Yes, Fringe Benefits Tax (FBT) is a consideration, but it doesn’t mean practices shouldn’t enjoy a Christmas get-together, or employees receiving small gifts.
As Peter Bembrick, a Sydney-based tax partner of national accounting group HLB Mann Judd explains: “The rules are very strict, and businesses need to be careful and plan ahead. However, the Christmas party is expected and is part of looking after your staff, so there’s a much bigger picture to consider in terms of staff relationships.”
Tax rules for Christmas parties
A tax-deductible and Fringe Benefits Tax exempt Christmas party will be a pretty dull affair, with only employees and customers invited to an event held on company premises during the working day. There can be no alcohol and only a light meal provided to ensure the party is classified as ‘sustenance’, not ‘meal entertainment’ under the Fringe Benefits Tax rules.
Bembrick believes trying to avoid all tax is missing the point.
“When it comes to employee celebrations, Christmas is more than just a morning tea. The Fringe Benefits Tax rules are limiting and there is a cost involved in holding a Christmas function, but it can still be done,” he says.
Fringe Benefit Tax exemptions
The ATO agrees Christmas functions have their place and grants employers a Fringe Benefits Tax exemption if the event is a ‘minor’ and ‘infrequent’ employee benefit valued at less than $300 (including GST).
This catch-all exemption covers all low value non-entertainment employee benefits supplied on an infrequent basis, including small Christmas gifts.
Your practice’s Christmas party will be Fringe Benefits Tax exempt if it is held on-site during normal working hours, or off-site at a restaurant or club.
If the party is held off-site, the total cost per head must be under $300 including GST in order to not be required to pay Fringe Benefits Tax. Once the cost of an off-site party exceeds $300 per head, a taxable fringe benefit arises on the costs relating to employees and any of their family members attending.
Christmas parties on your premises
“If it can be done in-house, it can be worth considering,” says Bembrick.
Where the party is held on your business premises and attended only by current employees (i.e. not by family members or former employees), then regardless of the costs involved, Fringe Benefits Tax will not be payable.
Additionally, if you decide to pay for an employee’s taxi ride home after a Christmas party held on the business premises, it’s classified as an exempt transport benefit and Fringe Benefits Tax is not payable.
Employee gifts and Fringe Benefits Tax
If the practice wants to reward staff with a small Christmas present, again it’s important to check if the gift is classified as ‘non-entertainment’ and valued at under $300. If these two criteria are met Fringe Benefit Tax will not be payable.
“The gift must be minor – like a bottle of whiskey or perfume – and cannot be cash,” notes Bembrick.
When it comes to tax deductions, a key rule to remember is the cost of a work Christmas party is not tax deductible unless the expenditure is subject to Fringe Benefits Tax.
So any exempt costs – like an off-site party costing under $300 a head – cannot be claimed as a tax deduction by the practice.
Bembrick adds. “Often it’s better if entertainment is non-deductible at a corporate level rather than paying FBT, as FBT is currently payable at 47%, so the business can be worse off. Losing the tax deduction at a 30% or 27.5% rate is usually a better outcome than paying FBT.”
Or if you really want to forget the tax considerations altogether, as practice principal you could pay for the party yourself from private funds and not enter the transaction into the accounts at all.
Important: This article has been prepared without taking account of the objectives, financial or taxation situation or needs of any particular individual. Before acting on the information, you should consider its appropriateness to your circumstances and if necessary, seek appropriate professional advice. Any information used in this article is for illustrative purposes only. HLB Man Judd is an external entity that is not a member of the Commonwealth Bank of Australia Group of Companies (the Group) and the content or any view expressed by HLB Man Judd and its employees does not represent an endorsement, recommendation, guarantee or advice in regard to any matter. CBA, nor members of the Group accept any liability for losses or damage arising from any reliance on external parties.