It is that time of the year again and, like every other year, we receive numerous questions about how the normal Christmas gifts and parties should be treated for tax purposes. If properly planned you can ensure that they don’t cost you more than they have to. Below we have looked at the treatment of common Christmas items.
Fringe Benefits Tax (FBT), Income Tax and GST
The tax implication for the above costs will differ depending on whether you are a tax-exempt employer or normal tax paying employer, and whether as an employer you use the 50/50 split method or the actual cost method for FBT purposes. For the purpose of this article we assume you are a normal tax paying entity and the 50/50 split method has not been elected.
Non-recreational gifts (such as a Christmas hamper, a bottle of wine, gift vouchers, etc.) provided to employees are generally subject to FBT unless it can be considered as an exempt minor and infrequent benefit. That is, the gift must cost less than $300 per employee (GST inclusive). This cost will also generally be tax deductible to the employer and the GST credit can also be claimed.
Recreational gifts (such as movie tickets, sporting event tickets and holiday accommodation) will be subjected to the same FBT treatment as above. The key difference is that no FBT has been paid, no income tax deducted and no GST credit will be allowed, as these items generally constitute entertainment.
The tax implications will depend on the location and who is attending the party. However, in the simplest form the cost of the Christmas party is generally subject to FBT unless it can be considered as an exempt minor benefit (i.e. the cost of the party is less than $300 per employee) or the cost is related to clients. Below is a summary showing the FBT, Income Tax and GST treatment of the Christmas party cost using the ‘actual cost’ method.
What happens if a Christmas gift is provided at the party?
The ATO in its Taxation Ruling TR 2007/12 has indicated that you will need to determine the FBT implication of each benefit provided separately. This means that the ATO accepts that each benefit that is provided in connection with the Christmas party (with a cost of less than $300) will still qualify as an exempt minor benefit, despite the fact that the combined cost of the gift and party is more than $300.
Using the ‘actual cost’ method
|Christmas Party||Subject to FBT||Income Tax (Deductible)||GST (Claimable)|
|Held at work premises – employee (no minimum cost limit)||No||No||No|
|Held at work premises – associates of employee (‘per head’ cost less than $300)||No||No||No|
|Held at work premises – associates of employee (‘per head’ cost more than $300)||Yes||Yes||Yes|
|Held at work premises – clients||No||No||No|
|Held off work premises – employee and their associates (‘per head’ cost less than $300)||No||No||No|
|Held off work premises – employee and their associates (‘per head’ cost more than $300)||Yes||Yes||Yes|
|Held off work premises – clients||No||No||No|
It is an area that can be very confusing so don’t hesitate to contact us if you want to clarify what you should do.