Christmas Parties and Tax - What You Need To Know

The silly season is fast approaching, and with it, corporate Christmas parties.

While they’re a great way for staff and management to let their hair down, they can also be a cause for concern for money-conscious businesses. After the cost of venues, catering, music, transport, and tax, a lavish soiree can result in as many light wallets as it does sore heads.

Fortunately, your festivities needn’t break the bank to be enjoyable. With a little forethought, and some insight into the ATO’s regulations, you can maximise the fun while minimising the expenses incurred by your business.

Minimising Tax On Your Corporate Christmas Party

Whether at Christmas or any other time of the year, splashing cash too eagerly on staff and their associates can leave your business liable for the often overlooked Fringe Benefits Tax (FBT).

The Australian Taxation Office (ATO) defines FBT as a tax “...paid by employers on certain benefits they provide to their employees or their employees’ family or other associates” (1). This tax applies even if the benefit is provided by a third party under an arrangement with the employer.

Though the definition may appear straightforward, the application of this tax is anything but. Determining if FBT applies depends largely on the given scenario.

Generally if you limit costs to below $300 per head you’re unlikely to incur FBT. This is thanks to what’s known as the Minor Benefits Rule, which exempts such expenses from FBT, tax deductions, and GST credits. Of course, there are countless exceptions to this.

The table below helps clarify some of the most common FBT situations involving employees, their associates (such as their spouse), and clients (2).

Situation                       FBT Applies To Employees?
 FBT Applies To Associates?
 FBT Applies To Clients?
A Christmas party is held at the workplace on a business day.

The cost per head is below $300. 		No - This is an exempt property benefit. The Minor Benefits Rule also applies. No - The Minor Benefits Rule applies. No. The costs of entertaining clients are not subject to FBT and are not income tax deductible.
A Christmas party is held at the workplace on a business day.

The cost per head is equal to or above $300. 		No - This is an exempt property benefit. Yes - FBT applies because the value per head is above or equal to $300, and no exemption precludes this. No. The costs of entertaining clients are not subject to FBT and are not income tax deductible.
A Christmas party is held off-premises.

The cost per head is below $300. 		No - The Minor Benefits Rule applies. No - The Minor Benefits Rule applies. No - The costs of entertaining clients are not subject to FBT and are not income tax deductible.
A Christmas party is held off-premises.

The cost per head is equal to or above $300.
 Yes - FBT applies because the value per head is above or equal to $300, and no exemption precludes this.
 Yes - FBT applies because the value per head is above or equal to $300, and no exemption precludes this.
 No. The costs of entertaining clients are not subject to FBT and are not income tax deductible.
A Christmas gift or hamper is provided to an employee that costs less than $300.
 No - The Minor Benefits Rule applies.

Note: The cost of gifts does not factor into the per head figure of entertainment, unlike transport off-premises.
 N/A
 N/A
A Christmas gift or hamper is provided to an employee that costs equal to or above $300.
 Yes - FBT applies because the value is above or equal to $300, and no exemption precludes this. N/A
 N/A
A taxi or rideshare is provided to go to and/or return from a Christmas party held at the workplace. No - This is an exempt property benefit. No - This is an exempt property benefit. No. The costs of entertaining clients are not subject to FBT and are not income tax deductible.
A taxi or rideshare is provided to go to and/or return from a Christmas party held off-premises. Possibly. Such travel is considered part of the overall entertainment ‘cost per head’. If this figure remains below $300 after factoring in other expenses such as food and drink, the Minor Benefits Rule will apply and no FBT will be due. Possibly. Such travel is considered part of the overall entertainment ‘cost per head’. If this figure remains below $300 after factoring in other expenses such as food and drink, the Minor Benefits Rule will apply and no FBT will be due.  No. The costs of entertaining clients are not subject to FBT and are not income tax deductible.


Calculating Your Fringe Benefits Tax and Deductions

There are three methods you can use to determine the total value that is subject to FBT - the ‘actual method’, the ‘50:50 method’, and the ‘12-week method’.

The Actual Method

The actual method involves tallying the total value of benefits provided to employees, associates, and clients based on actual expenditure. If you wish to take advantage of the aforementioned Minor Benefits Rule, this method is recommended.

Benefits provided to clients do not incur FBT when calculated using the actual method, nor are they claimable for GST credits or tax deductions.

Benefits provided to employees and associates incur FBT unless otherwise excluded by the minor benefits rule. These are claimable for GST credits and/or tax deductions.

The 50:50 Method

This involves tallying the value of the benefits provided to employees, associates, and clients. 50% of these costs incur FBT, are claimable for GST credits, and are tax deductible, while the opposite is true for the remaining 50%.

This method can generally become more costly as you don't have the flexibility to apply the different FBT exemptions. Additionally, any client expenditure must also be included in calculating the FBT liability versus applying the other methods.

The 12-Week Method

This method extrapolates the taxable value of fringe benefits by multiplying a continuous 12-week log of entertainment, meal, and other expenses (3).

Need Help Navigating Your Taxes? Reach out to Sentrika

When planning your corporate Christmas party, it’s important to keep in mind your FBT obligations. Sentrika can help you navigate these so you can throw a Christmas party that incurs minimal tax.

Reach out to our friendly team to arrange a no-obligation discussion. Based on the Gold Coast, we specialise in providing unrivalled tax, accounting, and business advisory services for clients of all types.



References

1. ATO -What is fringe benefits tax?

2. ATO - Fringe benefits tax and Christmas parties

3. ATO - Calculating the taxable value of entertainment

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