Many people agree Christmas is the most awaited season of the year. Smart business owners have already planned their party months ahead.
What’s more, really smart and experienced business owners plan not only the party but also plan their Christmas Tax ahead of time to eliminate unforeseen tax problems. That way, they know they can enjoy the season even more.
Top 3 Christmas tax planning items
- Christmas parties for employees (and perhaps their family members, and even clients)
- Gifts to employees, their family members and clients.
- Cash bonuses.
Christmas parties and FBT
There is no separate FBT category that relates to Christmas parties. While such social functions may result in FBT, income tax and GST outcomes, these are covered under the existing relevant legislation. The provision of “entertainment” at Christmas, therefore, mirrors the tax treatment such benefits will receive at other times of the year.
The ATO says that “meal entertainment”, and therefore an FBT liability, arises when food or drink is provided in a way that has the character of entertainment. In fact, the ATO holds that in most cases the mere provision of food or drink satisfies the “entertainment” test, but adds that there is a narrow category of cases where the mere provision of food or drink does not amount to entertainment.
For example, it considers that the provision of morning and afternoon tea to employees (and associates of employees) on a working day, either on the employer’s premises or at a worksite of the employer, is not entertainment. The provision of light meals (finger food, etc), for example in the context of providing a working lunch, is also not considered to be entertainment. Note however that providing any alcohol typically brings “entertainment” into the picture.
FBT Implications on work Christmas parties
With a Christmas party, FBT applies to an employer when they provide a benefit to an employee or their associate (for example, family members). Food, drink, entertainment and gifts provided at a Christmas party to employees and their associates may constitute either:
- An expense payment fringe benefit (eg. reimbursing an employee for expenses incurred or paying an expense on their behalf).
- A property fringe benefit (eg. provision of property such as meals or gifts by the employer), and
- A residual fringe benefit (eg. the provision of any right, privilege, service or facility such as the right to use a venue).
Typically, these benefits are valued for FBT purposes at their face value – an “actual basis” of valuation.
However, an employer may choose to apply special valuation rules by using either the 50/50 split method or 12-week register method. Ask us about these two valuation methods and if they are suitable for your business.[hyperlink] If the employer does not make an election, the taxable value is determined according to actual expenditure.
However, “meal entertainment” fringe benefits provided at a Christmas function can be exempt from FBT if it is:
- A “minor benefit” (more below).
- An exempt property benefit (see below) is provided at the employer’s premises on a workday.
FBT minor benefits
A minor benefit is one where it:
- Has a notional taxable value of less than $300 (including GST).
- Is provided on an “infrequent” or “irregular” basis.
- Is not a reward for services, and
- Satisfies other relevant conditions (ask us for details).
Note that other benefits (such as gifts) provided at a Christmas party may be considered as separate minor benefits in addition to meals provided (referred to as an “associated benefit”). In such cases, the $300 threshold generally applies separately to each benefit provided.
Exempt property benefit
A Christmas party held at the employer’s business premises on a working day where food and drink, including alcohol, is provided is generally deemed to be an exempt property benefit and is therefore usually FBT-free. This is no different to the occasional Friday drinks at work.
The law exempts such property benefits where:
- The benefit is provided to a current employee in respect of his or her employment, and
- It is provided to and consumed by, the employee on a working day and on the business premises of the employer.
This exemption applies only to employees. Where members of the employee’s family (‘associates”) also attend a function (such as the Christmas party), the cost attributable to each associate is subject to FBT unless it is a minor benefit.
If clients are invited to the function, the cost of providing the entertainment to these attendees is excluded from the FBT regime as this is not a “fringe benefit” to staff (and may qualify as a tax deduction — see below under “Gifts to clients”).
External Christmas functions
The costs associated with Christmas parties held off business premises (such as food, drink and transport to a restaurant) will give rise to FBT unless these costs are under the minor benefit threshold. Again, FBT will not apply to the extent that the benefit is provided to a client.
As an employer, you may provide your staff with taxi travel or some other form of transport to get to the Christmas function. Taxi travel provided to an employee will generally attract FBT unless the travel is for a trip that either starts or ends at the employee’s place of work.
For taxi travel to or from a Christmas function, employers should note:
- Where the employer pays for an employee’s taxi travel home from the Christmas party and the party is held on the business premises, no FBT will apply.
- Where the party is held off premises and the employer pays for a taxi to the venue and then also pays for the employee to take a taxi home, only the first trip will be FBT exempt. The second trip may be exempt under the minor benefits exemption if the employer has adopted to value its meal entertainment on an actual basis.
- The exemption does not apply to taxi travel provided to “associates” of employees (for example family members).
If other forms of transport are provided to or from the venue, such as bus travel, then such costs will form part of the total meal entertainment expenditure and be subject to FBT. A minor benefits exemption for this benefit may be available if the threshold is not breached.
Christmas gifts to employees
Gifts provided to employees or their associates will typically constitute a property fringe benefit and therefore are subject to FBT unless the minor benefits exemption applies. Gifts, and indeed all benefits associated with the Christmas function, should be considered separately to the Christmas party in light of the minor benefits exemption.
For example, the cost of gifts such as bottles of wine and hampers given at the function should be looked at separately to determine if the minor benefits exemption applies to these benefits. Gifts provided to clients are outside of the FBT rules (but may be deductible, see below — also note that deductibility may still apply even if the gift is a “minor benefit”).
The income tax deductibility and entitlement to input tax credits (ITC) for the cost of the gifts depends on whether they are considered to be “entertainment”. For example, an unopened bottle of spirits is deemed to be a property benefit (the entertainment starts after the cap is removed).
Again, in most cases the entitlement to an ITC for expenses incurred for the employer mirrors the income tax implications — so an ITC is only available to the extent that the expense incurred is deductible.
Examples of “entertainment”:
- glasses of champagne
- hot meals
- theatre tickets
- holiday accommodation
- hired entertainers
- hired sporting equipment.
Examples – not “entertainment”:
- bottled spirits
- TV sets, DVD players
- swimming pools
- gardening equipment
Effect on your tax of Christmas gifts to clients
If your business gives a gift a client, even a former client, the ATO confirms that such outgoings are generally deductible as they are being made for the purposes of producing future assessable income. However, the outgoing is not deductible where it is of a capital nature, relates to the gaining of exempt or non-assessable non-exempt income, or some other provision of the income tax law prevents it from being deductible.
Some generous/successful employers, budget permitting, may choose to provide cash bonuses to staff in their end-of-calendar-year payroll. Bonuses in the form of cash are considered to be a business cost, and therefore deductible under the general deduction provisions