Christmas parties and fringe benefits tax
It’s the end of the year — another unpredictable COVID 19 year at that — so it’s no surprise you would like to thank your team for all their hard work with a Christmas party. Whether it’s a small work-do or a major corporate event, you’re probably wondering how the fringe benefits tax (FBT) comes into play here.
There is no separate FBT category for Christmas parties, and you may encounter different circumstances when throwing these exciting wind-up events for your workplace. For example, fringe benefits provided by you, an associate, or under an arrangement with a third party to any current, past and future employees (and their spouses and children), may attract FBT.
Implications for taxpaying companies
If you’re not a tax-exempt organisation and don’t use the 50-50 split method for meal entertainment, FBT implications might arise from a corporate Christmas party. Let’s take a look at some of the circumstances.
Exempt property benefits
The costs (such as food and drink) associated with Christmas parties are exempt from FBT if they are provided on a working day at your business premises and consumed by current employees. The costs associated with Christmas parties held off your business premises (for example, a restaurant or winery) incur a taxable fringe benefit for employees and their associates (when we say “associates”, we’re talking about their families, namely their spouse and children), unless the benefits are exempt minor benefits.
If you invite new employees who will be joining you in the coming year, but haven’t formally started yet, this doesn’t apply to them. The property benefit exemption is only available for employees and doesn’t extend to their associates who might be joining you for the festivities.
Exempt benefits — minor benefits
The provision of a Christmas party to an employee may be a minor benefit and exempt if the cost of the party is less than $300 per employee, and certain conditions are met. The benefit provided to an associate of the employee may also be a minor benefit and exempt if the cost of the party for each associate of an employee is less than $300.
Gifts provided to employees at a Christmas party
Handing out Christmas gifts to your team might be a minor benefit that is an exempt benefit where the value of the gift is less than $300. Each benefit needs to be individually considered to determine if it’s less than $300 in value. If the Christmas party and the gift are less than $300 in value and the other conditions of a minor benefit are met, they will both be exempt benefits.
Tax deductibility of a Christmas party
The cost of providing a Christmas party is income tax deductible only to the extent that it is subject to FBT. Any costs that are exempt from FBT (that is, exempt minor benefits and exempt property benefits) cannot be claimed as an income tax deduction. If you invite clients or customers to your Christmas party, the costs of entertaining them are not subject to FBT or income tax deductible.
Taxpaying case studies that put things in perspective
1. A small renovation business throws a party in its showroom (its business premises), on a working day, before Christmas. The company provides food, beer and wine.
If only current employees attend, there are no FBT implications as it is an exempt property benefit. If current employees and their associates attend at a cost of $180 per head:
- there are no FBT implications for employees, as it is an exempt property benefit, and the minor benefit exemption could also apply.
- there are no FBT implications for associates as the minor benefit exemption applies.
If the current employees, their associates, and some clients attend at a cost of $365 per head:
- there are no FBT implications for employees as it is an exempt property benefit.
- a taxable fringe benefit will arise for associates as the value is more than $300.
- there is no FBT payable and no income tax deduction for clients.
2. A medium-sized manufacturing company holds its Christmas function at a restaurant (not its business premises), on a working day, before Christmas and provides food, drinks and entertainment.
If only current employees attend at a cost of $195 per head, there are no FBT implications as it is an exempt property benefit. Where current employees and their associates attend at a cost of $180 per head, there are no FBT implications as the minor benefits exemption applies. If the current employees, their associates, and some clients attend at a cost of $365 per head:
- a taxable fringe benefit will arise for employees and their associates.
- there are no FBT implications for employees as it is an exempt property benefit.
- for clients, there is no FBT payable and the cost of providing the entertainment is not income tax deductible.
Implications for tax-exempt companies
If you are a tax-exempt body, the following explanations may help you determine your FBT implications that come from throwing a Christmas party.
Gifts provided to employees at a Christmas party
A Christmas gift provided to an employee that meets the conditions of the minor benefits exemption rule and is less than $300 will not attract any FBT.
Christmas party held on business premises
The exempt property benefits (property benefits provided on your business premises) would not apply as the tax-exempt body entertainment provisions would apply. The minor benefits exemption rule is unlikely to apply to any staff Christmas party provided by a tax-exempt body, except in very limited circumstances.
For tax-exempt body entertainment fringe benefits, the minor benefit exemption is only available where the provision of entertainment is incidental to the provision of entertainment to outsiders, and does not consist of a meal other than light refreshments. It also applies when a function is held on your business premises solely as a means of recognising the special achievements of your employee within their role.
Christmas party held off business premises
The minor benefits exemption rule is unlikely to apply to any staff Christmas party provided by a tax-exempt body, unless very limited circumstances apply.
Still confused?
Don’t let slip-ups with your end-of-year celebrations put a dampener on the Christmas spirit. The friendly (and very merry) team at Ascent Accountants can help you ensure you understand how FTP might affect your festivities, so you can celebrate stress-free. Contact us now so you can be prepared.
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