It is that time of the year when giving is encouraged. As a business owner, you should ensure you have all the information available so that you are fully aware of your tax obligations this Christmas.
The cost of food and drink associated with a Christmas party is exempt from fringe benefits tax (FBT) if they are provided on a working day on your business premises and consumed by current employees. This exemption is only available for employees, not associates.
The provision of a Christmas party held off your business premises may also be exempt from FBT under the minor benefits rule if the cost of the party is less than $300 per employee. The FBT exemption also applies to an associate of your employee as long as the benefit remains under $300 per employee.
Under the minor benefits rule, providing a gift to an employee is also exempt from FBT as long as the value of the gift is less than $300 under the minor benefits rule.
If you are planning to provide your staff with cash bonuses rather than a gift voucher, remember that the cash will be taxed in the same way as wages and salaries; a PAYG withholding obligation will be triggered. The Australian Taxation Office view bonuses as ordinary earnings. This means the cash bonus will also be subject to Superannuation Guarantee provisions (an extra expense).
Tax deductibility of a Christmas party
The cost of a Christmas party can only be claimed as a tax deduction if it is subject to FBT. Therefore, if your party is less than $300 per employee, you cannot claim the cost as a tax deduction.
Inviting clients or customers?
Generally speaking, inviting clients or your customers to a Christmas party is not subject to FBT. However, as the Christmas party is considered to be providing entertainment, the cost of clients attending the party is not income tax deductible.
Here’s an Example
You decide to hold a Christmas party for your 60 employees, along with 20 of the employees’ partners and ten clients. The overall cost of the Christmas party totals $9,000, including gifts.
- The cost of the party is not subject to FBT, as the cost is considered a minor benefit to your employees and their associates. Also, the cost associated with your clients attending does not attract FBT.
- The average cost for your employees and their associates is $100 per person, being under the FBT limit. As no FBT applies, this cost ($8,000) is not tax deductible.
- The $1,000 of cost allocated to clients is also not tax deductible as it is considered the provision of entertainment, which is specifically denied as a deduction.
For employers that choose to be more altruistic, Christmas can be a time of charitable giving. While it may be considered unconventional, making a donation can generate goodwill amongst employees, particularly when they are given the opportunity to choose their charity. From a tax perspective, it is the safest way to ensure that you and your business can claim a deduction for your ‘Christmas charity, though it is essential to ensure the charity is registered to receive tax-deductible donations.
Click here for our table summarising the FBT, income tax and GST consequences. If you need advice on tax deductibility or your obligations, please contact the team.