Christmas is rapidly approaching and those of us that are in business will be planning Christmas parties and maybe gifts and/or cash bonuses for employees and possibly gifts for clients and business associates.
Therefore once again it is timely for this column to offer some tax 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.
The issues explained below are relevant for employers who are not tax-exempt organisations, but elect to use the “actual cost method” of valuing meal entertainment which includes Christmas parties and some gifts.
1) The Christmas Party
a) Held on the employer’s premises
If food and drink (including alcohol) is provided to employees and their associates on the employer’s premises on a working day and the actual cost, inclusive of Goods & Services Tax (GST) per employee is less than $300, this expenditure will normally be exempt from Fringe Benefits Tax (FBT) as an exempt minor benefit, but will not be tax deductible and no credit will be available for GST on any of the expenditure items.
b) Held off employer’s premises
Providing the cost per head is less than $300 the same exempt minor benefit situation will apply if the party is held elsewhere than the employer’s premises. If clients attend as well as employees and associates there will be no FBT implications but the cost is not tax deductible.
c) Taxi or other form of transport
It is quite common for employers to either pay for taxis 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 by taxi 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.
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) Gifts 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, are tax deductible and GST credits are claimable.
c) Gifts 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, consideration should be given to 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 27.5% 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% which would apply if the $300 threshold is exceeded.
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 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. Be sure however that the total of your employer super contributions and your personal deductible contributions do not exceed the $25,000 contributions cap.
The content of this article is not intended to be used as professional advice and should not be used as such. If you have any questions you should consult a registered tax agent.
Brian Spurrell FCPA CTA Director, Personalised Taxation & Accounting Services Pty Ltd. 0412 011 946