With the well earned December/January holiday season upon us, many of you will be planning to reward staff with a celebratory party or event. However, there are important issues to consider, including the possible FBT and income tax implications of providing ‘entertainment’ (including Christmas parties) to your staff and clients.
Rewarding staff at this time of year is common place for lot’s of businesses, and the last thing we want to dampen the holiday vibe is tax implications so read below for our top tips to make sure you get no nasty FBT surprises.
FBT is a tax payable by employers who provide benefits to their employee’s for non cash related benefits, in addition to their wages. And while the ATO recognises that irregular benefits may not be subject to FBT via the minor benefit exemption, it pays to make sure you’re clear on your FBT position prior to splashing out for your staff Christmas party.
Tax implications to be aware of when throwing a Christmas party:
1. FBT and ‘entertainment’:
Under the FBT Act, employers must choose how they calculate their FBT meal entertainment liability, most use either the ‘actual method’ or the ’50/50 method’.
Under the actual method, entertainment costs are normally split up between employees (and their family) and non-employees (e.g., clients and suppliers).
Such expenditure on employees is deductible and liable to FBT. Expenditure on non-employees is not liable to FBT and not tax deductible.
2. What is the 50/50 method?
Rather than apportion meal entertainment expenditure on the basis of actual attendance by staff, etc., many employers choose to use the more simple 50/50 method.
Under this method (irrespective of where the party is held or who attends) – 50% of the total expenditure is subject to FBT and 50% is tax deductible.
However, the following traps must be considered:
- even if the function is held on the your premises – food and drink provided to employees is not exempt from FBT;
- the minor benefit exemption cannot apply; and
- the general taxi travel exemption (for travel to or from the employer’s premises) also cannot apply.
3. What is the Minor Benefit Exemption?
The minor benefit exemption provides an exemption from FBT for most benefits of ‘less than $300’ that are provided to employees (and their family/associates) on an infrequent and irregular basis.
The ATO accepts that different benefits provided at, or about, the same time (such as a Christmas party and gift) are not added together when applying this threshold.
However, entertainment expenditure that is FBT exempt is also not deductible.
And ‘less than’ $300 means no more than $299.99! A $300 gift to an employee will be caught for FBT, whereas a $299 gift may be exempt.
Example: Staff Christmas Party
An employer holds a Christmas party for its employees and their spouses – 40 attendees in all.
The cost of food and drink per person is $250 and no other benefits are provided.
If the actual method is used:
- For all 40 employees and their spouses – no FBT is payable (i.e., by applying the minor benefit exemption), however, the party expenditure is not tax deductible.
If the 50/50 method is used:
- The expenditure is $10,000, so $5,000 (i.e., 50%) is liable to FBT and tax deductible.
If you’re throwing a party and not sure what this means for your particular business – get in touch with us and we can have a chat.
You can check out more information here on the ATO website.