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Tax and Christmas Party Planning - 1st November 2017
Christmas will be here before we know it, with smarter business owners already planning their end-of-year festivities. Celebrating the season can be team-building or just a bit of fun, but the well-prepared business owner will also know that a little tax planning can help make sure there's no unforeseen tax problems.
The three
benefits typically provided include:
- Christmas parties for employees (and perhaps their family members, and even clients)
- gifts to employees, their family members and clients, and
- cash bonuses.
The Christmas party
There is no
separate FBT category that relates to Christmas parties. While such social
functions may result in FBT, income tax and GST outcomes, these are covered
under the existing relevant legislation. The provision of "entertainment" at
Christmas therefore mirrors the tax treatment such benefits will receive at
other times of the year.
The ATO says that "meal entertainment", and
therefore an FBT liability, arises when food or drink is provided in a way that
has the character of entertainment. In fact, the ATO holds that in
most cases the mere provision of food or drink satisfies the "entertainment" test, but adds that there is a narrow category of cases where the mere
provision of food or drink does not amount to entertainment.
For example, it considers that the
provision of morning and afternoon tea to employees (and associates of
employees) on a working day, either on the employer's premises or at a worksite
of the employer, is not entertainment. The provision of light meals (finger
food, etc), for example in the context of providing a working lunch, is also
not considered to be entertainment. Note however that providing any alcohol typically
brings "entertainment" into the picture.
The implications of certain benefits provided at the year-end Christmas function for an employer may vary depending on:
- whether the function is provided at the employer's premises or provided externally
- the cost of the function per attendee, and
- the basis that the employer is using in working out the taxable value of such benefits.
FBT implications
(i) an expense payment fringe benefit
(eg. reimbursing an employee for expenses incurred or paying an expense on
their behalf)
(ii) a property fringe benefit (eg.
provision of property such as meals or gifts by the employer), and
(iii) a residual fringe benefit (eg.
the provision of any right, privilege, service or facility such as the right to
use a venue).
These
benefits are generally valued for FBT purposes at their face value - typically
referred to as an "actual basis" of valuation. However, an employer may elect
to apply special valuation rules by using either the 50/50 split method or
12-week register method. Ask us about these two valuation methods and if they
are suitable for your business. If the employer does not make an election, the taxable value is
determined according to actual expenditure.
However "meal entertainment" fringe benefits provided at a Christmas function can be exempt
from FBT if it is:
- a "minor benefit" (more below)
- an exempt property benefit (see below) is provided at the
employer's premises on a work day.
Minor benefits
Broadly, a minor benefit is one where it:
- has a notional taxable value of less than $300 (inclusive of GST)
- is provided on an "infrequent" or "irregular" basis
- is not a reward for services, and
- satisfies other relevant conditions (ask us for details).
Note that other benefits (such as gifts) provided at a Christmas party may be considered as separate minor benefits in addition to meals provided (referred to as an "associated benefit"). In such cases, the $300 threshold generally applies separately to each benefit provided.
Exempt property benefit
A Christmas
party held at the employer's business premises on a working day where food and
drink, including alcohol, is provided is generally deemed to be an exempt
property benefit, and is therefore usually FBT-free. This is no different to
the occasional Friday drinks at work.
Tax law exempts such property benefits where:
- the benefit is provided to a current
employee in respect of his or her employment, and
- it is provided to, and consumed by, the
employee on a working day and on the business premises of the employer (our
emphasis).
External Christmas functions
The
following examples supplied by the ATO illustrate the difference in FBT and
income tax treatment where a function is held on-premises compared to one being
held offsite:
Example 1 A small manufacturing
company decides to have a party on its business premises on a working day
before Christmas. The company provides food, beer and wine. The
implications for the employer in this situation would be as follows. |
|
If... |
Then... |
current
employees only attend |
there are
no FBT implications as it is an exempt property benefit. |
current
employees and their associates attend at a cost of $180 per head |
for employees - there are no FBT implications as it is an exempt
property benefit, and the minor benefit exemption could also apply for associates - there are no FBT implications as the minor
benefit exemption applies |
current
employees, their associates and some clients attend at a cost of $365 per
head |
for employees - there are no FBT implications as it is an exempt
property benefit for associates - a taxable fringe benefit will arise as the
value is equal to or more than $300 for clients - there is no FBT payable and no income tax
deduction |
Example 2 Another
company decides to hold its Christmas party function at a restaurant on a
working day before Christmas and provides meals, drinks and entertainment. The
implications for the employer in this situation would be as follows. |
|
If... |
Then... |
current
employees only attend at a cost of $195 per head |
there are
no FBT implications as the minor benefits exemption applies. |
current
employees and their associates attend at a cost of $180 per head |
there are
no FBT implications as the minor benefits exemption applies. |
current
employees, their associates and clients attend at a cost of $365 per head |
for employees - a taxable fringe benefit will arise for associates - a taxable fringe benefit will arise, and for clients - there is no FBT payable and the cost of providing
the entertainment is not income tax deductible |
Transport considerations
It may be
the case that to get to the Christmas function, an employer will provide their
staff with taxi travel or some other form of transport. Taxi travel provided to
an employee will generally attract FBT unless the travel is for a trip that
either starts or ends at the employee's place of work.
For taxi
travel to or from a Christmas function, employers should be mindful that:
- where the employer pays for an employee's taxi travel home
from the Christmas party and the party is held on the business premises,
no FBT will apply.
- where the party is held off premises and the employer pays
for a taxi to the venue and then also pays for the employee to take a taxi
home, only the first trip will be FBT exempt. The second trip may be
exempt under the minor benefits exemption if the employer has adopted to
value its meal entertainment on an actual basis.
- the exemption does not apply to taxi travel provided to "associates" of employees (for example family members).
If other
forms of transportation are provided to or from the venue, such as bus travel,
then such costs will form part of the total meal entertainment expenditure and
be subject to FBT. A minor benefit
exemption for this benefit may be available if the threshold is not breached.
Gifts
Gifts
provided to employees or their associates will typically constitute a property
fringe benefit and therefore are subject to FBT unless the minor benefit
exemption applies. Gifts, and indeed all benefits associated with the Christmas function, should be
considered separately to the Christmas party in light of the minor benefits
exemption.
For example, the cost of gifts such as
bottles of wine and hampers given at the function should be looked at separately
to determine if the minor benefits exemption applies to these benefits. Gifts
provided to clients are outside of the FBT rules (but may be deductible, see
below - also note that deductibility may still apply even if the gift is a "minor benefit").
The income tax deductibility and
entitlement to input tax credits (ITC) for the cost of the gifts depends on
whether they are considered to be "entertainment". For example, an unopened bottle of spirits is
deemed to be a property benefit (the entertainment starts after the cap is
unscrewed). Again, in most cases the entitlement to an ITC for expenses
incurred for the employer mirrors the income tax implications - so an ITC is
only available to the extent that the expense incurred is deductible.
Examples of "entertainment":
- glasses of champagne
- hot meals
- theatre tickets
- holiday accommodation
- hired entertainers
- hired sporting equipment.
Examples of not "entertainment":
- Bottled spirits
- groceries
- games
- TV sets, DVD players
- computers
- crockery
- swimming pools
- gardening equipment
Gifts to clients
Regarding a
business providing a gift a client, even a former client, the ATO confirms that
such outgoings are generally deductible as they are being made for the purposes
of producing future assessable income. However, the outgoing is not deductible where it is of a capital nature, relates to the gaining of
exempt or non-assessable non-exempt income, or some other provision of the
income tax law prevents it from being deductible.
To explain
this quirk, the ATO provides the following examples:
Example 1. Julia is
carrying on a renovation business. She gifts a bottle of champagne to a client
who had a renovation completed within the preceding 12 months.
Julia expects the gift will either generate future business from
the client or make them more inclined to refer others to her business. Although
Julia got on well with her client, the gift was not made for personal reasons
and is not of a private or domestic character.
The outgoing she incurred for the champagne is not of a capital
nature. Julia
is entitled to a deduction.
Example 2. David is
carrying on a business of selling garden statues. David sells a statue to his
brother for $200. Subsequently, David gifts a bottle of champagne to his
brother worth $170. Apart from this transaction, he provides gifts only to
clients who have spent over $2,500 over the last year.
The gift has been made for personal reasons, and is of a private
or domestic character. David is not entitled to a deduction.
Cash Bonuses
Some generous/successful
employers, budget permitting, may choose to provide cash bonuses to staff in
their end-of-calendar-year payroll. Bonuses in the form of cash are considered
to be a business cost, and therefore deductible under the general deduction
provisions.
However,
being a benefit in the form of "coin" there is another side to this coin, which
is that cash bonuses are assessable in the hands of employees as ordinary
income, no differently to salary and wages.
As a cash
bonus is salary and wages, it is therefore not a taxable supply for GST
purposes - so for these type of benefits, GST issues do not arise. Also there
are no FBT issues to consider. However employers should consider PAYG
withholding, superannuation guarantee and payroll tax issues. We can help with
these decisions.
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