No FBT, no tax deduction and no GST credits
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Note: Where reference is made above to claiming GST credits, this is only where GST has been included in the cost incurred.
Specifically, note that purchasing gift vouchers does not generally attract GST, so there may be no credits to claim.
Which type of gifts provide the best tax outcome?
Generally, it is considered that the best tax outcome for your business is to give staff non-entertainment type gifts that cost less than $300 inclusive of GST per staff member, or client/contractor as the cost is fully tax deductible, with no FBT payable and GST credits can be claimed.
Saving on employee on-costs
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.
