Claiming the office Christmas party and staff gifts on tax.
With the festive season fast approaching, business owners will be turning their mind to year-end celebrations with both employees and clients.
Knowing the rules around Fringe Benefits Tax (FBT), GST credits and what is or isn’t tax deductible can help keep tax costs to a minimum. Holiday celebrations generally take the form of Christmas parties and/or gift giving.
Parties
Where a party is held during a working day, on business premises, attended by current employees only and costs less than $300 a head (GST-inclusive), FBT does not apply. However, the cost of the function will not be tax deductible and GST credits cannot be claimed.
Where the function is held off business premises, such as at a restaurant, or is attended by employees’ partners, FBT applies where the GST-inclusive cost per head comes to $300 or more. In those cases, the costs are tax deductible and GST credits are available.
However, FBT will not apply where the per person cost is below the $300 threshold if it can reasonably be regarded as an exempt minor benefit — that is, a benefit provided only irregularly and infrequently. Where FBT does not apply due to the minor benefit rule, the cost is not deductible and no GST credits are available.
Where clients also attend, FBT will not apply to the cost attributable to them, but those costs will not be tax deductible and GST credits will not be available. If there is a mix of attendees, you may need to keep track of who participated in the function.
Gifts
First, you need to work out whether the gift is entertainment — for example, movie or theatre tickets, admission to sporting events, holiday travel, or accommodation vouchers.
Where an entertainment gift is provided to an employee (or their associate) and the GST-inclusive cost is below $300, the minor benefit exemption should apply, meaning FBT is not payable. In this case, the cost is not tax deductible and GST credits cannot be claimed. For entertainment gifts costing $300 or more, FBT applies and the cost is deductible with GST credits claimable.
Where the gift is not entertainment and it falls below $300 — such as Christmas hampers, alcohol, pen sets, or gift vouchers — the minor benefit exemption should apply. Because these items are not entertainment, the cost is deductible and GST credits are claimable.
Where a gift is made to a client, the $300 FBT minor benefit exemption does not apply, but as long as the gift is not entertainment and is provided in the reasonable expectation of generating goodwill or future business, it should be deductible to the business. GST credits are also claimable, with no strict dollar limit (within reason).
The best approach for employees
Provided parties aren’t regular events, taking employees out for Christmas lunch generally avoids FBT, as long as the cost stays below $300 per head. While the cost is not deductible and no GST credits can be claimed, this usually has a far smaller cash-flow impact than paying grossed-up FBT.
For employees and their associates, non-entertainment gifts under $300 are ideal. A non-entertainment gift costing up to $299 is a tax-effective way to show appreciation. Since the $300 cap applies separately to each benefit, you could also provide a separate $299 gift to an employee’s partner, effectively doubling the cap.
Where a non-entertainment gift under $299 is exempt from FBT, the business receives a tax deduction and GST credits — the best of both worlds.
The best approach for clients
While FBT does not apply to clients, giving a non-entertainment gift (deductible with no strict dollar limit) is usually more tax-effective than entertaining clients at restaurants, which is non-deductible entertainment. A thoughtful gift, especially one delivered personally, may have more impact than a shared meal during a busy holiday season.
Need taxation advice?
If you’re not sure and you need help sorting out the tax treatment of your upcoming holiday celebrations and gifting, don’t hesitate to give us a call.
For practical and professional guidance across accounting, taxation, business advisory and financial planning, contact Stratogen Accounting. Based in Noosa, our experienced team of accountants and business advisors support clients throughout the Sunshine Coast and Australia-wide. From tax compliance and bookkeeping to strategic planning, risk management and long-term wealth creation, Stratogen is here to strengthen your financial position and support your success.