November 27, 2012
Taxation & Accounting, Fringe Benefits Tax
With Christmas only a matter of weeks away many offices will be starting to think about dusting off the reindeer horns and karaoke machine to prepare for the annual Christmas party. Business owners may have the option to unlock the bar fridge for employees, but should make sure they are not the ones stuck with the tax hangover. In this article we outline what you need to know about tax when it comes to your Christmas party planning.
As with any benefit that a business provides to staff that is outside the safe definition of “salary”, the question of whether it is a (taxable) fringe benefit or not will need to be addressed.
But it’s not like the taxman doesn't know how to have fun — the Tax Office may be prudent, but there’s still some wriggle room in the tax rules to let your hair down. Christmas-time entertainment up to the value of $300 for each employee may be exempt from FBT. This may also be the case where an employee's spouse attends.
The Tax Office states that there are no different FBT rules that apply to Christmas entertainment, and that these social functions come under the “minor benefits” umbrella. A minor benefit will be FBT-exempt where, broadly, the benefit is less than $300 and provided on an infrequent and irregular basis. And herein lies a possibly Santa-inspired tweak to how the rule is applied, as the minor benefits threshold applies to each benefit provided, not to a total value of “associated benefits”. So if, as a generous employer, you also give a gift to everyone, the party and the gift are considered separately for FBT purposes. If each is less than $300, they are both generally FBT free.
Note that there are different ways in which entertainment may be treated for FBT purposes, such as the “50/50 split method” or the “12 week register method”, and where these are adopted the treatment of Christmas party expenditure will be different to what is described above (consult with this office about the alternatives).
Exemption negates deduction
But remember that if a benefit is exempt from FBT, you cannot claim it as an income tax deduction, nor can you claim any GST credits arising from these “supplies”.
The safest option FBT-wise would be to hold the Christmas party on the business premises on a working day, as providing the food and drinks will be FBT free, if it's only employees who attend. If spouses or partners are invited (the law refers to them as “associates”) the cost will still be FBT free if less than $300 (if the minor benefit rule applies), and if bona fide clients attend there is no FBT in respect of them. If the party is held off-premises, at say a restaurant or pub, the $300 limit applies to both employees and associates, subject to the application of the 50/50 split or 12 week register methods referred to above.
Where do taxis stand?
For an employer thinking of paying for this travel option for staff, the important consideration in regard to this will be venue. If the taxi travel is from home to an entertainment venue (that is not the workplace) and home again, the Tax Office will include the cost of the ride as part of the entertainment and deem that it is to be included in the cost-per-head total (that is, it counts towards the $300 minor benefit limit). But if the cab drives from home to a function held at the workplace, and/or from the workplace back to home after the festivities, the taxi fare is exempt from FBT.
Spreading the joy
Some canny business operators have taken the convivial, and tax effective, approach of holding more than one social event over the year. Rather than have just one large bash at Christmas, a business may decide to spread the entertainment budget out to, say, an end-of-financial-year function in winter.
Dividing the party purse into two events can reduce the value of the entertainment each employee enjoys below the minor benefits limit of $300, and keeps the FBT liability of an employer to a happy minimum. It should be remembered however that to be a minor benefit it is necessary that the particular benefit (or similar benefits) be provided irregularly and infrequently.
Call us on 5452 1155 to check if you have any FBT surprises this Christmas.