As the festive season approaches and employers prepare for the traditional end of year celebration, benefits such as meals, gifts and entertainment may be provided to staff.
The provision of such benefits may have fringe benefit tax (FBT) and income tax implications. The Australian Tax rules associated with entertainment are ridiculously complex so it is important that you always seek your own tax advice.
This article considers the tax & FBT implications as they apply to benefits commonly provided to employees and their associates (eg. spouses) during the festive season.
The benefits which are most commonly provided by employers to staff (and/or their associates) at Christmas time are likely to include:
- meal entertainment – meals and alcohol provided at a function with the possibility of ancillary entertainment (whether on or away from the employer’s premises)
- the provision of a function venue
- gifts (eg. hampers or alcohol), and
- travel and taxi fares (eg. to and from the function venue)
Christmas-time entertainment up to the value of $300 for each employee is generally exempt from FBT. So throwing a party where the cost per head is less than $300 should escape the tax. This should also be the case where an employee’s spouse attends the function.
The Tax Office has stated that there are no different FBT rules that apply to Christmas entertainment, and says that they are part of the general FBT rules and come under the ‘minor benefits’ umbrella. This allows a $300 limit to ‘incidental’ benefits (that are not provided regularly) to be FBT-free.
There is a tweak to how the rule is applied, as the minor benefits threshold of $300 applies to each benefit provided, not to a total value of ‘associated benefits’, which used to be the case. So if, as a generous employer, you also give a gift to everyone, the party and the gift are considered separately for FBT. If each is less than $300, they are both generally FBT free so long as the gift is not given at the Christmas party (ridiculous I know). The gift will also be tax deductible provided it is not considered entertainment (such as tickets to a theatre, sporting event or other recreational activity).
Note however, there are three different ways in which entertainment may be treated for FBT purposes; two of these alternatives are the ’50/50 split method’ and the ’12 week register method’. Where either of these two methods are adopted, the treatment of Christmas party expenditure will be different to what is described above in that all entertainment will be pooled in applying the chosen method. It is therefore recommended that you seek advice from your accountant as to the most tax effective method for your business’s circumstances.
Exemption Negates Deduction
If an employee benefit is exempt from FBT, the business cannot claim it as an income tax deduction, nor can it claim any GST credits arising from these ‘supplies’. In other words, the only way to claim entertainment as a tax deduction is for it to be subject to FBT.
If you want to spend more than $300 per employee, the safest option would be to hold the Christmas party on the business premises on a working day, as providing the food and drinks will be FBT free, if it’s only employees who attend.
If spouses or partners are invited the cost will still be FBT free if less than $300, and if bona fide clients attend there is no FBT anyway. If the party is held off-premises, at say a restaurant or pub, the $300 limit applies to both employees and associates, subject to the application of the 50/50 split or 12 week register methods referred to above.
What about Taxis?
For an employer thinking of paying for this travel option for staff, the important consideration in regard to this will be the venue.
If the taxi travel is from home to an entertainment venue (that is not the workplace) and home again, the Tax Office says that this is all part of the fun and that the fare has to be included in the cost-per-head limit, with the total cost being under the $300 minor benefit threshold to escape being taxed. But if the cab drives from home to a function held at the workplace, and/or from the workplace back to home after the festivities, the taxi fare is exempt from FBT.
Dividing the party purse into two events can reduce the value of the entertainment each employee enjoys below the minor benefits limit of $300, and keeps the FBT liability of an employer to a happy minimum. It should be remembered however that to be a minor benefit it is necessary that the particular benefit (or similar benefits) be provided irregularly and infrequently.
The above advice is general in nature and should not to be taken as specific tax advice for you or your business. You should contact your accountant if you require additional information or clarification on any issues or rules.