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It's the time of the year again!
For business owners, this is when you’re starting to think about Christmas parties and office celebrations. It’s also the time to say thank you to your staff for another year of hard work. But it’s also worth knowing what you can claim and what you can’t.
At Christmas time, additional benefits are typically provided to employees and clients in the form of entertainment and gifts. Businesses do not always understand the Fringe Benefits Tax (FBT) implications of providing such benefits. When these implications aren’t understood, it can result in significant and avoidable costs to businesses.
The two examples below illustrate the importance for businesses to understand the FBT implications before providing benefits to employees.
Company A and Company B have 100 employees each. Both businesses provide their employees with a gift card at Christmas time. Company A provided gift cards at a value of $250, and Company B provided gift cards at a value of $300. There were no additional administration fees or charges associated with the gift cards.
Company A
On the basis that the value of each gift card is under $300 and it is provided once a year, this benefit qualifies for the minor, irregular and infrequent exemption from FBT. Accordingly, all gift cards provided to employees would be exempt from FBT.
Company B
On the basis that the value of each gift card is equal to $300 (i.e. not under $300), FBT will be payable on the total value of gift cards.
The calculation of the total cost to each business is outlined below.
Company ACompany BNumber of gift cards provided100100Value of each gift card$250$300Total$25,000$30,000FBT$0$26,604*Total cost to the business$25,000$56,604
*The FBT calculation is as follows: $30,000 * 1.8868 * 47% = $26,604. Generally, gift cards are not subject to GST and therefore, the Type 2 gross up rate is applied.
As detailed in the example above, FBT nearly doubles Company B’s cost of providing the Christmas gifts.
Company A and Company B invited their employees to their respective annual Christmas parties held at reception venues (off business premises). Both Companies used an external event management provider. In both instances, transport to the venue from the office was organised for employees. The respective Christmas parties were attended by 100 employees.
Company A received an invoice from its event management provider with the following breakdown of costs:
Food and drinks$20,000Entertainment$5,000Transport to the venue from the office$2,000Management fee charged by event manager$4,000Total$31,000
Company B received an invoice from its event management provider for the total cost of the Christmas Party, being $31,000 (inclusive of GST). No breakdown of costs was provided by the event management company.
Company A
In determining the taxable value of Company A’s Christmas Party for FBT purposes, it needs to consider the cost of all benefits provided to employees, including Food and Drink, Entertainment and Transport. The management fee charged by the event management company is not considered to be a benefit provided to the employees, so it is not included in the taxable value. On this basis, the per head cost of the Christmas Party is $270 (i.e. ($20,000 + $5,000 + $2,000)/100).
Given the cost per person is under $300, and the benefit is provided once a year, Company A’s Christmas party qualifies for the minor, infrequent and irregular exemption, and will not attract FBT.
Company B
As Company B was not provided with a breakdown of costs for the Christmas Party, the total value of the invoice becomes the taxable value for FBT purposes. Accordingly, the cost per person is $310. As the cost per person is greater than $300, the minor benefit exemption does not apply, and the benefit is subject to FBT in full.
The calculation of the total cost to each business is outlined below.
Company ACompany BFood and drinks*$20,000Entertainment*$5,000Transport to the venue*$2,000Management fee$4,000Total costs$31,000$31,000Costs subject to FBT$27,000$31,000Number of employees attended100100Cost per person$270$310FBT$0$30,309**Total cost to the business$31,000$61,309****Costs subject to FBT.
** The FBT calculation is as follows: $31,000 * 2.0802 * 47% = $30,309. Christmas party costs are subject to GST, therefore, the Type 1 gross up rate is applied.
*** The above calculations assume that the Actual Method for valuing meal entertainment is used. In some circumstances it might be more advantageous to use the 50/50 Split method. However, business’ total annual meal entertainment expenditure has to be considered in order to determine which valuation method produces the lowest taxable value.
As demonstrated above, FBT essentially doubles the cost of Company B’s Christmas party, highlighting the importance of understanding the FBT rules and its implications when providing various benefits to employees. With proper planning, costs can be significantly reduced particularly where benefits are exempted from FBT.
To help you identify and analyse your entertainment expenditure, we have provided some notes on the FBT, GST Input Tax Credits (GST ITC) and income tax deductibility implications associated with festive season celebrations.
The table below summarises the tax treatment of gifts provided to clients and employees (or their associates).
RecepientGifts – Not Entertainment
(e.g. hamper, bottle of wine)Gifts – Entertainment*
(e.g. movie/theatre tickets, restaurant voucher)ClientNo FBT
Deductible
GST ITC availableNo FBT
Not deductible
No GST ITCEmployee or Associate
(e.g. Spouse/ Partner/ Family Member)<$300 (GST incl)$300 or more
(GST incl)<$300
(GST incl)$300 or more
(GST incl)No FBT
Deductible
GST ITC availableSubject to FBT
Deductible
GST ITC availableNo FBT
Not deductible
No GST ITCSubject to FBT
Deductible
GST ITC available*This assumes the entertainment is not meal entertainment or if it is meal entertainment, that the actual method is used. If the entertainment constitutes meal entertainment and the 50/50 split method or register method are used, the costs must be included as per the method requirements. Please note that the application of the minor benefits rule is limited for income tax exempt businesses in relation entertainment benefits.
The correct tax treatment of costs associated with Christmas functions can be confusing as it depends on whether the employer is concessionally taxed for FBT and income tax purposes, and the method chosen by the employer to value meal entertainment for FBT purposes (there are three methods: 50/50 split, actual or register) and whether benefits are provided to employees, associates or clients.
The table below summarises the treatment for an ordinary business taxpayer (i.e. it does not apply to income tax exempt businesses). To allow the calculation to be made accurately and be substantiated in the event of a tax office audit, taxpayers need to keep all necessary documentation on file such as attendance lists and receipts.
Entertainment costs (e.g. Christmas party costs) are only tax deductible, and GST ITC are only available to the extent that the costs are subject to FBT. Where event costs are exempt from FBT, there should be no income tax deduction nor any GST ITC entitlement.
Actual Method50/50 Split MethodRegister MethodEmployee or AssociateEmployee, Associate, ClientEmployee, Associate, ClientUnder $300
Entertainment Function
< $300 per head (GST inclusive)
on or off business premisesMinor Benefit for employee and associate costs – exempt from FBT.
Not deductible.
No GST ITC.Include all GST inclusive costs. 50% subject to FBT and 50% exempt. The portion subject to FBT is deductible.
GST ITC available.Include all GST inclusive costs. Register percentage subject to FBT is deductible.
GST ITC available.ClientNo FBT on client costs.
Not deductible.
No GST ITC.The portion of costs not subject to FBT is not deductible.
No GST ITC.The portion of costs not included for FBT is not deductible.
No GST ITC.EmployeeEmployee, Associate, ClientEmployee, Associate, ClientOver $300
Entertainment Function
<= or > $300 per head (GST inclusive)
on business premisesExempt Benefit for employee costs, no FBT.
Not deductible.
No GST ITC.
Include all GST inclusive costs.
50% subject to FBT and 50% exempt.Include all GST inclusive costs.AssociateFBT is payable on associate costs and is deductible.
GST ITC available.The portion subject to FBT is deductible.
GST ITC available.Register percentage subject to FBT is deductible.
GST ITC available.ClientNo FBT on client costs.
Not deductible.
No GST ITC.
The portion of costs not subject to FBT is not deductible.
No GST ITC.The portion of costs not subject to FBT is not deductible.
No GST ITC.Employee and AssociateEmployee, Associate, ClientEmployee, Associate, ClientOver $300
Entertainment Function
= or > $300 per headoff business premisesEmployee and associate costs are subject to FBT.
Deductible.
GST ITC available.Include all GST inclusive costs.
50% subject to FBT and 50% exempt.
The portion subject to FBT is deductible.
GST ITC available.Include all GST inclusive costs.
Register percentage subject to FBT is deductible.ClientNo FBT on client costs.
Not deductible.
No GST ITC.The portion of costs not subject to FBT is not deductible.
No GST ITC.
The portion of costs not subject to FBT is not deductible.
No GST ITC.
*This assumes the entertainment is not meal entertainment or if it is meal entertainment, that the actual method is used. If the entertainment constitutes meal entertainment and the 50/50 split method or register method are used, the costs must be included as per the method requirements. Please note that the application of the minor benefits rule is limited for income tax exempt businesses in relation entertainment benefits.
The FBT treatment of entertainment costs for income tax exempt employers (who are taxable for FBT purposes) is similar to that of an income tax paying employer where the 50/50 split or register methods are chosen. However, where the actual method is used, FBT is generally payable on costs relating to the employee and any associate(s) regardless of the cost or location of the function (i.e. the minor benefit and food and drink consumed on premises exemptions are not available to income tax exempt employers). Under this method, the costs relating to the entertainment of clients should be exempt from FBT.
We recommend businesses take the following steps:
This article is published by R J Sanderson and Associates Pty Ltd ABN 71 060 299 783. This article contains general information only and is not intended to represent specific personal advice (Accounting, taxation, financial or credit). No individual personal circumstances have been taken into consideration for the preparation of this material. It is recommended that you obtain your own personal professional advice before making any financial or business decision.