Festive Season Fringe Benefits: What Employers Need to Know

Introduction

When the festive season arrives it’s easy to get caught up in the spirit of Christmas. People tend to spend more than they should and are happy to worry about the consequences in the new year. December also marks the end of the calendar year which seems like the perfect time to thank and spoil your nearest and dearest. The same can be said for many business owners and managers.

The pressure and expectation to arrange parties, barbecues, dinners, activities, hampers and gifts is everywhere! So why not spoil your employees, they’ve worked hard for you all year and have earned it. Plus, it’s all tax deductible, right? Wrong!

A common misconception is that gifts and entertainment expenditure is all tax deductible if it relates to employees in your business. Unfortunately, the tax rules are not that generous or straight forward and Fringe Benefits Tax (FBT) comes into play.

Understanding FBT on Christmas Gifts and Entertainment

FBT, put simply, is a tax that is payable by employers when certain non-cash benefits are provided to their employees. These benefits could include motor vehicles, loans, phones, and importantly at this time of year, it includes entertainment and gifts.

There are, however, a number of FBT exceptions to be aware of. For instance, if the benefit provided is considered ‘minor and infrequent’, in many circumstances no FBT is payable. Expenditure will be considered minor and infrequent if the outlay is less than $300 per head and is not provided on a regular or recurring basis. This rule is often applied when determining if a Christmas Party will be subject to FBT, though is not available where the employer is using the 50/50 meal entertainment method. As an example, if a business holds a Christmas Party which costs a total of $4,000 and 18 employees attend, this equates to $222 per head and therefore the minor and infrequent exemption is likely to kick in.

The Hidden Costs of FBT Exemptions

It might be tempting to think you’re home free if you escape FBT, but the most important take away is this; if the entertainment you’re providing is exempt from FBT, this most likely has two unfavourable consequences:

1. The expenditure will not be tax deductible.
2. Any GST paid on the expenditure cannot be claimed as a credit.

Non-entertainment gifts to employees that are exempt from FBT under the $300 limit may still be tax deductible with GST claimable.

These hidden costs are often misunderstood or ignored. When you appropriately factor in all the variables, you might find that those Christmas Parties provided in December are costing you more than you expected. Further complications can arise depending upon where the functions might be held (i.e., on-site or off-site), who else attends the parties (e.g., partners of employees, clients, etc.), and what other gifts are provided (e.g., gift cards, movie tickets, etc.) as not all combinations will attract FBT or be non-deductible.

Practical Tips for a Tax-Smart Festive Season

That’s not to say you should abandon all festive traditions immediately, it’s just important that you take on board the following advice:

• DO make sure you’re aware how the rules work so there are no nasty surprises later.
• DO have open discussions with your accountant about this.
• DON’T try to hide your Christmas expenditure in your accounts
• DO invite your accountant to your Christmas Party!