With the festive season fast approaching and staff Christmas parties being organised. It is now prudent to start thinking about the Fringe Benefits Tax (FBT) consequences of providing entertainment to employees.
FBT is a tax levied on employers for certain benefits provided to employees (and/or associates of employees – example a spouse) in respect of their employment.
In general a social function provided for employees outside of the office premises of which there is a provision of Food and Beverage, Leisure Activities, Gifts and Rewards are generally subject to FBT.
To determine if you are providing a benefit and what the value of the benefit provided is to the employee the legislation categorises different types of benefits, which includes a category for entertainment for events such as a Christmas party.
The steps to undertake when providing benefits in nature of entertainment such as Christmas party to an employee include:
Step 1: Determine if any exemption applies.
The common exemptions that may apply to a Christmas party are the minor benefits exemption and also whether the food or drink is consumed on the employer’s premises. In order for the minor benefit exemption to apply the expenses must be less than $300 per employee, the benefit must be considered infrequent and irregular, and the benefit is not part of the employee’s reward for their services. The food or drink consumed on the premises exemption applies to food and drink to current employees, on your business premises and on a working day. This exemption does not apply to spouses or family members of employees however the minor exemption may then apply.
Step 2: If no exemptions apply what can you do to reduce the amount FBT payable.
The options include asking employees to contribute to entertainment provided as value of the fringe benefit provided reduces by the amount that an employee contributes in respect of the benefit provided.
The other option is 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.
Step 3: 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 deductible and the GST credits are allowed to be claim. We do note if applying the 50/50 method to value your entertainment benefits only 50% of the expenses will be tax deductable 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.
Step 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.
Documentation of the event is prudent. We would recommend that you ensure you have a record of the date of the Christmas party, who was at the Christmas party and categorise if they are an employee, a spouse or family member of the employee or another person, the cost of the entertainment provided, the kind of entertainment provided and where the entertainment is provided.
If you have any further questions regarding the FBT consequences of providing a Christmas party please contact us or refer to NAT 1054 “FBT – Guide for Employers”.
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