Apart from giving businesses a chance to thank their employees for a job well done over a difficult year, end of year Christmas celebrations are also of course a chance to get everyone together for some fun and socialising. But while you should feel free to pop a champagne cork or three for employees, make sure that you don’t get the tax hangover.
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 fringe benefit (and therefore taxable) or not (therefore not taxable) will need to be addressed.
But don’t think for a minute that the ATO doesn’t know how to have fun. While the ATO may be prudent, it can still provide some wriggle room for businesses to let their hair down. Christmas-time entertainment up to the value of $300 for each employee is generally exempt from FBT. So throwing a party where the cost per head is less than $300 generally dodges any FBT liability. This should also be the case where an employee’s spouse attends the function.
But as the ATO has stated before, there are no different FBT rules that specifically apply to Christmas entertainment, and the rules as they stand are part of the general FBT regime. Under the “minor benefits” umbrella is the allowance for the $300 limit mentioned above for “incidental” benefits (that are not provided regularly) to be FBT free.
Happily however there seems to be a Kris Kringle-inspired tweak to how the rule is applied — the minor benefits threshold of $300 applies to each benefit provided, not to a total value of “associated benefits” (which used to be the case).
So if, as a generous employer, you also give a gift to staff, the party and the gift are considered separately for FBT. If each is less than $300, they are both generally FBT free. But remember that if a benefit is exempt from FBT, the business cannot claim it as an income tax deduction, nor can it claim any GST credits arising from these “supplies”.
Deductibility of the actual party
The cost of providing a Christmas party is income tax deductible only to the extent that it is subject to FBT. Therefore, as mentioned above, any costs that are exempt from FBT (for example, those minor benefits) can’t be claimed as an income tax deduction. Also the costs of entertaining clients are not subject to FBT and are not income tax deductible.
Christmas party held on the business premises
A Christmas party provided to current employees on your business premises or worksite on a working day may be an exempt benefit. The cost of associates attending the Christmas party is not exempt.
Christmas party held off the business premises
The costs associated with Christmas parties held off your business premises (for example, a restaurant) will give rise to a taxable fringe benefit for employees and their associates unless the benefits are exempt minor benefits.
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 ATO holds that this is all part of the fun and that the fare has to be included in the cost-per-head limit, with the total cost to be under the $300 minor benefit threshold to escape being taxed. 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.
Some canny business operators have taken the convivial, and tax effective, approach of holding more than one social event over the year. It may not suit every business, but rather than having just one big bash at Christmas-time, 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”.