Tax Rules for Christmas Parties and Gifts

Media Release - Tuesday December 6

I have been to enough race day celebrations to appreciate that fellow racing tragics enjoy a party as much as anyone (arguably a little more..).

Accordingly, it is no stretch to believe (and I can certainly vouch) that racing industry employers often have elaborate and costly XMAS parties for their hard-working employees, employees who often start work at insane hours.

In the spirit of goodwill and the festive season, I am going to share with industry employers what the Income tax, GST and FBT rules are in relation to these XMAS parties and the related gifts, to employees and clients, which are provided.

This is obviously a complex area, so I would like to think that my personal XMAS “gift” to readers is that at least you have these rules in this one article for easy reference. The last section walks through how these rules apply to employees, their family members and clients.

Overview re tax entertainment rules

1.1 Income Tax

Benefits provided to both employees, their families and clients can come in the form of; XMAS parties, providing food and drink (including alcohol), entertainment, gifts (including monetary bonuses).

Tax law operates to deny a deduction for entertainment expenses which are defined as expenses incurred on “food, drink or recreation and accommodation and travel to do with providing that food, drink or recreation.” Recreation is broadly defined to cover “any amusement, sport or similar leisure-time pursuits.”

If the acquisition is an entertainment expense which is denied a deduction (refer above) under the income tax regime, then GST paid cannot be claimed back.

Conversely, where the entertainment is provided to employees and the employer is liable to pay FBT on those entertainment expenses then the Tax Act operates to allow an income tax deduction.

As an income tax deduction is allowable in this circumstance, the entertainment expenses will be considered as creditable acquisitions and therefore the GST can be claimed back.

An employer is liable for FBT on the taxable value of benefit provided to their employees and associates.

Note - an “associate” is a relative of the employee and is not limited to the employee’s immediate family members.

To help payroll administration, fringe benefits that are entertainment by way of food and drink, i.e., a XMAS party, and benefits associated with that entertainment, such as travel and accommodation are excluded from reporting on the employees annual payment summary.

2. Calculating FBT - Meal Entertainment Expenses

The summaries below detail what XMAS related costs are subject to FBT. There are three different methods for calculating the taxable value of meal entertainment.

The FBT Act allows an employer to elect to use either the ‘50:50 Split Method’ or ‘12-week Registration Method’. If an election is not made, the ‘Actual Expense Method’ will apply.

The election applies to all meal entertainment expenses for the year, so getting the election right is key.

2.1 FBT “Minor Benefits” Exemption

Thankfully, the provision of XMAS parties and gifts often attracts this exemption.

A minor benefit is one that is less than $300. If the benefit provided meets the threshold, it is an exempt benefit

The $300 threshold applies to each benefit and it not cumulative

FBT law sets out the factors to be considered in deciding whether it is unreasonable to treat a minor benefit as a fringe benefit. These include the “infrequency” or “irregularity” of similar benefits being provided.

Per an example in an ATO ruling, a XMAS party for employees that is given every year is not considered to be regular and frequent, so if it less than $300 per attendee, it will meet the exemption requirements for FBT.

How the tax rules apply to staff XMAS functions

If the XMAS party costs less than $300 per head and is provided on-site (i.e., at work), it is:

For employees

Exempt from FBT
No income tax deduction
No GST input tax credit

For employee family members

Exempt from FBT
No income tax deduction
No GST input tax credit

If the XMAS party costs less than $300 per head and is provided off-site (i.e., at a restaurant), it is:

For employees

Exempt from FBT
No income tax deduction
No GST input tax credit

For employee family members

Exempt from FBT
No income tax deduction
No GST input tax credit

If the XMAS party costs more than $300 per head and is provided on-site (i.e., at work), it is:

For employees

Exempt from FBT
No income tax deduction
No GST input tax credit

For employee family members

Subject to FBT
Income tax deduction available
GST input tax credit available

If the XMAS party costs more than $300 per head and is provided off-site (i.e., at a restaurant), it is:

For employees

Subject to FBT
Income tax deduction available
GST input tax credit available

For employee family members

Subject to FBT
Income tax deduction available
GST input tax credit available

How the rules apply to staff XMAS gifts – EMPLOYEES AND FAMILY MEMBERS

If the XMAS gift costs less than $300 per head and is not entertainment (e.g., gift card, hamper, alcohol)

Exempt from FBT
No income tax deduction
No GST input tax credit

If the XMAS gift costs less than $300 per head and is entertainment (e.g., movie ticket, sports ticket)

Exempt from FBT
No income tax deduction
No GST input tax credit

If the XMAS gift costs greater than $300 per head and is not entertainment (e.g., gift card, hamper, alcohol)

Subject to FBT
Income tax deduction available
GST input tax credit available

If the XMAS gift costs greater than $300 per head and is entertainment (e.g., movie ticket, sports ticket)

Subject to FBT
Income tax deduction available
GST input tax credit available

How the rules apply to XMAS functions and gifts – CLIENTS

XMAS function for clients – on-site and off-site

Exempt from FBT
No income tax deduction
No GST input tax credit
However, if employees also attend the same function, it is necessary to apportion the expenses to work out the income tax, and FBT liabilities.

XMAS gifts for clients – if not entertainment (refer definition above)

Income tax deduction available where owner expects gift will generate future business from the client, or make them more inclined to refer others to their business
Can be a form of advertising – e.g., a fancy pen with company logo, bottles of wine from business’ winery, etc.

XMAS gifts for clients – if entertainment

Exempt from FBT
No income tax deduction
No GST input tax credit
However, if employees also attend the same function, it is necessary to apportion the expenses to work out the income tax, and FBT liabilities.

Please don’t hesitate to contact the writer if you wish for me to clarify or expand on any of the matters raised in this article.

PAUL CARRAZZO CA

CARRAZZO CONSULTING PTY LTD