The festive season is finally here and I am sure you are all relieved that even Covid-19 could not stop it from arriving. So if you want to treat your employees with a year end party or gifts which they deserve, beware of the fringe benefits tax (FBT), GST and income tax consequences.
You might think that the party and gifts are simply a tax deductible expense as they are connected to your business.
It is not so simple.
Not only that, but you may end up having to pay fringe benefits tax as well.
Below I have simplified the regulation to help you decide what you should do to be sure that you get the maximum tax benefits from your Xmas party.
As a general rule, which applies throughout the year as well, entertainment expenses are a non-deductible tax expense nor can you claim gst on this, unless you pay FBT on the expense. In your accounting records this will be recorded in an account called “entertainment” and when it comes to the income tax return, this amount will generally be added back to expenses.
A Christmas party triggers an entertainment related fringe benefit in most cases. You will only be able to deduct the cost of the party for tax, if you pay fringe benefits tax on it. So the rule is, no FBT, then no tax deduction.
Now most business owners do not want to get involved in another tax system, so would rather not have to register and pay fringe benefits tax. In this case, the expense cannot be deduct.
So what should you do in order to be able to claim the cost as an income tax deduction and not pay any FBT?
The best situation from a tax perspective is to hold a Christmas party on your premises on a working day with only employees and/or clients attending. There is no limit to the cost per employee in this case.
There can be no alcohol provided and only finger food or a light meal served.
If alcohol is provided and the cost is less than $300 incl gst per employee, FBT is still not applicable but the expense and gst cannot be claimed as it becomes an “entertainment” expense.
The no alcohol option is the most tax effective situation, as there will be no FBT applicable and gst can be claimed on the expenses and the cost can be claimed as a tax deduction.
Any other arrangement will result in FBT and /or the expense being non deductible.
There are two types of gifts as defined by tax regulation. An entertainment gift and a non- entertainment gift.
Non-entertainment gifts are, alcohol, perfume, department store gift cards or vouchers and hampers.
Entertainment gifts are, restaurant meals, theatre tickets, tickets to movies, plays or shows or sporting events and holiday accommodation.
If you provide a non-entertainment gift to employees with a value of less than $300 including gst, there will be no FBT and the cost will be an allowable income tax deduction.
Non-entertainment gifts given to clients and suppliers do not fall within the FBT rules and gst and a tax deduction can be claimed as long as they are not excessive.
Where the cost of the gift to an employee is less than $300 incl gst, FBT is not payable and no tax deduction or gst can be claimed. Where the cost is greater than $300, then a tax deduction and gst can be claimed but FBT would be payable.
Entertainment gifts to clients are not subject to FBT, so cannot be deducted and no gst claimed
The best tax outcome would be for your business to give employees a non-entertainment type gift that cost less than $300 incl gst per person as then the cost is fully deductible with no FBT payable and gst credits claimable.
Should you have any questions specific to your business, contact us at firstname.lastname@example.org or contact Accolade Accounting on (08) 6263 4466.