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The work Christmas party
Christmas parties adhere to the same tax obligations that entertainment incurs throughout the year. Social functions may result in income tax, goods and services tax (GST), and fringe benefits tax (FBT).
Christmas party expenses are income tax deductible only to the degree that these expenses are subject to FBT. This means that any costs exempt from FBT cannot be claimed as an income tax deduction. Also, the costs of entertaining clients do not acquire FBT, therefore they are not income tax deductible.
Costs, such as food and drink, are exempt from FBT if the Christmas party is on a working day, at your business premises, and the entertainment is for current employees. This is called a property benefit exemption and excludes associates (employees’ spouses or partners and children).
Minor benefits are exempt. A minor benefit is not a reward for services, it is “irregular” or “infrequent”, and has a notional taxable value of less than $300 (inclusive of GST).
Other benefits, such as gifts at a Christmas party, are separate minor benefits and generally the $300 threshold applies separately to each benefit provided.
Entertainment benefits – illustrated
A company invites employees, their associates, and clients to a Christmas party held in Melbourne during the working week at the business premises. The company supplies catering and also pays for taxi travel home after the party. These costs are $125 per person.
Even though this is classified as entertainment by the ATO a variety of exemptions apply.
Catering provided to employees is exempt from FBT because the party is at the business premises, on a working day. For employees, taxi travel directly to or home from the workplace is also exempt from FBT.
The catering and taxi travel directly home paid by the company for associates is exempt FBT because of the minor benefits exemption.
There is no FBT on benefits given to clients.
Where an employer pays for a taxi to and from a venue which is not the business premises only the trip to the venue is exempt FBT. If the employer values the meal entertainment on an actual basis an employee’s taxi fare home may be exempt FBT under the minor benefits exemption. Taxi fares for either employee’s spouses or partners and their children are excluded from the minor benefits exemption.
Alternative forms of transportation to the venue provided by the employer are subject to
FBT. If the threshold is not exceeded a minor benefit exemption for this benefit may be available.
Christmas gifts
Unless the minor benefit exemption applies, gifts for employees or their associates are generally a property fringe benefit and incur FBT. If the minor benefits exemption apples, all benefits relating to the Christmas party should be considered separately. Gifts given at the party, for example hampers and wine, should be viewed separately as the minor benefits exemption may apply to these benefits. Gifts for clients are exempt from FBT and may also be deductible. Even if the gift is a “minor benefit” deductibility may still be applicable.
For example, an unopened bottle of alcohol is considered a property benefit as the entertainment commences after the cap is removed. This means income tax deductibility and entitlement to input tax credits (ITC) for the cost of the gifts relies on whether they are considered to be “entertainment”. Therefore, an ITC is only available to the extent that the expense incurred is deductible.
The out goings for gifts to clients or former clients are generally deductible as their purpose is for producing future assessable income. But, an outgoing is not deductible if it relates to gaining exempt or non-assessable non-exempt income, is of a capital nature, or where income tax law prohibits its deductibility.
Disclaimer:
Hillyer Riches Management Pty Ltd , accountants and advisors located in Caulfield, is a Corporate Authorised Representative (No 466483) of Capstone Financial Planning Pty Ltd. ABN 24 093 733 969. AFSL / ACL No. 223135.This document contains general advice only and is not personal financial or investment advice. Also, changes in legislation may occur frequently. We recommend that our formal advice be obtained before acting on the basis of this information.
