Christmas Parties & Tax Treatment of Gifts

Any bosses left with the spirit of giving this Christmas?

In deciding whether a Christmas party is subject to FBT, you need to consider such things as the income tax status of the employer, where the function is held, who attends, what was provided, how much it costs and how similar functions are to be treated.

The annual office Christmas party could see lots of festive frolics, but generally there’s no tax deduction.  For tax purposes, the food, alcohol is classified as entertainment and not deductible but is an exempt fringe benefit where below the above indicated threshold.

Under the minor benefits rule, the Christmas party is not subject to fringe benefits tax if it’s for staff only and costs less than $100 per person.  When spouses or partners come along to an off-site Christmas party where the cost is $100 per head, the combined costs is $200 per family unit.  This puts it outside the minor benefit rule.

In order for the party to become FBT exempt when partners or spouses are there, the cost must be less than $50 per head.  If this happens the exemption will apply and there will be no deduction.

On-site office parties are covered by the in-house property exemption but the effect is the same:  “no FBT for employees but will become subject to FBT if they bring their partners or spouses”.  Only the spouse’s portion is subject to FBT and will be deductible under current legislation.

Overall for income tax purposes, the general rule is that a Christmas party or function is only tax deductible to the extent that it is subject to FBT.  If not subject to FBT, it will not be deductible for income tax.

In addition to Christmas parties, most businesses normally provide their clients and employees (and associates) with Christmas gifts. These gifts will fall into one of two categories – being either “Entertainment gifts” or “Non-entertainment gifts” which will be explained in further details below.

Non-entertainment Gifts

“Non entertainment” gifts provided by businesses include flowers, hampers, wine and spirits, gift vouchers and perfume etc. You need to consider the timing of when these gifts are provided to take better advantage of the $100 minor benefits rule. The Australia Taxation Office has indicated that if these types of gifts are given to employees at least two weeks before the actual Christmas party, then the gift and the Christmas party will be treated as separate benefits. Therefore, there will be no FBT implications and the $100 minor benefits exemption can be claimed twice – once for the Christmas party and once for the Christmas gifts.

“Non-entertainment” gifts provided to non-employees and clients generally do not fall within the FBT regime, and a tax deduction and GST credits can be claimed on these gifts as long as they are not excessive and overly valuable.

Entertainment Gifts

Businesses providing “entertainment” gifts to employees have different implications to providing “non-entertainment” gifts. “Entertainment” gifts include things such as movie tickets, travel and accommodation, sporting events and musicals etc. If these types of gifts are provided to employees and their associates, and the combined value is less than $100, then there are no FBT implications. However, if the combined value of the gift is $100 or more, then FBT is payable,

Claiming Tax Deductions & Input tax credits on Gifts Provided to Employees

All gifts provided to employees (and/or their associate), whether it be “Entertainment” or “Non-entertainment” are treated identically when it comes to claiming a tax deduction and input tax credits. Basically, if a gift(s) is provided to an employee, and its combined value is less than $100, you are unable to claim a tax deduction or GST credits on the purchase. However, if the combined value of the gift amounts to $100 or more, then GST can be claimed on the gift and you can also claim a tax deduction on the expense.

All of the above can be summarised in the following table:

If you have any queries or require further information please contact Alexanders on (02) 94383233 or e mail info@alexanders.net.au.