Find out what the ATO says about Christmas gifts & parties? Tax rules on minor benefits & more made easy!
Those Christmas parties you have planned and the gifts you bought for your staff and your clients a few months back feel like fait accompli, right? But perhaps not quite, to the ATO.
As business owners, we can get carried away saying thanks and forget all about the tax implications. Unfortunately, as far as the tax office is concerned, they don’t disappear when you take the Christmas decorations down.
Now is the time to figure out if those Christmas gifts were tax-deductible? Not to mention the lavish party for your staff and your clients?
We want to help you get a bit clearer about the FBT (fringe benefits tax). There may also be income tax implications of providing entertainment in the form of parties as well as gifts to staff and clients.
We want you to be sure of what you are in for when those end of year tax returns are handed in!
Christmas entertainment expenditure and how to calculate the costs?
There is an FBT Act. It states employers have the freedom to choose how they calculate their Christmas entertainment expenditure. So, what does that mean????
There are two popular calculation methods that are most generally used. These are the ‘actual method’ and the ’50/50 method’.
The ‘actual method’
Entertainment costs are divided between employees, their families, and non-employees. This includes clients and suppliers.
Expenditure on employees is tax-deductible and can be liable to FBT. However, any expenditure on non-employees isn’t liable to FBT and isn’t tax-deductible.
The ’50/50′ method
This is where 50% of the total expenses are subject to FBT and 50% is tax-deductible.
This method is often more popular. That is simply because it is easier to calculate. Please remember though that employees’ food and drink are not exempt from FBT under this method. That’s the case even if the event is held on the employer’s premises. The minor benefit exemption and the general taxi travel exemption cannot be applied either.
What’s the minor benefit exemption?
The minor benefit exemption is an exemption from FBT for most benefits. This includes Christmas gifts of less than $300 (a $299 gift may be exempt while one worth $301 not!).
It is worth noting that those provided around the same time (such as drinks and gifts) are not added together when applying this threshold.
To put this information into context, let’s use an example. We are hosting a Christmas party…
So, what is tax-deductible and what is not?
Our Christmas party is hosted by you, the employer and you invite employees and their spouses. A total of 40 guests attend.
The cost of food and drink is $200 per person. No other provisions are catered for.
Using the actual method:
For all 40 guests, no FBT is payable but the event expenses aren’t tax-deductible.
Using the 50/50 method:
The expenditure is $8,000, so $4,000 is liable to FBT and tax-deductible.
Christmas gifts: What is tax-deductible and what is not?
Whether you hold a Christmas party or not, Christmas gift-giving also needs to be thought about.
A Christmas gift can be a great personal way to show employees your gratitude and express your thanks. The question is though how should this be handled from a tax perspective?
Christmas gifts need to be categorised into two sections:
- Those considered entertainment – including jewellery, alcohol, flowers, etc.
- Those NOT considered entertainment – including event tickets, airline tickets, etc.
Giving a gift that is not considered entertainment
These Christmas gifts to employees are liable to FBT. The exception is where the ‘less than $300’ minor benefit exemption is applicable, and they are tax-deductible.
Giving a gift that is considered entertainment
These Christmas gifts to employees are tax-deductible and are liable to FBT, unless ‘less than $300’ minor benefit exemption is applicable.
Gifts to suppliers, clients, etc.
Whether these gifts are considered entertainment or not, they are not FBT-liable and not tax-deductible.
If you are still unclear, speak to your Bookkeeper or your accountant. They will e able to guide you on what is the best route for you to take and the most tax-effective gifts for you to buy.
If you do your own books and would like some guidance, then Liz Peacock and the team at Keeping Numbers are standing by to help you! Give Liz a call on 0405 801 119 or email her here.
We hope you have a wonderful Christmas and a stress-free New Year. We would love to hear from you if you want help with your bookkeeping moving forwards!