Are Christmas gifts & parties tax deductible?
The holiday season is almost upon us and for many businesses that means it’s time to start sending Christmas gifts to their clients and organising Christmas parties and 'thank you' lunches or dinners with their employees. It’s important to be aware of the tax implications of any gifts and celebrations you provide, as the rules can be quite complex.
Tax friendly Christmas gifts
Christmas gifts are treated differently when it comes to Fringe Benefits Tax (FBT). The gifts may attract FBT, but there are some things to consider:
- Who you are giving to?
There are different rules for employees and clients.
- Which type of gifts are you giving?
A wireless headphones or a bottle of wine, there's a big difference when if comes to FBT.
Christmas gifts to clients
Under Australian Tax Office (ATO) rules, gifts given to a current or former client may be deductible at tax time if they are offered with the intention of generating future assessable income. However, it is important to seek advice from your Tax Accountant before deciding to purchase client gifts this Christmas as not all gifts are tax deductible.
Christmas gifts to employees
The provision of a gift to an employee at Christmas time may be a minor benefit that is an exempt benefit where the value of the gift is less than $300. Where a Christmas gift is provided to an employee at a Christmas party that is also provided by the employer, the benefits are associated benefits, but each benefit needs to be considered separately to determine if they are less than $300 in value. If both the Christmas party and the gift are less than $300 in value and the other conditions of a minor benefit are met, they will both be exempt from FBT (unless using the 50/50 split method noted below).
It is also essential that the present is not considered entertainment. For example, non-entertainment gift could be a bottle of wine, a hamper, a gift basket, department store vouchers or gift cards, beauty products, flowers, etc.
FBT-friendly Christmas parties
How to ensure your company's Christmas party is tax deductible? If you plan to hold a work Christmas party for employees or clients, you will need to follow the rules if you want to avoid paying FBT. There's a few things to consider:
- Who are your guests?
There are different rules for employees and clients.
- Is event held on your business premises or off-site?
Events held on business premises on a normal work day are treated differently to an event outside of work.
- How much it costs?
Some costs are exempt from FBT if they are provided on a working day on your business premises and consumed by current employees.
The cost of food and drinks consumed by CLIENTS
The costs of entertaining clients are not subject to FBT and are not income tax deductible.
The cost of food and drinks consumed by EMPLOYEES
To be free of FBT, the cost of food and drink consumed by current employees and family at the event must be less than $300 per head. However, there is no tax deduction or GST input credit claimable.
A Christmas ON-SITE party
If the cost of the on site party is over $300 (GST inclusive) per head, there is still no FBT payable for employees and clients.
A party OUTSIDE of the business premises
Once you head off to an event venue, there is still no FBT payable if the costs remain under $300 per head, as this is also considered a minor benefit. Once the per head cost rises over the $300 threshold, FBT is payable for employees and any family members, but not for clients attending. If however you use the 50/50 split method the rules are different.
Our FBT Smart list details the steps to take when providing benefits to employees.
Tip 1: Determine if any exemption applies.
The common exemptions that may apply to a Christmas party are the minor and infrequent benefits exemption and also whether the food or drink is consumed on the employer’s premises.
Tip 2: If no exemptions apply what can you do to reduce the amount of FBT payable.
The options include asking employees to contribute to entertainment so long as the value of the fringe benefit provided reduces by the amount that an employee contributes. The other option is to provide a cash bonus to the employee to spend on the Christmas party. As cash is not fringe benefit the employer will not pay FBT on the bonus, it is the employee who pays the tax on the bonus at their marginal rate through their PAYG Withholding system.
Tip 3: Understand the tax implications of Fringe Benefit Expenses.
As a general rule if the FBT is payable on the benefits provided for the expense it will be tax deductible and the GST credits are allowed to be claim. We note if applying the 50/50 method to value your entertainment benefits only 50% of the expenses will be tax deductible and only 50% of
the GST credit will be able to be claimed.
If no FBT applies to Christmas party expenses due to one of the above exemptions being applied the expense will not be tax deductible and no GST credits will be allowed to be claimed.
Tip 4: Substantiation and record keeping requirements.
In order to correctly calculate FBT on entertainment provided, the employer must retain proper records and ensure these expenses are properly categorised when processing the financial accounts.
There is still a bit of time to plan your end-of-year gifts and celebrations. If you would like to find out more about tax deductions or your FBT reporting requirements, get in touch.
Have you noticed our #FridayExpertTips... here's one that relates to #Taxation
"Do you know the Tax Deductions and offsets for which you might be eligible this Financial Year? They change every year so check with your Tax Advisor!"