This is a question that we as accountants are typically asked this time of year and unfortunately our response is not always in the affirmative.
With the December/January break fast approaching, many employers and business owners are planning to reward their staff with a Christmas Party and/or provide a gift of some description. Before we delve into the intricacies of the FBT, Income Tax and GST Acts let’s start at the outset saying that in the majority of cases the ATO will disallow tax deductions for entertainment benefits provided to employees unless certain criteria are met.
Now for the intricacies (summarised of course)…
Generally speaking fringe benefits tax (FBT) applies to most forms of “entertainment” style benefits provided by an employer to their employees. There are several methods available to calculate FBT however both typically incur additional tax costs to the employer which can be a unexpected surprise when it comes time to actually registering for FBT and paying the appropriate FBT tax itself (this is obviously in addition to the cost of providing the actual Christmas party and/or gift so can have the potential effect of doubling the cost of providing the benefit in the first place!).Many small business owners rely on an FBT exemption called the Minor Benefit Exemption which allows the employer to avoid paying FBT on benefits provided to employees (and their family/associates) when the cost is less than $300 and the benefit is provided on an infrequent and irregular basis. The ATO accepts that different benefits provided at, or about, the same time (such as a Christmas party and gift) are not added together when applying this less than $300 exemption.
- Income Tax
Income tax deductibility of Christmas parties and employee gifts generally depends on how you choose to treat the same for FBT purposes.If registered for FBT and pay FBT on the actual entertainment and gift expenditure then the ATO allow tax deductions for the expenses. If however the employer relies on the FBT minor benefit exemption (which has the effect of exempting the expense for FBT as discussed above) the trade-off is that the expenditure generally becomes non-deductive from an income tax perspective. Generally because for entertaining expenditure (i.e. the cost of the Christmas party) if exempt from FBT there is not tax deduction for the cost however the cost of the gift, if not entertainment in nature (i.e. Christmas hamper, bottle of wine, flowers, etc.) would still remain tax deductible. If the gift is considered entertainment in nature (i.e. movie tickets, sporting tickets, etc.) then they fall outside what the ATO accept as tax deductible gifts to employees. Clear as mud?!?
The general rule of thumb is if the expenditure qualifies as tax deductible then GST typically is claimable on the expenditure. If however the expenditure is not tax deductible then GST should generally not be claimed on the same.
We understand that these areas of tax law can all be somewhat bewildering, so if you would like a some assistance to work out exactly where you stand this year with your Christmas Party and employee gifts, please contact the team at Aspect Accountants & Advisors where we will be more than happy to work through the particulars with you.