It’s that time of year again, when we open our hearts (and our wallets) to celebrate the year that’s been. Generosity with clients and employees abounds as we say thank you with gifts and parties – but tax rules abound, so beware the ‘FBT hangover’. Taxation Consulting expert Kim Reynolds gives us a whirlwind tour of the tax implications of your festivities.
Let’s look at the possible fringe benefits tax (FBT) and income tax implications that can arise from providing ‘entertainment’ to staff and clients, in particular, regarding Christmas parties and gifts including:
· How the $300 minor benefit exemption works
· How to value meal entertainment benefits – 50/50 split method and the actual method
Christmas Parties
Minor and infrequent benefits
Several years ago, the Australian Taxation Office (ATO) increased the minor benefit exemption from $100 per employee to $300 per person. This is great news for small businesses, which typically pause to celebrate with their employees during the festive season.
In practice, this exemption allows for an FBT exemption to be claimed for benefits provided, where each benefit (on a benefit by benefit basis) is less than $300 (including GST), regardless of whether it is provided to an employee or an employee’s associate (i.e. spouse or family member), provided that the benefit is made on an infrequent and irregular basis.
For example, a business hosts a family friendly Christmas party and encourages employees to bring spouses and children. The cost of the party is $220 per head. In addition to this, the employer also provides each employee with a gourmet food and wine Christmas hamper valued at $165 each. Under the minor & infrequent benefit exemption, the costs of the Christmas party can be exempt from FBT, as they are under $300 per person. The provision of the hamper is considered separately to the provision of the Christmas party and is also considered exempt.
It should be noted that where this exemption applies, no income tax deduction will be available for the expenditure.
Meal entertainment - 50/50 split method
Businesses may elect to simplify their FBT paperwork, by nominating to pay FBT on 50% of all meal entertainment benefits provided in an FBT year, regardless of who it is provided to (employee, associate, client etc).
Under the 50/50 split method, where Christmas parties include food and drink, 50% of this cost will be subject to FBT and 50% will be deductible/claimable for income tax and GST purposes, regardless of where is it provided and to whom it is provided. Taxi travel to and from the event will also be considered to be meal entertainment and will be treated the same way.
Exemptions such as the exempt property benefit and the minor benefit exemption are not available for meal entertainment when being valued under the 50/50 method.
Meal entertainment – actual method
The actual method applies where an employer has not made an election to value their meal entertainment expenditure for FBT purposes under either the 50/50 split method or the 12 week register method. As the name suggests, this method relies on a determination of actual expenses incurred.
Under the actual method, FBT is generally only payable on that portion of the meal entertainment provided to employees and their associates.
To calculate how much meal entertainment relates to employees and associates, the employer can use the exact cost attributable to each person or, where it is difficult to make an exact allocation, a “per head’ apportionment.
Recreation expenditure / exclusive use of premises
Where an employer hires a band or other form of entertainer for a Christmas party, this expenditure is “recreation expenditure” and is generally dealt with based on actual expenditure.
Property benefits
Another FBT exemption that is often made use of during the festive season is that of the exempt property benefit. This applies to Christmas parties held on a business premises, on a working day and attended by employees and clients. Where employees’ associates attend the event, the benefit provided to the associate may be taxable where it is not excluded under another exemption, such as the minor benefit exemption referred to above.
Christmas Gifts
Gifts, including gift vouchers and hampers with food and drink, where the food and drink are unopened and are designed for consumption at a later date, are generally not considered to be “entertainment”. While still considered for FBT purposes and subject to FBT (unless an exemption such as the minor and infrequent exemption applies), such gift items are considered for income tax and GST purposes under normal deductibility rules.
However, gifts such as movie/theatre tickets or sporting events are considered to be entertainment. The income tax and GST implications of giving these gifts will therefore be determined by the FBT treatment of the gift. That is, where the gift is made to an employee or their associate, FBT will be payable and an income tax deduction allowed (except where the minor benefit exemption applies). However, where the gift is for a client, no FBT applies and no income tax deduction will be available.
Interaction between FBT, income tax and GST
The interaction between FBT, GST and income tax can be confusing. In simplest terms, where a benefit is classed as ‘entertainment’ (which can include entertainment by way of food, drink or recreation and accommodation or travel to do with providing entertainment by way of food, drink or recreation) an income tax deduction and GST credit can only be claimed when the benefit has been subject to FBT.
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