Christmas is the ideal time for celebrations.
It’s the end of the year, your people have worked hard and you want to recognise that.
But, what about the ever present obligation of tax?
It’s important to keep this in the back of your mind when planning any kind of Christmas celebration or gifting as some entertainment expenses may attract Fringe Benefits Tax (FBT).
So, let’s tiptoe our way through what your tax obligations are during the festive season so that you can make informed decisions about how you want to celebrate.
What Is Fringe Benefits Tax (FBT)?
Fringe Benefits Tax (FBT) is a tax that employers have to pay on certain benefits that are provided to their employees, their employee’s family or other associates. It is separate from income tax and is calculated on the taxable value of the ‘fringe benefit’.
To put it simply, a fringe benefit is similar to a ‘payment’ to an employee, but not in the same form as their usual salary or wages. It’s considered an extra benefit that they receive, therefore must be taxed. Many entertainment costs, such as meals out, free tickets to a movie or day out, and personal memberships paid on their behalf can attract FBT.
While it is the employee who is receiving the benefit, as the employer, you must pay the FBT. So, it is important to consider these factors when planning your Christmas party and any Christmas gifts. You’ll need to think about the potential tax implications before going ahead.
When Does FBT Apply?
Food, drink and recreation will sometimes attract FBT, depending on the circumstances. These circumstances are based on whether the items you are offering are for entertainment purposes or not. According to the ATO, entertainment is considered as:
- business lunches and drinks
- parties and staff social functions
- product release functions, reward and recognition functions
- sporting or theatrical events
- gym or sporting club memberships
- sightseeing tours and holidays
Whether FBT applies to the above list of activities will depend on a couple of factors. The main ones are why you are providing food and drink for your employees and what kind of refreshments you are supplying.
If you are providing light refreshments and snacks that allow your team to complete the working day in comfort, then it is less likely to be considered entertainment. However, if the refreshments are supplied for the purpose of your employees to enjoy themselves and you are providing an elaborate meal along with alcohol, it is likely to be considered entertainment and therefore liable for FBT.
How FBT Applies To Christmas Parties
So, how does FBT work when it comes to your Christmas party? Again, it comes back to the entertainment factor and what you actually do for your Christmas celebrations. If you are unsure about any aspect of FBT and how it might impact your Christmas celebrations, then chat with the team here at Cadenze and we’ll be happy to guide you.
As a general rule of thumb, these are a few examples of Christmas party scenarios and how FBT might apply:
Scenario 1
You hold a celebration at your work premises for your current employees only(no partners or clients), serving food and non-alcoholic drinks.
FBT does not apply to the food and drink.
Scenario 2
Your celebration is held away from your business premises and includes partners of your employees. Food, drink and taxi fares are covered. The cost is equivalent to $150 per person.
FBT does not apply as it is considered a minor benefit – under $300 per person
Scenario 3
You hold an offsite Christmas party for your employees and for your key clients where food, drink and entertainment are supplied.
FBT does not apply to any of the costs relating to your clients and would only apply to the costs incurred for your employees if they exceeded $300 per person.
Scenario 4
You throw a big bash celebration for your employees and their partners at an off-site venue with an elaborate meal, alcohol and entertainment.
FBT may apply if the costs total more than $300 per person.
Scenario 5
Your celebration is held offsite and you provide taxi travel to and from the venue for your employees and the partners as alcohol is being served, along with food.
FBT may apply if the costs total more than $300 per person.
FBT And Christmas Gifts
So, if FBT does not apply to some of your Christmas party scenarios, what about when you give your employees a Christmas gift? Would it apply then?
Similar rules to Christmas parties are in place for Christmas gifts. If you gift your employees a small token at the end of the year to say thanks, then FBT is not likely to apply. That is because there is the same $300 per person threshold in place and it would be considered unreasonable to treat a small gift as a fringe benefit.
However, if you give your team members an extravagant gift or a high value item like an ongoing gym membership, FBT may apply as they are both considered entertainment and a perk.
It is important to note that if your Christmas party does not attract FBT, then you can’t claim income tax deductions or GST credits for the cost of the celebration.
Planning For A Fun Christmas
Having just spent the last little while discussing taxes, it’s now time to focus on the fun aspect of Christmas! End of year celebrations are a great way to thank your team for the hard work they have put in throughout the year.
While it is important to consider the potential tax implications, that shouldn’t be the driving force behind your plans. Here’s how to plan for a fun Christmas party:
- Be modest, but not cheap!: Keeping your celebrations modest will mean you are less likely to attract FBT, but don’t be so modest that it feels cheap. Show your team that you value them by organising a nice celebration that falls within your budget.
- Invite everyone: Make sure your event is open to all of your employees, including the ones who work remotely or job share.
- Consider on-site: Do you have a nice space at your workplace where you could hold your Christmas celebration? This can minimise the chance of FBT. If not, choose an off-site venue that your whole team can enjoy.
- Focus on the fun: Rather than handing out extravagant gifts, focus on creating a fun, team building experience that brings everyone together and finishes the year on a high.
No Nasty Surprises
Sometimes it can be hard to know if your planned celebrations are going to attract FBT or not. That’s why it is always helpful to chat with an accountant before you finalise any plans. Then, you can make a fully informed decision about how you want to proceed when you understand the full cost involved.
Here at Cadenze, our team are experts in Fringe Benefits Tax and will be able to provide specific guidance tailored to your individual plans. So, don’t hesitate to contact us in regards to your FBT or wider accounting needs.