Christmas Parties and Fringe Benefits Tax
Employers may be liable for fringe benefits tax by hosting a party for their employees or giving them a bottle of scotch or perfume for Christmas. No longer are Christmas parties or gifts seen as a reward for hard work but rather a taxing opportunity.
Christmas parties fall under the entertainment rules in the FBT law. Entertainment is broadly defined in that law to mean the provision of food, drink or recreation including related accommodation or travel, such as taxi travel to and from a restaurant. Generally employers spend modestly and reasonably on their valued employees at Christmas time. Employers generally don’t supply a car or a first class trip around the world at Christmas time but if such gifts were made, FBT is likely to apply. As a general rule, Christmas gifts that are supplied to an employee or their associate, such as a partner/spouse/child, are subject to FBT unless they fall under the minor benefits exemption. This is so in respect of current, past and future employees.
If an employer does not use the 50-50 split method for determining the FBT value for entertainment, the costs associated with Christmas parties are exempt from FBT if provided on a working day on the employer’s business premises and attended by current employees. A taxable fringe benefit will arise in respect of an associate of an employee who attends the party unless the minor benefits exemption applies. That exemption applies if the Christmas party or gift costs less than $300 per head. If both the Christmas party and the gift are less than $300 in value and the other conditions of a minor benefit are met, they will both be exempt benefits. The $300 exemption also applies for Christmas parties held for employees or their associates away from your business premises. Note that the minor benefit exemption does not apply where the 50-50 split method is used to apportion benefits between employees and non-employees.
The cost of providing a Christmas party (or any other form of entertainment) is income tax deductible only to the extent that it is subject to FBT. Therefore, any costs that are exempt from FBT (that is, exempt minor benefits and exempt property benefits) cannot be claimed as an income tax deduction. The costs of entertaining clients are not subject to FBT but they are not tax deductible.
The costs associated with a Christmas party not held on an employer’s business premises will give rise to a taxable fringe benefit for employees and their associates unless the benefits are exempt minor benefits. The above tax deductibility rules also apply in this instance.
The FBT entertainment rules applying to tax exempt organisations are different. Entertainment expenditure of a kind that is non-deductible under the normal income tax rules and that is provided by an income tax exempt body is known as tax-exempt body entertainment fringe benefits. Such expenditure is generally subject to FBT. The minor benefits exemption only applies to tax exempt body entertainment benefits where its provision to an employee is incidental to the entertainment of persons other than employees. Hence it could not be applied to meals provided to employees at a staff Christmas party.
The ATO has released a fact sheet specifically dealing with Christmas parties and gifts which can be accessed via the following link:
http://www.ato.gov.au/businesses/content.asp?doc=/content/51481.htm