Are Christmas gifts & parties tax deductible? ATO rules on minor benefits & more explained…
Those Christmas parties and gifts you presented a few months back probably feel like ancient history. But they’re not to the ATO.
An important part of the festivities to remember is the tax implications. Unfortunately, they don’t disappear when the Christmas decorations come down.
Were those Christmas gifts tax deductible? How about parties for staff or client dinners?
Get clear on the FBT (fringe benefits tax) and income tax implications of providing entertainment in the form of parties and gifts to staff and clients.
That way there will be no surprises when end-of-year tax returns are completed.
Christmas entertainment expenditure: How do you calculate the tax?
In accordance with the FBT Act, employers have the freedom to choose how they calculate their Christmas entertainment expenditure.
The two popular calculation methods are the 'actual method' and the '50/50 method'.
The actual method
Entertainment costs are divided between employees, their families, and non-employees, including clients and suppliers.
Expenditure on employees is tax deductible and can be liable to FBT. However, any expenditure on non-employees isn't liable to FBT and isn't tax deductible.
The 50/50 method
This is where 50% of the total expenses are subject to FBT and 50% is tax deductible.
This method is often more popular due to its simple calculation. However, it is important to remember that employees’ food and drink is not exempt from FBT under this method. That’s the case even if the event is held on the employer's premises. The minor benefit exemption and the general taxi travel exemption cannot be applied either.
What’s the minor benefit exemption?
The minor benefit exemption is an exemption from FBT for most benefits, such as Christmas gifts of less than $300 (a $299 gift may be exempt!) given to individual employees or their family members infrequently.
Benefits provided around the same time (such as drinks and gifts) are not added together when applying this threshold.
To put this information into context, let's use a Christmas party as an example...
A Christmas party: What’s tax deductible and what’s not?
A Christmas party is hosted by an employer for employees and their spouses. A total of 40 guests attend.
The cost of food and drink is $200 per person. No other provisions are supplied.
Using the actual method:
For all 40 guests, no FBT is payable but the event expenses aren't tax deductible.
Using the 50/50 method:
The expenditure is $8,000, so $4,000 is liable to FBT and tax deductible.
Christmas gifts: What’s tax deductible and what’s not?
Whether you hold a Christmas party or not, Christmas gift-giving also needs to be considered.
A Christmas gift can be a great personal way to show employees your gratitude but how should this be handled from a tax perspective?
Christmas gifts need to be categorised into two sections:
1. Those considered entertainment - including jewellery, alcohol, flowers, etc.
2. Those NOT considered entertainment - including event tickets, airline tickets, etc.
Giving a gift that is not considered entertainment
These Christmas gifts to employees are liable to FBT, unless the 'less than $300' minor benefit exemption is applicable and they are tax deductible.
Giving a gift that is considered entertainment
These Christmas gifts to employees are tax deductible and are liable to FBT, unless 'less than $300' minor benefit exemption is applicable.
Gifts to suppliers, clients, etc.
Whether these gifts are considered entertainment or not, they are not FBT-liable and not tax deductible.
The tax deductibility of Christmas entertainment can be a confusing area for many business owners.
For help in understanding this, contact Ascent Accounting. Perth businesses rely on us for tax accounting, bookkeeping, and more.