Christmas is just round the corner and with it comes the Christmas party season.
Over the next few days, thousands of Australian small businesses will pay for their staff to let their hair down at the annual end of year celebration. There will be embarrassing moments, regrets and probably a hangover or two. But if your business is forking out for a festive fling is there also a tax hangover looming on the horizon?
Here is my comprehensive guide to the tax consequences of Christmas for your business. First of all, I’ll consider entertainment and gifts for your employees and then I’ll consider your customers and suppliers.
Employees
If you throw a Christmas function for your staff off-site, for example at a hotel, restaurant or function centre, the cost of providing the party would normally be treated as a fringe benefit, with fringe benefits tax (FBT) payable by the employer. However, provided the cost per employee is less than $300, no FBT will be due. This is because of the so-called minor benefits exemption. This exemption also applies if spouses or partners come along to the party.
The minor benefits exemption applies to each benefit provided. What that means in practice is that if you’re feeling generous and spend $290 per head on the party and then give a gift to each employee valued at a further $290, then both expenses are free of FBT.
If you spend more than $300 per head on the function, the whole lot will be subject to FBT, not just the excess.
The costs (such as food and drink) of a Christmas party are exempt from FBT if they are provided on a working day on your business premises and consumed by current employees. If spouses or other guests of employees are entitled to attend, there could be an FBT liability unless the cost is covered by the minor benefits exemption (above).
If your business also covers the cost of taxi fares to and from the festivities, these costs will count as part of the $300 per head limit if the function is off-site but will be exempt from FBT if the party is at your premises.
The bad news is that if the cost of your Christmas party is exempt from FBT, it isn’t tax deductible for income tax purposes. Nor can the business claim GST credits for the costs incurred.
Confusingly, even though gifts to employees are also covered by the FBT exemption, they generally ARE tax deductible and a GST credit can be claimed.
None of this generally impacts on the employee’s own tax position. They can eat, drink and be merry knowing that the tax consequences usually fall only on the employer.
And what about your clients and suppliers?
If you hold a bash for clients and suppliers, there is no FBT (which is only relevant where a benefit is provided to employees and their associates) but the costs aren’t income tax deductible. This is because the provision of entertainment isn’t tax deductible.
If you give festive gifts to clients and suppliers, you can generally claim a tax deduction for the cost of those gifts where the gift is given with a view to generating future income in the business. So, if you give a festive gift of a decent bottle of malt whisky to your best customer, with a view to building goodwill which leads to more sales next year, the cost of the malt is tax deductible.
Your business can’t claim a deduction for gifts of capital items, such as a piece of technology (a tablet computer for instance) and nor can you claim a deduction if the gift is for private purposes – so if your best customer is also your brother-in-law, you might struggle to get the deduction.
The dividing line between a gift (such as giving a bottle of wine) and the provision of entertainment (such as taking the client to a bar and purchasing a bottle of wine for consumption in the bar) can be hazy, particularly where the “gift” is, for instance, a voucher for a meal in a restaurant or a theatre show. Talk to your accountant if you’re not sure whether you’re giving a gift or providing entertainment.
Charitable donations
You can only claim a tax deduction for gifts or donations to organisations which are deductible gift recipients (DGRs). You can check whether an organisation is a DGR here: Deductible gift recipients | ABN Lookup (business.gov.au). Most major charities are DGRs.
When you make a gift, you do not receive a material benefit in return for your payment. This is contrasted with a contribution (for example, purchasing a ticket to attend a fundraising dinner) where you receive a benefit in return.
For you to claim a tax deduction for a gift, it must meet these conditions:
- The gift must be made to a deductible gift recipient (DGR).
- The gift must truly be a gift. A gift is a voluntary transfer of money or property where you receive nothing in return.
- The gift must be money or property, which includes financial assets such as shares.
You can’t claim as a gift or donation anything that provides you with a personal benefit, such as:
- raffle tickets
- items such as chocolates and pens
the cost of attending fundraising dinners, even if the cost exceeds the value of the dinner.
As you can see, Christmas can be a surprisingly taxing time for small business if you’re not careful. Follow the advice above and you should be able to avoid an unwelcome festive tax bill but remember the information above is general in nature so if you ‘d like specific advice, talk to your accountant.
Merry Christmas!
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Christmas is a time for celebration, but if you’re not careful, it could lead to unexpected tax surprises. Here’s how to keep it fun and financially smart Expert, Tax, Christmas Dynamic Business
