Tax issues for businesses providing benefits to staff at Christmas

After a tough year of lockdowns and restrictions, many bosses may wish to treat their employees to a bigger than usual Christmas party or gift as a way of saying thank you.

However, this generosity could create a tax liability for the business.

This article examines the tax implications of holding a Christmas party (on the business premises or off-site) and also providing employees (including working directors) and contractors with Christmas gifts.

An assumption in the examples provided below is that the business has not elected to use either the ‘50-50 split’ or ‘12 week register’ methods for FBT purposes.

Christmas parties

Christmas parties constitute “entertainment benefits” and to the extent that the expenditure relates to employees or their associates attending the function, the expenses may be subject to fringe benefits tax (FBT) unless an exemption (e.g. the “minor benefits” exemption) applies.

A minor benefit is one that is provided to an employee or their associate (e.g. spouse) on an “infrequent” or “irregular” basis, which is not a reward for services, and at a cost less than $300 (inclusive of GST) “per benefit”.

Entertainment expenses are not tax-deductible unless they are subject to FBT. This means that expenses incurred in providing a Christmas party are not generally deductible where the minor benefit FBT exemption applies.

* Non-entertainment benefits provided to employees at the Christmas party, such as a hamper, are considered separately when applying for the $300 minor benefits exemption. Although the total cost per person is more than $300, each benefit should be considered separately under the minor benefits exemption.

Provision of gifts

Generally, it is considered that the best tax outcome for businesses is to give employees non-entertainment type gifts that cost less than $300 (inclusive of GST) per employee as the cost is fully tax-deductible, with no FBT payable and GST credits can be claimed. The gifts at Christmas parties are usually exempt from FBT because they are not provided on a frequent or regular basis, and the gift is not provided to the employees wholly or principally as a reward for their services rendered.

Unlike non-entertainment gifts, gifts classified as entertainment, including recreation, are non-deductible and GST credits cannot be claimed. A tax deduction and GST credits can only be claimed on entertainment or recreation gifts where Fringe Benefit Tax applies. This means that while the minor and infrequent exemption could still apply for entertainment and recreation gifts costing less than $300 (GST inclusive), tax deductions and GST credits can only be claimed where FBT applies to entertainment and recreation gifts.

For further information and expert assistance with your tax, contact our KMT accountants today!

This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or professional advice from your accountants at KMT Partners.