There are two important points you need to know:
- Firstly, that from a tax perspective you are better to pay your staff a Christmas bonus and let them throw their own Christmas party; and
- Secondly, there is no way you can dress up a Christmas party to be anything else but entertainment.
Now just in case you have heard to the contrary, here is why:
Why Not Pay a Bonus Instead?
The bonus will be taxed at your employee’s marginal tax rate rather than the maximum rate applicable to fringe benefits. Unless your employee is earning more than $180,000 per annum, their marginal rate will be lower than the Fringe Benefits Tax (FBT) rate of 47%, and there are no FBT consequences for the employer, and the employer can claim a tax deduction. Plus the employee has some extra cash at Christmas time. Nice and simple.
Why Not Call It An FBT-Exempt Minor Benefit and Claim as a Tax Deduction?
A minor benefit is a benefit paid by an employer to an employee and/or associate, which has a taxable value of $300 and under, per person, per benefit. The benefit must be minor, infrequent and irregular. There are some exceptions to this for some benefits/employers, but this comment is for commercial organisations, who are not using the 50/50 method for paying FBT on entertainment expenses.
Per person means that you get another $300 for the spouse of an employee and per benefit means that if you give them a Christmas present as well that gets another $300 threshold, as long as the present isn’t considered entertainment; that is as long as it is not movie tickets, concert tickets or something similar.
So for non-entertainment expenses, such as a gift hamper or Voucher under $300, the minor benefit cost is tax-deductible and GST input tax credits are claimable. So if you’ve had a good year, you could pay them a cash bonus and a non-entertainment gift and it’s tax effective for the employer, and the under $300 gift is tax-free in the employee’s hands.
You Can’t Claim a Christmas Party as a Minor Benefit, Because it is Entertainment
That is the catch, entertainment is not tax-deductible. For discussion on why a Christmas party will always be considered entertainment see much further down, but for the moment just trust me on that one.
This is something to get very clear. To summarise:
- if the value of the Christmas party per head is under $300 then it is exempt from FBT, but is entertainment, therefore not tax-deductible, and no input credit for GST.
- if it is over $300 per head then the entire amount (including the $300) is subject to FBT. If this is so, then it will be tax-deductible with input tax credits available, but better to arrange a benefit clearly under the $300 limit.
The reality is that, unless you are Clive Palmer, who reportedly treated some staff to a new Mercedes for their 2010 Christmas, your Christmas party is going to cost less than $300 per head. So, in that scenario there is no employer tax deduction or input credit on the expense.
This effectively means that the cost of the Christmas party is going to be taxable as profit in the employer’s hands, unlike the non-entertainment gift under $300 and taxable cash bonus.
Christmas Party can’t be Disguised
TR 97/17 is the ATO ruling on entertainment, if you’re into some light tax reading at Christmas time. It does not class finger food at the workplace during normal working hours as entertainment; but add alcohol to the mix and you have crossed the line. Further, at paragraph 23(a), it is clear that any food or drink provided “in a social situation where the purpose of the function is for employees to enjoy themselves has the character of entertainment”.
Or……Don’t Let the ATO Spoil Your Christmas Fun
If you are an employer of not many staff, you might not worry so much about the tax deductibility compared to the motivation of your staff. In that case, you need to keep good records of who attended and dividing your expenses between Entertainment and Non-Entertainment gifts/Christmas Party in your accounting package chart of accounts. This will be needed for 31 March 2020, when your accountant will be assessing your accounts for any Fringe Benefits to staff and/or associates.
Merry Christmas to you too, ATO!
References – TR97/17, FBTAA 136(1) and 58P
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