Here are some tax tips for celebrating the festive season.
Holding a Christmas party and rewarding your employees year can boost employee morale and increase productivity.
Importantly, you want to ensure that your limited budget is not impacted by the tax consequences of holding a Christmas party or giving gifts. Here are some common tax consequences to consider in celebrating the season.
A Christmas party is treated no differently to any other work-related party or function. Generally, any form of function is considered entertainment and is subject to Fringe Benefit Tax (FBT). The party does not have to be fun or enjoyed by all to be considered entertainment!
The costs of providing the entertainment, including associated costs, such as transportation to and from the Christmas party and accommodation for employees, may be subject to FBT unless an exemption applies. Costs of entertaining clients are not subject to FBT but also not tax deductible.
There are two common exemptions:
- The ‘minor benefits exemption’, where the cost of the Christmas party is less than $300 (GST inclusive) per person. This exemption is not available where the employer uses the 50/50 method for calculating the taxable value of meal entertainment
- Where the Christmas party is held on your business premises. Food and drink consumed by employees at work is not subject to FBT. Unfortunately this exemption does not extend to associates of the employee, such as their spouses, or past or future employees.
There are also income tax and GST issues to be considered. The general rule is that the employer can only claim a tax deduction for the cost of providing entertainment to the extent it is subject to FBT. Therefore, if the Christmas party is exempt from FBT it is not tax deductible.
In addition, you can only claim a GST input tax credit for the entertainment where it is subject to FBT. This is a common mistake picked up by the ATO during audits.
Gifts (such as hampers, bottles of wine, vouchers, etc.) provided to an employee or an associate are typically subject to FBT. However, if gifts are provided on a few special occasions (i.e. on an infrequent and irregular basis) throughout the year these may qualify for the minor benefits exemption.
The cost of providing gifts to employees may be deductible where the gift is not considered to be ‘entertainment’. Entertainment includes gifts such as movie tickets.
Bonuses are generally taxable as wages and the employer is required to withhold PAYG Withholding. Importantly, the bonus may also be subject to the 9.5% Superannuation Guarantee charge. Payments of this type of bonus will generally be tax deductible to the employer when it is paid.
This article has been provided by Michelle Hartman of Deloitte Private and the advice is designed to be general in nature.