Tax rules for Christmas parties and gifts

With Christmas fast approaching, many employers and businesses will be hosting Christmas parties and providing gifts or other entertainment to staff and clients. 

There are many hidden income tax, GST and Fringe Benefits Tax (FBT) traps to be aware of in relation to these and we set out the key rules below for easy reference.

The last section walks through how these rules apply to employees, their family members and clients.

1. Overview re tax entertainment rules

1.1 Income Tax

Benefits provided to both employees, their families and clients can come in the form of Christmas parties, providing food and drink (including alcohol), entertainment, and gifts (including monetary bonuses).

Tax law operates to deny a deduction for entertainment expenses which are defined as expenses incurred on “food, drink or recreation and accommodation and travel to do with providing that food, drink or recreation”. Recreation is broadly defined to cover “any amusement, sport or similar leisure-time pursuits.”.

1.2  GST

If the acquisition is an entertainment expense which is denied a deduction (refer above) under the income tax regime, then GST cannot be claimed back even when paid by a GST registered business.

Conversely, where the entertainment is provided to employees and the employer is liable to pay FBT on those entertainment expenses then an income tax deduction is available.

As an income tax deduction is allowable in this circumstance, the entertainment expenses will be considered as creditable acquisitions and therefore the GST can be claimed back.

1.3  Fringe Benefits Tax (FBT) 

An employer is liable for FBT on the taxable value of benefit provided to their employees and associates.

Note - an “associate” is a relative of the employee and is not limited to the employee’s immediate family members.

To help payroll administration, fringe benefits that are entertainment by way of food and drink, i.e., a Christmas party, and benefits associated with that entertainment, such as travel and accommodation are excluded from reporting on the employees annual payment summary.

2. Calculating FBT - Meal Entertainment Expenses

The summaries below detail what Christmas-related costs are subject to FBT. There are three different methods for calculating the taxable value of meal entertainment.

The FBT Act allows an employer to elect to use either the ‘50:50 Split Method’ or ‘12-week Registration Method’. If an election is not made, the ‘Actual Expense Method’ will apply.

The election applies to all meal entertainment expenses for the year, so getting the election right is key.

2.1 FBT “Minor Benefits” Exemption

Thankfully, the provision of Christmas parties and gifts often attracts this exemption.

A minor benefit is one that is less than $300. If the benefit provided meets the threshold, it is an exempt benefit.

The $300 threshold applies to each benefit and is not cumulative (for example, a gift and attendance at a Christmas party can be considered separately from each other).

FBT law sets out the factors to be considered in deciding whether it is unreasonable to treat a minor benefit as a fringe benefit. These include the “infrequency” or “irregularity” of similar benefits being provided.

Per an example in an ATO ruling, a Christmas party for employees that is given every year is not considered to be regular and frequent, so if it less than $300 per attendee, it will meet the exemption requirements for FBT. Note that the ‘minor & infrequent’ exemption is only available in respect of meal entertainment when using the Actual Expense Method.

3. How the tax rules apply to staff Christmas functions

a)    If the Christmas party costs less than $300 per head and is provided on-site (i.e., at work), it is:

For employees

• Exempt from FBT
• No income tax deduction
• No GST input tax credit

For employee family members

• Exempt from FBT
• No income tax deduction
• No GST input tax credit

b)    If the Christmas party costs less than $300 per head and is provided off-site (i.e., at a restaurant), it is:

For employees

• Exempt from FBT
• No income tax deduction
• No GST input tax credit

For employee family members

• Exempt from FBT
• No income tax deduction
• No GST input tax credit

c)    If the Christmas party costs more than $300 per head and is provided on-site (i.e., at work), it is:

For employees

• Exempt from FBT
• No income tax deduction
• No GST input tax credit

For employee family members

• Subject to FBT
• Income tax deduction available
• GST input tax credit available

d)    If the Christmas party costs more than $300 per head and is provided off-site (i.e., at a restaurant), it is:

For employees

• Subject to FBT
• Income tax deduction available
• GST input tax credit available

For employee family members

• Subject to FBT
• Income tax deduction available
• GST input tax credit available

4.    How the rules apply to staff Christmas gifts

a)    If the Christmas gift costs less than $300 per head and is not entertainment (e.g., gift card, hamper, alcohol)

• Exempt from FBT
• Income tax deduction available
• GST input tax credit available

b)    If the Christmas gift costs less than $300 per head and is entertainment (e.g., movie ticket, sports ticket)

• Exempt from FBT
• No income tax deduction
• No GST input tax credit

c)    If the Christmas gift costs greater than $300 per head and is not entertainment (e.g., gift card, hamper, alcohol)

• Subject to FBT
• Income tax deduction available
• GST input tax credit available

d)    If the Christmas gift costs greater than $300 per head and is entertainment (e.g., movie ticket, sports ticket)

• Subject to FBT
• Income tax deduction available
• GST input tax credit available

5.    How the rules apply to client Christmas functions and gifts

a)    Christmas function for clients – on-site and off-site

• Exempt from FBT
• No income tax deduction
• No GST input tax credit
• However, if employees also attend the same function, it is necessary to apportion the expenses to work out the income tax, and FBT liabilities.

b)    Christmas gifts for clients – if not entertainment (refer definition above)

• Income tax deduction available where owner expects gift will generate future business from the client, or make them more inclined to refer others to their business
• Can be a form of advertising – e.g., a fancy pen with company logo, bottles of wine from business’ winery, etc.

c)    Christmas gifts for clients – if entertainment

• Exempt from FBT
• No income tax deduction
• No GST input tax credit
• However, if employees also attend the same function, it is necessary to apportion the expenses to work out the income tax, and FBT liabilities.

Please contact Baumgartners should you have any questions in relation to gift or entertainment costs.

CONTACT BAUMGARTNERS