In 2021 Tax Tips

Advice For Avoiding Christmas Tax

It’s that time of year again! Christmas is just around the corner, and if you’re anything like me, you’ve already started thinking about what to buy your loved ones. Unfortunately, with so many people on the same wavelength as us, prices are going through the roof, and it can be tough knowing where to find some good deals. So here are my top tips for avoiding some of those nasty taxes this festive season.  I hope they help save you some cash!

Christmas Tax in Australia is a big problem, and many people think that it’s too late to do anything about it.  However, with these tips, you’ll be able to avoid the Christmas tax and save your hard-earned money!  The best way to get around this is by donating your gifts instead of buying them. 

That way, you can give back to charities in need while avoiding the tax on expensive items like cars or houses. It’s also important not to buy any pre-owned items for friends or family members because they will trigger the tax as well! If you’re still struggling with what gifts to buy, there are plenty of websites out there which sell gift cards, so all you have left to do is wrap them up and send them off!

Don’t Invite The Tax Man to Your Christmas Party

With just four weeks until Christmas, we bet you’re already thinking about how you and your team are going to celebrate the silly season.

As a business owner, you might want to thank your employees and clients for a great 12 months by throwing a Christmas bash or buying a few well-thought gifts.

But whilst playing Santa is a great idea for boosting morale, it can have hidden tax implications.

Don’t get caught with an unforeseen tax bill this Christmas; follow our simple guide to Christmas parties, gifts and Australian tax law.

Is Your Workplace Christmas Party Liable For Fringe Benefit Tax?

While there is no express ‘entertainment fringe benefit’, a fringe benefit may arise from providing your employees and their connections with social and recreational activities such as Christmas parties, getaways and other social functions.

To determine whether providing your office Christmas party is considered entertainment, you need to look at the following factors.

Why Are You Supplying The Food Or Drink For Employees?

Providing your staff with food or drinks to help them get through the working day in comfort is not generally considered entertainment – think cold water on a hot day or pizza for dinner while you’re all working late to meet a tight deadline.

But suppose you provide food and drink in a social situation where the event’s primary purpose is for employees to enjoy themselves. In that case, it is likely to be considered entertainment.

What Type Of Food Or Drink Are You Providing?

Next, consider the type of refreshments you’re providing. Are they inexpensive nibbles or homemade treats? Or are you paying for a meal at a nice restaurant, drinks at a trendy bar or a multi-course extravaganza?

If the food and drink you have planned are more elaborate than your regular meal, then it’s likely to be considered entertainment.

If the food you’re providing is during work time, overtime, or while travelling for work, it is less likely to be entertained because it’s for a work-related purpose rather than for enjoyment.

Food or drink provided at a function room, hotel, theatre, or restaurant is more likely to be entertained than refreshments in-store or at the office.

It’s also likely to be entertained if the meal comes with music, dancing, performance and other forms of amusement.

How Much Do The Food And Drink Cost?

If the cost of putting on your celebration is more than $300 per person, inclusive of GST, it doesn’t fall under the minor benefits exemption, and you will need to pay FBT.

An FBT exemption exists for fringe benefits if they are infrequent, irregular and have a value of less than $300. However, note the $300 amount is not a deductible amount and if exceeded, FBT applies.

How To Calculate Your FBT Entertainment Liability

Under the FBT Act, you need to choose how you calculate your entertainment liability. Most business owners use either the ‘actual method’ or the ‘50/50 method’.

Actual Method

Using this method, you split up the entertainment costs between employees (and their families) and non-employees.

What you spend on employees is tax-deductible and liable to FBT, while the amount you spent on non-employees is not liable to FBT, not tax-deductible and is not GST claimable.

50/50 Method

Rather than dividing up entertainment costs based on who attends your party, you can choose to use the more straightforward 50/50 method

Under this method, regardless of where the party is or who attends, 50 per cent of the total cost is subject to FBT, and a tax deduction/GST credit can be claimed (where applicable) for this component. FBT applies to the other 50 per cent.

But be careful not to fall into the following traps:

  • First, even if the function is on your premises, the food and drink you provide to your employees are not exempt from FBT.
  • The minor benefit exemption cannot apply if using the 50/50 method.

Do Gifts Make Better Sense Than A Christmas Party?

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The short answer is yes! Instead of hosting a Christmas bash, consider giving your team non-entertainment gifts that cost less than $300.

Give your staff non-entertainment gifts under $300.Non-entertainment gifts under $300 are usually exempt from FBT. You can claim a tax deduction and GST credit as well. 

Non-entertainment gifts include skincare and beauty products, flowers, wine, perfumes, gift vouchers and hampers. Avoid giving tickets to sporting events, cinemas and theatre productions, gym memberships or holiday experiences; these are all considered recreation or entertainment.

The $300 minor benefits exemption also separately applies to any gifts provided to associates meaning that a matching gift can go to a spouse or partner of the staff member with the same favourable tax outcome.

These favourable tax rules don’t apply to gifts to sole proprietors and partners in a partnership. After all, you can’t be your own employee.

Don’t forget to claim a tax deduction for “non-entertainment gifts”, including gift vouchers and keep in mind Christmas gifts are considered separately to the Christmas party when determining whether the minor benefits exemption can apply.

Gifts Over $300 Per Person Are Less Tax Effective

Providing more expensive gifts is less tax-effective. You can still claim a tax deduction and GST credit; however, FBT is payable at the rate of 47 per cent on the grossed-up value on gifts valued at more than $300, including GST.

FBT doesn’t apply to gifts for clients and suppliers. Non-entertainment gifts given to clients and suppliers do not fall within the FBT rules because they are not staff. Generally, a tax deduction and GST credit can still be claimed, provided the gifts aren’t overly valuable or excessive.

Well, What Should I Give My Staff This Holiday Season?

The best tax outcome for your business is to give staff non-entertainment type gifts that cost less than $300 instead of hosting a Christmas party. These are tax-deductible, and no FBT is payable.

We suggest giving small but meaningful tokens of your appreciation, such as hampers, gift cards, wine, flowers or beauty products.

Gift cards are a great solution for larger teams. Don’t be tempted to give $300 gift cards, this is not less than $300 and isn’t eligible for the minor benefit exemption. Try $250 (even $299) instead.

Tips For Avoiding An Unexpected Christmas Tax Bill

Christmas parties are often considered to be entertainment and are liable for FBT. This is primarily if they are held off-site, involve recreational and social activities and cost more than $300 per staff member. We note:

  • Giving non-entertainment gifts that cost less than $300 per staff member is more tax effective than hosting a party.
  • If issuing gift cards, don’t be tempted to provide $300 vouchers, as this is not less than $300 and will not be eligible for the minor benefit exemption.
  • Remember that Christmas gifts are considered separately to the Christmas party when determining whether the minor benefit exemption can apply.

Top Tips For Keeping The Tax Man Happy This Christmas

We’re heading into the Christmas party season. Over the next few weeks, thousands of Australian businesses will pay for their staff to let their hair down at the annual end of year celebration.

There will be embarrassing moments, regrets and probably a hangover or two. But if your business is forking out for a festive fling, is a tax hangover also looming on the horizon?

We’ve done the hard work for you, and here are our top ten tips for avoiding an unwelcome festive season tax bill:

  • If you throw a Christmas function for your staff off-site, for example, at a hotel, restaurant or function centre, the cost of providing the party would normally be treated as a fringe benefit, with fringe benefits tax (FBT) payable by the employer.
  • However, if the cost per employee is less than $300, no FBT will be due. This is because of the so-called minor benefits exemption. This exemption also applies if spouses or partners come along to the party.
  • The minor benefits exemption applies to each benefit provided. What this means in practice is that if you’re feeling generous and spend $290 per head on the party and then give a gift to each employee valued at a further $290, then both expenses are free of FBT.
  • If you spend more than $300 on the function, the whole lot will be subject to FBT, not just the excess.
  • A Christmas party’s costs (such as food and drink) are exempt from FBT if they are provided on a working day on your business premises and consumed by current employees. However, if spouses or other guests of employees are entitled to attend, there could be an FBT liability unless the cost is covered by the minor benefits exemption (see above).
  • If your business also covers the cost of taxi fares to and from the festivities, these costs will count as part of the $300 per head limit if the function is off-site but will be exempt from FBT if the party is at your premises.
  • The bad news is that if the cost of your Christmas party is exempt from FBT, it isn’t tax-deductible for income tax purposes. Nor can the business claim goods and services tax credits for the costs incurred.
  • Confusingly, even though gifts are also covered by the FBT exemption, they generally ARE tax-deductible, and a GST credit can be claimed.
  • If you hold a bash for clients and contacts, there is no FBT, but the costs are not income tax-deductible.
  • None of this generally impacts on the employee’s tax position. So they can eat, drink and be merry knowing that the tax consequences usually fall only on the employer!

Top Tips For Avoiding An Unwelcome Festive Season Tax Bill

The Christmas party season is almost upon us, and over the next few weeks leading up to the holiday break, lots of Australian businesses will pay for their Team to let their hair down at the annual end of year celebration.

Our top tips for avoiding an unwelcome festive season tax bill:

  1. If you throw a Christmas function for your staff off-site, for example, at a hotel, restaurant or function centre, the cost of providing the party would normally be treated as a fringe benefit, with fringe benefits tax (FBT) payable by the employer.
  2. However, if the cost per employee is less than $300, no FBT will be due. This is because of the so-called minor benefits exemption. This exemption also applies if spouses or partners come along to the party.
  3. The minor benefits exemption applies to each benefit provided. What this means in practice is that if you’re feeling generous and spend $290 per head on the party and then give a gift to each employee valued at a further $290, then both expenses are free of FBT.
  4. If you spend more than $300 on the function, the whole lot will be subject to FBT, not just the excess.
  5. A Christmas party’s costs (such as food and drink) are exempt from FBT if they are provided on a working day on your business premises and consumed by current employees. If spouses or other guests of employees are entitled to attend, there could be an FBT liability unless the cost is covered by the minor benefits exemption.
  6. If your business also covers the cost of taxi fares to and from the festivities, these costs will count as part of the $300 per head limit if the function is off-site but will be exempt from FBT if the party is at your premises.
  7. The bad news is that if the cost of your Christmas party is exempt from FBT, it isn’t tax-deductible for income tax purposes. Nor can the business claim goods and services tax credits for the costs incurred.
  8. Confusingly, even though gifts are also covered by the FBT exemption, they generally ARE tax-deductible, and a GST credit can be claimed. So, if you are also an employee of your own business, you also qualify for the tax-deductible gift – Merry Christmas to you too!
  9. If you hold a bash for customers and contacts, there is no FBT, but the costs are not income tax-deductible.
  10. None of this generally impacts on the employee’s tax position. They can eat, drink and be merry knowing that the tax consequences usually fall only on the employer!

The top Christmas tax questions

The key to Christmas presents for your team is to keep the gift spontaneous, ad hoc, and from a tax perspective, below $300 per person. $300 is the minor benefit threshold for Fringe Benefits Tax (FBT) so anything at or above this level will mean that your Christmas generosity will result in a gift to the Tax Office as well. To qualify as a minor benefit, the gifts also have to be ad hoc (no ongoing gym membership payments or giving the same person regular gift vouchers amounting to $300 or more).

A question we often get is what is the tax impact if you give your team say a hamper and a gift card? The good news is that the tax rules treat each item (the hamper and the gift card) separately. FBT won’t necessarily apply as long as the value of each item is less than $300. However, the minor benefits exemption is a bit more complex than this. For example, you need to look at the total value of similar benefits provided to the employee across the FBT year etc.

If you are planning to provide your team with a cash bonus rather than a gift voucher or other item of property, then this will be taxed in much the same way as salary and wages.  A cash bonus at Christmas is not a gift; it’s still income for the employee regardless of the intent. A PAYG withholding obligation will be triggered and the ATO’s view is that the bonus will also be treated as ordinary time earnings which means that it will be subject to the superannuation guarantee provisions unless it relates solely to overtime that was worked by the employee.

The staff Christmas Party

If you really want to avoid tax on your work Christmas party then host it in your office on a work day (COVID rules allowing!). This way, Fringe Benefits Tax is unlikely to apply regardless of how much you spend per person.  Also, taxi travel that starts or finishes at an employee’s place of work is also exempt from FBT.  So, if you have a few team members that need to be loaded into a taxi after overindulging in Christmas cheer, the ride home is exempt from FBT.

If your work Christmas party is out of the office, keep the cost of your celebrations below $300 per person. This way, you won’t generally pay FBT because anything below $300 per person is a minor benefit and exempt.

If the party is not held on your business premises, then the taxi travel is taken to be a separate benefit from the party itself and any Christmas gifts you have provided. In theory, this means that if the cost of each item per person is below $300 then the gift, party and taxi travel can all be FBT free.  However, the total cost of all benefits provided to the employees needs to be considered in determining whether the benefits are minor.

The trade-off to this is that if the costs associated with hosting the party are not subject to FBT then it would be difficult to claim a tax deduction or GST credits for the expenses.

If your business hosts slightly more extravagant parties and goes above the $300 per person minor benefit limit, you will generally pay FBT but you can also claim a tax deduction and GST credits for the cost of the event.

Client gifts

Few of us have that much time in the diary for pre-Christmas entertainment so why not give a gift instead?  In addition to a few extra hours saved and a lot less calories to work-off (most of us are still struggling post lock down), there is also a tax benefit.  As long as the gift you give to the client is given for relationship building with the expectation that the client will keep giving you work (that is, there is a link between the gift and revenue generation), then the gift is generally tax deductible as long as it doesn’t involve entertainment.

Entertaining your clients at Christmas is not tax deductible. If you take them out to a nice restaurant, to a show, or any other form of entertainment, then you can’t claim it as a deductible business expense and you can’t claim the GST credits either.  It’s goodwill to all men but not much more.

Charitable gift giving

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The safest way to ensure that you or your business can claim a deduction for the full amount of the donation is to give cash to an organisation that is classified as a deductible gift recipient (DGR). And, the charities love it as they don’t have to spend any of their precious resources to receive it.

There are a few rules that make the difference between whether you will or won’t receive a tax deduction.

  • The charity must be a DGR. You can find the list of DGRs on the Australian Business Register.
  • If you buy any form of merchandise for the ‘donation’ – biscuits, teddies, balls or you buy something at an auction – then it’s generally not deductible (the rules become more complex in this area).  Your donation needs to be a gift, not an exchange for something material.  Buying a goat or funding a child’s education in the third world is generally ok because you are generally donating an amount equivalent to the cause rather than directly funding that thing.
  • The tax deduction for charitable giving over $2 goes to the person or entity whose name is on the receipt.

If your business is making a donation on behalf of someone else, such as a client or that friend ‘who has everything’, it will depend on how the donation is structured. The tax rules generally ensure that the deduction is available to the individual or entity who actually makes the gift or contribution. Having receipts issued in someone else’s name can make this more complex.

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