Christmas is rapidly approaching and those of us that are in business will hopefully be planning Christmas parties and maybe gifts and/or cash bonuses for employees and possibly gifts for clients and business associates. Those of us who are employees will be eagerly looking forward to celebrating with colleagues and hoping their employers can afford to turn on a great Christmas celebratory function.
Therefore it is timely for this column to offer some tax planning tips to business owners and their bookkeepers in the hope that unforeseen tax problems do not arise as a result of their generosity at this festive time of the year. It should also be of interest to employees who may wish to have input into planning for their employer’s Christmas party.
The issues explained below are relevant for employers other than tax-exempt organisations, and employers that elect to use the “actual cost method” of valuing meal entertainment which includes Christmas parties and some gifts.
Important Caveat
The discussion that follows is subject to the Government and/or the ATO not making any changes to the tax legislation as it stands at the time of going to press.
1) The Christmas Party
a) Held on the employer’s premises
If food and drink (including alcohol) is provided only to current employees and NOT to their associates on the employer’s premises on a working day and the expenditure is accounted for as an exempt property benefit, there will be no FBT implications for employees even if the cost per head is over $300 but being classed as entertainment, the expenditure will not be tax deductible.
If under the same conditions both employees and their associates (family members) attend and the cost per head including GST is under $300 per head, this expenditure will normally be exempt from Fringe Benefits Tax (FBT) as an exempt minor benefit including for associates but will not be tax deductible and no credit is available for GST on any of the expenditure items.
If under the same conditions the expenditure per head exceeds $300 there is no FBT liability for employees as it is an exempt property benefit but for attending associates the expenditure per head being in excess of $300 will trigger a taxable fringe benefit.
b) Held off employer’s premises
Providing the cost per head is less than $300 the exempt minor benefit situation will apply if the party is held off the employer’s premises. If the cost per head exceeds $300 a taxable fringe benefit will occur for both employees and associates. If clients attend there are no FBT implications but the cost is not tax deductible being in the nature of meals and entertainment.
Tax Implications
Opting for either of these two alternatives if the benefit provided is less than $300, FBT at 47% may be avoided. On the other hand if the employer is a base rate company with a turnover of less than $50 million it will be denied a tax deduction at the rate of 26% or at a rate of 30% if its turnover exceeds $50 million. For non-incorporated business entities, the tax saving forgone will depend upon the size of the entity’s marginal tax rate.
For employers expecting to make a tax loss for the 2021 financial year, opting for a celebratory alternative that saves 47% FBT makes a lot of sense.
c) Taxi, Uber or other form of transport
It is quite common for employers to either pay for taxis/Uber or other forms of transport to take staff and other guests to and or from the venue at which the staff Christmas party is held.
If the travel cost is for employees transported to and or from work premises to the function premises it will normally be exempt from FBT, non-tax deductible and GST credits non claimable.
Travel from the Christmas party to home for employees and associates will only be exempt from FBT, non-tax deductible and GST credits non claimable if the cost of the fare together with the other costs of the party are less than $300 per head.
2) Gifts
a) Entertainment or not entertainment
The tax treatment of gifts firstly depends upon whether the gift is in the nature of entertainment or not.
Examples of gifts that would constitute entertainment include drinks served in glasses, meals, theatre tickets, holiday accommodation, hired entertainment and hired sporting equipment.
Examples of gifts that are not deemed to be entertainment include bottled wines and spirits, groceries, games, TV sets, DVD players, computers, household items, gardening equipment and most importantly gift vouchers.
b) To employees and their family members
i) Gifts that constitute entertainment and cost less than $300 including GST will be treated as exempt minor benefits and will therefore be exempt from FBT, non-tax deductible and GST credits not claimable.
If the gift is associated with a Christmas function the $300 minor benefit exemption may be treated as a separate minor benefit enabling employees and associates to receive two separate exempt benefits which would not be taxable to the recipients.
ii) Gifts that are not entertainment and cost less than $300 being exempt minor benefits will be exempt from FBT and tax deductible and GST credits will be claimable.
c) To clients and business associates
Gifts to clients, customers and business associates are outside the FBT rules which only apply to employees and their associates. Therefore the $300 exempt minor benefit is not relevant when setting a limit on the level of generosity. Instead, the issue is whether the gift is construed to be “entertainment” or not.
i) Gifts that constitute entertainment are neither tax deductible nor GST credits claimable as the tax legislation was amended some years ago to specifically deny entertainment expenses as a business deduction or work related expense.
ii) Gifts that are not entertainment are both tax deductible and GST credits are claimable.
3) Cash Bonuses
It is quite common for employers to provide cash bonuses to employees in their end-of-calendar-year payroll. Bonuses are a business cost and therefore deductible as a business expense. Whilst eagerly anticipated by staff, unfortunately this benefit is taxed as ordinary income in the hands of employees, effectively at their marginal tax rate.
Whilst FBT and GST issues are not relevant for cash bonuses, there is the need to consider super guarantee and payroll tax issues that increase the cost to the employer.
4) Tax Tips Summary
a) Because the FBT rate is 47% and the company tax rate for small business enterprises is now 26%, there is an incentive to keep the cost of Christmas Parties and Gifts to staff and their associates under the $300 minor benefit threshold thereby avoiding FBT at 47% in return for foregoing a tax deduction at 26% which would apply if the $300 threshold is exceeded under certain circumstances.
b) Staff may prefer to receive a series of irregular exempt minor benefits over the year as well as at Christmas time that are tax free in their hands rather than a cash bonus that would be taxable to them at their marginal rate which could be 32.5%, 37% or 45% plus the Medicare levy and the Medicare levy surcharge where applicable.
A good case in point would obviously be to provide taxis for staff to get home safely from the Christmas party.
Recipients may also prefer to receive a gift in the form of a gift voucher which offers greater choice to the recipient and is less hassle for the employer.
c) Should staff members still prefer to receive rewards in the form of a cash bonus they may prefer to salary sacrifice their bonus into super by requesting their employer to make a concessional (deductible) contribution into their super fund providing it doesn’t result in exceeding the concessional super contribution cap. USING SUPER CONTRIBUTIONS TO REDUCE YOUR TAX –PART A
By Brian Spurrell
Disclaimer:
The content of this article is not intended to be used as professional advice and should not be used as such. Some aspects of this topic can be quite complex, so if you are a share investor or contemplating investing in shares you should consult a registered tax agent or a financial advisor or broker.
Brian Spurrell FCPA CTA Director, Personalised Taxation & Accounting Services Pty Ltd. 0412 011 946
Email bspurrell@ptasaccountants.com.au,
Web www.ptasaccountants.com.au