Christmas Parties, Gifts and Tax Deductions – What’s Allowed?
If your business is throwing a Christmas party, giving gifts to staff, clients and suppliers or paying a Christmas bonus to your employees, you’ll need to know what’s allowed for Christmas tax deductions and the BAS.
Christmas business deductions are not always easy to work out! We’ve got some general information here, but it’s important to check with your tax agent about specific expenses, particularly if they don’t fit into our simple examples.
Christmas is generally when business owners like to acknowledge their staff with parties and presents. We often see owners spending money at Christmas without considering the fringe benefits and employee tax implications. It can end up costing more than you counted on.
Don’t get caught out by the ATO’s entertainment rules at Christmas!
Claiming Christmas party expenses is not always straightforward, as there are implications for GST, income tax and fringe benefits tax. There are different rules for employees, their spouses, and your clients or suppliers.
Entertainment is generally not a deductible business expense. Entertainment rules can be tricky, but in general, the more extravagant and costly the meal or event, the later in the day, and if alcohol is involved, then it will generally be classed as entertainment.
Fringe benefits tax may apply to entertainment benefits provided to employees. If an event or gift is classified as entertainment, you cannot claim a business deduction or GST on that expense unless you’re also paying Fringe Benefits Tax (FBT). The purpose of Fringe Benefits Tax is to reverse any benefit you received by claiming the GST and claiming the expense as a tax deduction. While there’s nothing wrong with splashing out and rewarding staff, clients and suppliers, it makes sense to maximise your tax deductions by using a strategic approach to the money you spend at Christmas and to be aware of the total cost of your celebrations and rewards.
Minor Benefits Rule
A minor benefit is one that has a value of less than $300. Minor benefits are exempt from FBT because they are low value and provided only occasionally. For example, a Christmas gift voucher or the cost of a party would be exempt from FBT.
Christmas Parties and Tax
A Christmas party for employees, spouses, suppliers, and customers may or may not be classed as entertainment, depending on the nature of the event. Whether the event is held on or off the business premises also impacts the decision, as does the cost per head.
The costs of food and non-alcoholic drinks at a Christmas party for current employees are exempt from FBT if the party is on a working day and held at your business premises.
If the party is held elsewhere, it would generally be exempt from FBT if the cost is less than $300 per employee, and therefore would not be tax deductible.
The cost of the party may attract FBT if it costs more than $300 per employee, and it would then be allowed as a tax deduction.
Let’s say you have a party for 30 staff, 10 customers and suppliers and 10 spouses of employees and spend $10,000. That equates to $200 per head, which is under the minor benefits FBT threshold. The party is not subject to FBT, therefore, is not tax deductible. The costs associated with customers and suppliers are deemed entertainment and are BAS excluded.
Fringe benefits tax may apply to some benefits you provide to employees in addition to wages or salary. So, to avoid paying FBT, keep in mind these rules for gifts given to employees.
- If you give gifts to your employees, keep them under $300 each.
- You can give cash gifts to employees so long as they are less than $300 each. The cash gift does not need to be processed through payroll and is exempt from income tax.
- Give gift cards or vouchers up to the value of $300. (Vouchers are not considered to be entertainment).
Fringe Benefits Tax
If your business is already registered for Fringe Benefits Tax and you are providing benefits over the minor benefits threshold, remember to include the Christmas benefits to work out the reportable amounts for employees’ income statements and your FBT return.
Fringe benefits are reportable on the employee’s income statement if the total taxable value of certain relevant benefits is more than $2,000 in the FBT year (1 April to 31 March).
Paying a Christmas Bonus
If you want to give more than $300 as a cash gift to an employee, you’ll need to pay this through payroll as a bonus and tax it accordingly. We often see business owners paying large amounts to their staff without paying it through payroll, so we have to work out the gross amount, tax and super later.
This can cost the business significantly more than they calculated because the income tax and super are added to the net bonus amount.
Bonus payments still have to be reported as earnings for the employee. Remember that superannuation also applies to bonus wages unless it’s related to overtime.
Let’s take an employee on $110,000 per annum who receives $11,550 superannuation guarantee contribution.
If you pay a $10,000 bonus at the end of the year, we need to work out the gross amount and the amount of tax to withhold so that the net amount is $10,000. We then work out super on top of the gross payment.
In this example, it could be $15,000 gross, plus super, less tax, which equates to $10,000 net.
That would be a total cost of $16,575 to pay a $10,000 bonus.
It’s generally better to pay a bonus of a set amount and let us calculate the tax and super on that. So in this example, the total cost, including super, would be $11,050.
The cost difference in this example is $5,525 – quite an extra cost if you hadn’t factored in tax and super to the bonus payment!
If you pay a net amount and don’t take care of the gross amount, you could also affect the employee’s annual tax calculation if they are thrown into the next tax bracket, as in this example.
(Note this is not a precise calculation but a theoretical example for illustration).
Enjoy Your Party!
There are many rules to consider when it comes to Christmas business deductions. Doing a bit of research ahead of time will be worth it when it comes to allocating the costs and knowing whether GST and FBT apply. Once you know the costs of throwing a party and giving gifts and bonuses, you can put your feet up and enjoy the party!