Christmas Party Tax Rules

Contributed by Ed Carr, CCH senior tax writer

The festive season looms and we look forward to some good cheer, compliments of the boss. But as you enjoy the fare at the office Christmas party, spare a thought for your finance people who must work out how

the tax rules apply.

If you want to keep it simple, have the party in the office, staff only. Costs, including serving food and drink, at a Christmas party in the office are exempt from FBT. Oh, and it must happen on a working day. But the FBT exemption applies, regardless of the cost, so you could hire Jamie Oliver and Nigella Lawson to do the

catering.

If you invite an employee’s partner or other family along, FBT is payable on their costs, unless the minor benefits FBT exemption applies. Minor benefits are free from FBT if they have a value of less than $300 per person and meet certain other conditions. Broadly, a benefit is minor if it would be unreasonable to collect FBT because the benefit is provided infrequently and not regularly. There is no FBT if the per-head cost of inviting partners to the office Christmas party is a minor benefit.

The FBT exemption for minor benefits is not straightforward. Technically, all benefits that are associated with each other must be considered together. An example is an event that involves several costs: a restaurant meal, transport, maybe accommodation, with entertainment or a gift. Unrelated benefits given to the individual at other times in the FBT year are part of considering whether any particular benefit is really minor.

Christmas party venues are big business these days. If you hold a party at a restaurant or other venue, FBT is payable on the costs of wining and dining employees as well as their partners or kids, unless the minor benefits exemption is available. So the per-head cost of these events, including the meal, transport, entertainment and so on, must be scrutinised. It is fairly safe to say that if the total per-head cost of a Christmas party is less than $300, it will be a minor benefit and FBT-free. It can still be exempt if the total cost is more than $300 but probably not if the restaurant is in Vanuatu.

What about gifts — the hamper, the bottles of wine or spirits, or the gift voucher? These are free from FBT if the value is less than $300. However, the Tax Office says that if the boss gives a present at the staff Christmas party and both the meal and the gift cost less than $300 each, both will be free from FBT as minor benefits, even if together they cost more than $300, providing the other relevant conditions are met.

Is any of this tax deductible? The general rule is the employer can get a tax deduction for the cost of providing a Christmas party to the extent that it is subject to FBT. But costs that are not subject to FBT are not tax deductible. That includes the costs for which the employer can get the minor benefits exemption.

So, if you plan a frugal employee-only Christmas party in your office this year on a working day, there will be no FBT to pay, regardless of the cost of the feast. Forget claiming a tax deduction. If the party is at a restaurant or a big entertainment venue, no FBT, so long as the per-head cost of separate fringe benefits is under $300 — for both employees and partners.

If you invite business customers or clients to your Christmas party, the costs of entertaining them with food and drink are not subject to FBT and not tax deductible. The $300 threshold does not apply to them. All this makes for a fairly complicated matrix that will keep the finance person responsible for accounting for it in a state of some stress, even after the third glass of Merlot.

Note that different rules apply to tax-exempt employers and those who use the 50/50 split method to work out the taxable value of meal entertainment. They are not dealt with here.