It’s Christmas time….what’s tax deductible?
By Matthew Stewart, Director – Edney Ryan Chartered Accountants
So it’s just about the time you are thinking “What are we going to do for our staff for Christmas” or “I hope my employer is going to put on a huge show for the festive season and it’s going to be big because we can make it tax deductible”.
Unfortunately it isn’t that straightforward. There are income tax, Fringe Benefit tax (FBT) and GST considerations that can take a bit of the giving out of the Christmas budget. FBT is levied on entertainment at 46.5% which is the same as the top personal tax rate and more than the company tax rate of 30%. However there are some exemptions on FBT.
If the Christmas Party is held at the work premises (on a work day) then the food and drink for employees won’t be subject to FBT regardless of how much is spent, but unfortunately there is also no tax deduction or credit for the GST paid on the lobster or the Moet. The only additional catch is there is a $300 limit in total for associates who attend the party (typically family members). Clients aren’t associates for FBT purposes. If “associates only” expenditure goes over $300 then this will be subject to FBT.
If the party (for clients and employees only), is just minimal food (e.g. a party pie you can fit in your mouth in one go) and no alcohol then the costs wouldn’t be subject to FBT and you would be able to get a tax deduction and claim the GST as this is not considered entertainment. It would also be relatively cheap as there is a good chance no one will turn up.
If the function is offsite from work premises then as long as the amount spent is less than $300 per employee and associate, and it is considered minor and infrequent (i.e. doesn’t happen regularly) then FBT won’t apply – but there is still no tax deduction or GST claimable. If the amount goes over $300 then FBT will apply however the business will get a tax deduction and can claim the GST. The party will probably cost more as everyone will turn up.
If clients are attending then their cost is not subject to FBT but not tax deductible or GST claimable. A good point to remember is that FBT (if applicable) will only ever be levied on employees and associates. It never applies to clients or those who aren’t employees or associates.
Christmas presents given to staff at the party will be included in the $300 limit for FBT exemption for that function. If the present is given a few days before then a separate $300 limit applies. If the Christmas present is considered entertainment (e.g. restaurant voucher, bottle of wine, skydiving) then no tax deduction or GST is claimable.
Go over $300 on the present (classed as entertainment) and FBT will apply. If the gift given is work related (e.g. mobile phone, electronic organizer laptop) then regardless of value it may be tax deductible and GST claimable.
Finally, it might be worth giving a cash bonus as an employee’s marginal rate of tax could be less than the FBT rate of 46.5%.