It’s Christmas. So much to do.
There is the office Christmas party to organise. Gifts to buy for the whole team. Hampers and other Christmas gifts for key clients and suppliers. But wait! My accountant says that some of this might not be tax-deductible. Some of it might be subject to Fringe Benefits Tax (FBT).
Here are the basics of Christmas and tax including how to handle Christmas gift tax deductions.
Staff Christmas parties and tax implications
Let’s start with what can be the biggest expenditure – the staff Christmas party. You want it to be a memorable occasion and not let skimping on everything destroy the fun. However, there are limits if you want the best tax outcome.
The starting point in the analysis is, generally, the provision of entertainment by way of food, drink or recreation is not a deductible expense under Australian tax law. However, if the entertainment is an employee benefit, this is deductible, but only if it is a ‘fringe benefit’ as defined.
Understanding Fringe Benefit Tax (FBT) and minor benefit exemptions
Under the FBT law, anything provided to an employee or their associate is a ‘benefit’. So, a Christmas party is a benefit. However, there is a section in the FBT law that makes an employee benefit exempt from FBT if its value is less than $300 and it is provided (broadly) on an infrequent and irregular basis. The ATO generally considers that Christmas parties where the value per head is less than $300 are covered by the FBT exemption.
But, if the FBT exemption applies, the provision of the benefit is no longer a ‘fringe benefit’ as defined. This means that the general rule where a fringe benefit is deductible to an employer does not apply. Accordingly, a Christmas party that is held off premises is not tax deductible. If the value per head of the Christmas party is less than $300, there will be no FBT payable.
There are other rules in the FBT law that allow you to have your meal entertainment 50% subject to FBT and claim a 50% deduction. Further, there is another provision that permits you to keep a logbook to work out the percentage subject to FBT. These rules are not discussed here.
Where there is a Christmas gathering on work premises, this can be deductible and not subject to FBT. Nevertheless, there are a number of conditions that apply to this. The issues include whether entertainment is being provided, whether there is an ‘in-house dining facility’, whether the gathering is being held on a working day and whether the gathering is a party or social function. The extent of non-employees attending the function is also relevant.
Christmas gift tax deductions for employees
Turning to Christmas gifts, employee gifts will nearly always be deductible. Provided it can be said that the cost of the gift is incurred in deriving the employer’s income. Employee benefits will normally fall into this category and can be eligible for Christmas gift tax deductions.
Such gifts can be subject to FBT if they have a value of $300 or more. If the value is less than $300, they will be exempt from FBT provided it can be said that the provision of the gift, broadly, is minor or infrequent. A Christmas gift under the value of $300 will normally be considered FBT exempt by the ATO. It should also be noted that the ATO does not think you need to add the value of the Christmas party to the value of the Christmas gift in determining whether the value is $300 or more. The ATO has ruled that each benefit needs to be considered separately when considering the $300 FBT exemption rule.
Gifts for clients and business associates
Considering Christmas gifts to clients and other business associates, these would normally be tax deductible provided they do not constitute the provision of entertainment. Food and drink given as a gift would not normally be considered as the provision of entertainment. Rather it is the provision of property and therefore eligible under Christmas gift tax deductions.
If a gift to a client or an employee is highly valuable or extravagant, this will not necessarily cause the gift to be non-tax-deductible. However, the extravagance of the gift may raise the question of whether there is more than one purpose in making it. That is, is there another purpose other than deriving the assessable income of the business making the gift? If the ATO concludes that there is another purpose, it may apportion the deductibility of the cost of the gift between the purpose of deriving assessable income and other purposes.
Gifts can become the provision of entertainment when they are such things as movie, sporting or concert tickets.
Get advice on Christmas gift tax deductions from Geelong accountants
Need help navigating the rules around FBT, entertainment expenses and Christmas gift tax deductions? The experienced Geelong accounting team at MacMillan Cowan & Co can help you wrap up the year with confidence.
Get in touch today for personalised advice that ensures your festive generosity doesn’t lead to a tax-time headache.