With the holiday season fast approaching it is important for employers to be cognisant of Fringe Benefit Tax (FBT) implications before rewarding employees for their efforts during the year.
In the countdown to Christmas, employers can be generous with employee parties and gifts. For those lucky enough to be on the receiving end, happy days. But before employers start celebrating, they should be aware that parties and gifts generally attract FBT (due to being classified as entertainment).
Fear not, we have pulled out some FBT exemptions, available for meal entertainment expenses and property benefits meaning you too can enjoy your Christmas eggnog without sweating the post-Christmas implications.
FBT Exempt Benefits
Minor Benefit Exemption
As a general rule, if the benefit provided by the employer is a minor benefit, then it is exempt from FBT. A benefit is an exempt minor benefit where:
- The taxable value of the minor benefit is less than $300.
- The benefit is unreasonable to be treated as a fringe benefit, determined by the following:
- The frequency and regularity of the minor benefit.
- The total value of the minor benefits provided.
- The total value of associated benefits provided in connection with the minor benefit.
- The difficulty in determining the notional taxable value of the minor benefit.
- The circumstances in which the minor benefit or any associated benefits were provided.
Property Benefit Exemption
In addition, any property benefits provided on a working day, on your business premises and consumed by current employees are exempt from FBT. In this case any food, drinks or Christmas gifts provided will be FBT exempt as long as these conditions are satisfied.
It is important to note that the above exemptions are only applicable if you use the actual method of calculating meal and entertainment expenses; it is unavailable to those who use the 50/50 method. In order to use the actual method, it is imperative that you keep records of benefits provided for five years after they are prepared, obtained or the transactions completed.
The kind act of gift-giving is generally straight forward when it comes to determining the FBT consequences. Where an employer provides an employee with a gift, it will be a minor benefit where the value of the gift is less than $300. In this case it is deemed unreasonable to treat the gift as a fringe benefit, and no exclusions apply. In this case the employer can be as generous as they like (up to the $300 limit per employee) without having to worry about paying any FBT.
The FBT treatment for Christmas parties requires a two-factor determination – the location of the party as well as the specific circumstances of the event.
Party on business premises
As previously mentioned, any property benefits such as meals, drinks or gifts are exempt from FBT if they are provided on a working day on your business premises and consumed by current employees only. However, this exemption is not available for property benefits provided to associates of the employee or employees not currently employed by the employer.
Below is a summary of the FBT consequences if a Christmas party is held on an employer’s business premises:
Party off business premises
If your Christmas party is held away from your business premises then the costs associated will be subject to FBT unless the benefits are exempt minor benefits.
So, if you’re planning to head out for your Christmas festivities and want to avoid any FBT, keep your costs under $300 per head!
Below is a summary of the FBT consequences if a Christmas party is held off employer business premises:
The golden rule for the tax deductibility of entertainment expenses is… If you’ve paid FBT it’s tax deductible!
On the other hand, if you’ve provided any exempt minor benefits or exempt property benefits you won’t be entitled to a tax deduction for those costs. In addition, any client related costs incurred that are entertainment in nature are not income tax deductible.
To determine if gifts are tax deductible we need to distinguish between entertainment and non-entertainment gifts. If the gifts are non-entertainment in nature you can claim them as a tax deduction as well as any GST credits, no matter the cost.
However, as with all Christmas party entertainment expenses, gifts that are entertainment in nature are only tax deductible if FBT has been paid on them. In this case if the cost of the gift is less than $300, for which the minor benefits exemption applies, you would not be entitled to a tax deduction.
For more information about Fringe Benefits Tax:
FBT is a complex area of tax, if you have any questions on the particulars please contact your local RSM specialist today.