The Christmas Party
In the blink of an eye the year has passed, the shops are filling with Christmas decorations and we are beginning to wind down for the holidays. Once again we are asking ourselves where has the year gone? As the weather starts to warm up and the end of year events start to fill our calendars, I feel it is a timely reminder to talk about the business Christmas Party and the tax implications.
At the risk of sounding like Ebenezer Scrooge, I need to break the myth that the staff Christmas party is a tax deduction. I see some businesses go to elaborate lengths to create a mega event, I am sure with the understanding that they will be able to “claim it”. In most cases you can’t.
The ATO do not have a specific ruling on Christmas parties. They considered Christmas celebrations as entertainment and therefore they fall under the Fringe Benefits Tax rules. The ATO do have some fact sheets and you may want to have a read at the following link (in case you don’t believe what I am saying). https://www.ato.gov.au/businesses-and-organisations/hiring-and-paying-your-workers/fringe-benefits-tax/types-of-fringe-benefits/entertainment-related-fringe-benefits/common-entertainment-scenarios-for-business#ato-Christmaspartiesandgifts
Specifically the ATO says:
“Tax deductibility of a Christmas party
The cost of providing a Christmas party is income tax deductible only to the extent that it is subject to FBT. Therefore, any costs that are exempt from FBT (that is, exempt minor benefits and exempt property benefits) cannot be claimed as an income tax deduction.
The costs of entertaining clients are not subject to FBT and are not income tax deductible.”
Cool, so if my Christmas party is subject to Fringe Benefits Tax, I get a tax deduction? That means I need to pay Fringe Benefits Tax on the party, which is at 47%. Maybe not so cool! Unless you and your staff are being paid in the highest tax bracket you will want to avoid Fringe Benefits Tax. It gets complicated.
What we would like to do is to avoid Fringe Benefits Tax by making sure our party is considered an Exempt Minor Benefit. If it is, then we don’t have to be concerned with Fringe Benefit Tax.
Before we look at these benefits we need to look at who is possibly attending the Christmas party.
· Employees
· Associates (ie, the family of the employee)
· Clients
Please note that having clients at your Christmas party does not change the nature of the party to a tax deductible event. It is still entertainment. However, clients are not employees so we do not need to think about Fringe Benefits Tax for entertainment provided to clients.
Exempt Minor Benefits
A minor benefit is exempt from fringe benefits tax if it is less than $300 per employee. To qualify as a minor benefit we need to consider the regularity of the benefit. Having regular weekly drinks at the pub with your staff with a value of less than $300 is not considered a minor benefit as it is regular. Christmas parties, Christmas gifts, birthday gifts, or the occasional team lunch are not regular and can qualify as an exempt minor benefit.
The benefits are looked at in isolation. A Christmas gift can be less than $300. A Christmas party can be less than $300. Inviting your spouse (associate) to the Christmas party can be less than $300. Although they may total just under $900, they would be seen as 3 separate $300 minor benefits. Each in its own right is irregular.
Don’t try to get too smart with this. Keep records about who is attending and how you have worked out that they benefit qualifies as a minor exempt benefit.
Remember that even though the party is not subject to fringe benefits tax, it is not tax deductible as it is considered entertainment. To rub salt into the wound, you cannot claim GST on entertainment benefits.
We appreciate this is tricky. We want you to celebrate Christmas with your staff and clients. Not everything in life should be based on a tax deduction and having fun with your co-workers and clients is important. However, please be aware of the tax implications. We really don’t want you to get caught out.
If in doubt please speak to your tax advisor.
