How to Have a Tax-Effective Christmas
It’s important to understand the Fringe Benefits Tax (FBT) obligations associated with employee incentives for Christmas. Generally, putting aside a few exceptions, whenever an employer provides a non-cash benefit to their employee, the FBT rules apply to crystallise a FBT liability, putting the employer in the same position as if they were providing gross wages to enable the employee to spend their after-tax wages on the same benefit. I.e. FBT is essentially PAYG Withholding on the fringe benefit provided.
However, when it comes to Christmas functions, there are some hair-splitting rules that could affect your exposure to FBT:
- If you hold the party in-house and provide food and drinks to employees for consumption on a working day on your business premises, no FBT would normally apply. Unless you elect to use the ‘50/50 method’ in calculating the FBT for meal entertainment. However, if the employees’ associates also attend, FBT will apply to the associates’ portion of the expenditure.
- If you hold the party somewhere else other than your business premises, the cost of the party would normally be subject to FBT. However, if the cost is ‘minor’ on a per employee basis, that part of the cost will be exempt from FBT.
- A benefit is considered ‘minor’ if it is provided on an infrequent basis, and is less than $300 (GST-inclusive) per employee (the employee and their associates are counted as one). Just because the cost of a benefit is less than $300 does not automatically mean that the benefit is minor. If an identical or similar type of benefit has been provided to the relevant employee frequently during the year, FBT would still apply.
- Unfortunately, the law does not provide a specific definition of ‘infrequent’. I am aware that some accountants use five times as a benchmark (i.e. if the benefit is provided to an employee more than five times in a year, the benefit is assumed to have been provided frequently and is therefore not a minor benefit) while others use up to 13 times a year.
- As a general proposition, it is generally acceptable to use a higher ‘infrequent threshold’ if the type of benefit concerned has a lower dollar value. For instance, you may use 13 times for road tolls that are not related to income-producing purposes, while five times may be more appropriate for meal entertainment, such as a Christmas function.
- If you incurred travelling and accommodation expenses in connection with the Christmas function; those expenses, including tips, would be included in the total cost of the food and drink. In other words, all these expenses are aggregated and treated as the cost of a single ‘meal entertainment fringe benefit’ for the purpose of determining if the minor benefit exemption applies.
- On the other hand, the cost of entertainment provided at the party is not included in the meal entertainment benefit.
- To make things even trickier, the cost of hiring the venue may or may not be considered as part of the meal entertainment benefit. The general rule is that if the employer has exclusive possession of the premises to the exclusion of others, the cost will be included in the meal entertainment benefit.
- The main difference between a meal entertainment fringe benefit (e.g. a Christmas function) and other types of recreation benefits (e.g. provision of theatre tickets), is that you have the alternative to use the 50/50 method in calculating your FBT liability for a meal entertainment benefit. While the ‘per head basis’ must be used to calculate the FBT for other types of recreation benefits.
- However, be careful if you use the 50/50 method because certain exemptions are not available under this method. For example, the full cost of a Christmas function that is held in house on a working day must be taken into account before the total expenditure is halved under the 50/50 method.
- If non-employees such as clients are invited to the Christmas function, their portion of the costs will not be subject to FBT if you choose to calculate the FBT attributable to your employees under the ‘per head basis’. If you choose to use the 50/50 method, 50 per cent of the total costs of the function, including the costs attributable to the non-employees, would be taxable for FBT purposes.
- Be careful with Christmas gifts. The rules are somewhat peculiar as if a gift is provided at the Christmas function, it will be counted towards the minor benefit exemption threshold. If the same gift is provided two weeks before the function, the cost would not be counted.
- Bear in mind that the FBT rules interact with the income tax and GST rules. Broadly speaking, meal entertainment expenditure that has been subject to FBT is generally tax-deductible and you can claim back the GST on the expenditure. On the other hand, any meal entertainment expenditure that has not been subject to, or is exempt from FBT is generally not tax-deductible and you cannot claim the GST included in such expenditure.
In my experience, the extent of Christmas cheer one has tends to be inversely related to the amount of tax payable, so try and minimise your FBT and have a happy and tax-effective Christmas.
Important disclaimer: No person should rely on the contents of this article without first obtaining advice from a qualified professional person. This article is provided on the terms and understanding that the author and BDO (QLD) Pty Ltd are not responsible for the results of any actions taken on the basis of information in this article, nor for any error in or omission from this article. The article is provided for general information only and the author and BDO (QLD) Pty Ltd are not engaged to render professional advice or services through this article. The author and BDO (QLD) Pty Ltd expressly disclaim all and any liability and responsibility to any person in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this article.