Employee Christmas Parties and Gifts – Any FBT?
FBT AND ENTERTAINMENT
Under the FBT Act, employers must choose how they calculate their FBT entertainment liability and most use either the ‘actual method’ or the ’50/50 method’.
ACTUAL METHOD
Entertainment costs are normally split up between employees (and their family) and non-employees (e.g. clients and suppliers). Expenditure on employees is deductible and liable to FBT. Expenditure on non-employees is not liable to FBT, not tax deductible and no GST claimable.
50/50 METHOD
Rather than apportion entertainment expenditure on the basis of actual attendance by employees, etc., many employers choose to use the more simple 50/50 method. Under this method (irrespective of where the party is held or who attends) – 50% of the total expenditure is subject to FBT and 50% is tax deductible. However, the following traps must be considered:
- even if the function is held on the employer’s premises – food and drink provided to employees is not exempt from FBT;
- the minor benefit exemption* cannot apply; and
- the general taxi travel exemption (for travel to or from the employer’s premises) cannot apply.
(*) MINOR BENEFIT EXEMPTION
The minor benefit exemption provides an exemption from FBT for most benefits of ‘less than $300’ which are provided to employees (and their family/associates) and which are infrequent and irregular. The ATO accepts that different benefits provided at, or about, the same time (such as a Christmas party and gift) are not added together when applying this threshold.
However, entertainment expenditure that is FBT exempt is also not Tax deductible and no GST claimable.
NOTE: ‘less than’ $300 means ‘no more than $299.99’. A $300 gift to an employee will be caught for FBT, whereas a $299 gift can be exempt.
EXAMPLE: CHRISTMAS PARTY
An employer holds a Christmas party for employees and their spouses – 40 attendees in all. The cost of food and drink per person is $250, and no other benefits are provided.
If the actual method is used:
- For all 40 employees and their spouses – no FBT is payable (i.e., applying the minor benefit exemption), however, the expenditure is not tax deductible and no GST claimable.
If the 50/50 method is used:
- Expenditure is $10,000 and 50% (i.e., $5,000) is liable to FBT and tax deductible.
CHRISTMAS GIFTS
With the holiday season approaching, many employers and businesses want to reward their employees and loyal clients/customers/suppliers… so let’s look at how gifts to employees and clients are handled “tax-wise”.
GIFTS WHICH ARE NOT CONSIDERED TO BE ENTERTAINMENT
These generally include, for example, a Christmas hamper, a bottle of whisky or wine, gift vouchers, a bottle of perfume, flowers, a pen set, etc.
Briefly, the general FBT and income tax consequences for these gifts are as follows:
- gifts to employees and family members – are liable to FBT (except where the ‘less than $300’ minor benefit exemption applies) and tax deductible; and
- gifts to clients, suppliers, etc. – no FBT, and tax deductible.
GIFTS WHICH ARE CONSIDERED TO BE ENTERTAINMENT
These generally include, for example, tickets to attend a theatre, live play, sporting event, movie or the like, a holiday airline ticket, or an admission ticket to an amusement centre.
Briefly, the general FBT and income tax consequences for these gifts are as follows:
- gifts to employees and family members – are liable to FBT (except where the ‘less than $300’ minor benefit exemption applies) and tax deductible; and
- gifts to clients, suppliers, etc. –no FBT, not tax deductible and no GST claimable
NON-ENTERTAINMENT GIFTS AT FUNCTIONS
What if a Christmas party is held at a restaurant at a cost of less than $300 for each person attending, and employees with spouses are given a gift or a gift voucher (for their spouse) to the value of $150?
Under the actual method, for employees attending with their spouses: no FBT is payable because the cost of each separate benefit (including the gift) is less than $300 (i.e., the benefits are not aggregated). No deduction is allowed for the food and drink, but the gift is tax deductible.
Where the 50/50 method is adopted:
- 50% of the total cost of food and drink is liable to FBT and tax deductible; and
- the total cost of all gifts is not liable to FBT because the individual cost of each gift is less than $300.
As the gifts are not entertainment, the cost is tax deductible.