The festive season is upon us once again, which means it’s time for our business clients’ questions and concerns about the costs associated with their staff Christmas parties.
“Is the Christmas party tax deductible?”
“Can I claim the GST on the expenses?”
”Will I need to pay Fringe Benefits Tax?”
Do any of these questions sound familiar? If they do, then let us give you the lowdown on the ATO Christmas Grinch.
But first things first: There are no special tax rules for staff Christmas parties. The costs relating to the party fall under the same rules that apply to any other meal and/or entertainment a business provides to employees (past, present and future) and their associates.
Here’s a table from the ATO that outlines how each situation is treated in terms of Income Tax and Fringe Benefits Tax:
|Employee takes two clients to lunch at a restaurant – cost $150||Employee’s portion: $50 tax deductibleClient’s portion: $100 non-deductible||Employee’s portion: $50 fringe benefitClient’s portion: No FBT|
|Employee has meal in restaurant while travelling on business trip||Tax deductible||No FBT (‘otherwise deductible’ rule)|
|Employee has meal in an ‘in-house canteen’||Tax deductible||Exempt from FBT|
|Employer provides sandwiches and juice for working lunch in office (not entertainment)||Tax deductible||Exempt from FBT|
|Employer provides substantial lunch with wine for employees and clients in office||Non-deductible||Exempt from FBT|
|Employer provides social function for employees /clients in office||Non-deductible||Exempt from FBT|
|Employer provides social function for employees and associates in office||Cost per employee: Non-deductibleCost per associate: Tax deductible||Cost per employee: Exempt benefitCost per associate: Taxable fringe benefit|
|Employer reimburses employee for cost of private party||Amount reimbursed is tax deductible||Taxable fringe benefit|
|Employer provides employee and associates with theatre tickets||Tax deductible||Taxable fringe benefit|
By looking at the table we can take away a very simple rule of thumb: You can’t claim a tax deduction or an input tax credit in relation to a benefit provided to employees or their associates unless the amount is subject to Fringe Benefits Tax.
Fringe Benefits: Minor Benefits Exemption
To be eligible for this exemption, the taxable value of the fringe benefit must be:
- under $300 per employee
- ‘infrequent’ and ‘irregular’.
The ATO has provided very little guidance on what they believe to be ‘infrequent’ and ‘irregular’, which is frustrating for tax accountants and employers alike. However, the ATO has stipulated the more often and regularly benefits are provided, the less likely an employer will satisfy this criterion.
The ATO touches on how the minor and infrequent exemption should be applied to staff Christmas parties in Taxation Ruling TR 2007/12. This ruling states an employer who provides a Christmas party for its staff isn’t exempt because the benefit is not infrequent. (Christmas parties are arranged annually for staff and, therefore, occur on a regular basis.)
We take the approach outlined in Taxation Ruling TR 2007/12. If a benefit is provided regularly (e.g. every week, month, quarter or year), then it doesn’t qualify for the minor and infrequent exemption and fringe benefits tax applies according to the table. If the benefit occurs ad-hoc or for one time only, then it will qualify as a minor benefit providing the taxable value is less than $300.
How does this apply to your upcoming Christmas party?
We believe employers who hold annual Christmas parties don’t satisfy the minor and infrequent exemption criterion, and will be liable for FBT on the costs associated with the party.
However, employers who don’t necessarily hold Christmas parties every year, or start-up businesses planning their first Christmas party, can satisfy the infrequent criteria, and the minor and infrequent exemption can be applied to the benefit if the cost is less than $300 per person.
Remember: If the amount isn’t subject to Fringe Benefits Tax then it’s not deductible and you can’t claim your input tax credits.
Having said that, I’m sure you throw a good Christmas party for reasons other than tax deductions!