How can you ensure your Christmas celebrations don't leave the business feeling the effects of FBT.
Christmas is a time of year when many SMEs take a breath and host some form of celebration with their staff, be it a party or an event, gifts and other forms of showing appreciation for the people who support your business.
Far be it from us to don the Ghost of Christmas Future hat, but it's important to make sure that your Christmas celebrations don't run you foul of the taxman. Here are our top tips for making sure the ATO doesn't leave coal in your stocking.
One of the preferred ways to share the Festive Season with customers is not necessarily the most tax-effective. If you take your clients out or entertain them in anyway, it's not tax deductible and you can't claim back the GST. There are some specific rules that are designed to prevent deductions and GST credits where expenses related to entertainment, irrespective of whether there is an expectation of new business as a result.
On the other hand, if you send your customer a gift, it is tax deductible as long as there is an expectation that the business will benefit – so long as the gift does not amount to entertainment.
A tip: personally deliver your gifts: it will have a much bigger impact.
If budgets are tight, then it's better to focus on the customers you believe deliver the most value to your business than spending a small amount on every customer, regardless of value. Make it something people will remember and that it's appropriate to your business.
Another thing that is worth considering is making a donation on behalf of your customers (where your business takes the tax deduction) or for your customers (where they receive the tax deduction). Donations to deductible gift recipients (DGRs) above $2 are tax deductible and can make an active difference to a cause (see For you below).
Christmas is expensive. Some businesses simply can't afford to do much because cash flow is too tight. Expectations are high so if you are doing something then its best not to exacerbate cash flow problems and take advantage of any tax benefits or concessions you can. Let's have a look at the impact of your options.
If you really want to avoid tax on your work Christmas party then host it in the office on a workday. This way, Fringe Benefits Tax (FBT) 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 exempt from FBT.
So, if you have a few team members that need to be loaded into a taxi after over indulging in Christmas cheer, the ride home is exempt from FBT, if the party is hosted on premises.
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 pay FBT because anything below $300 per person is a minor benefit and exempt. Be careful though as the $300 includes all the costs of the event so meals, drinks, entertainment, etc.
If the party is held somewhere other than 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 employees needs to be taken into account in determining whether the benefits are minor across the FBT year.
Just remember that if entertainment is provided to employees and an FBT exemption applies, you will not be able to claim tax deductions 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 pay FBT but you can also claim a tax deduction for the cost of the event. Just bear in mind that deductions are only useful to offset against tax. So, if the business is paying no or limited amount of tax, a tax deduction is not going to help offset the cost of the party.
Christmas gifts for staff:
$300 is the minor benefit threshold for 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 at a rate of 49%. To qualify as a minor benefit, gifts also have to be ad hoc - no monthly gym memberships or giving the one person multiple gift vouchers amounting to $300 or more.
Gifts of cash from the business are treated as salary and wages – PAYG withholding is triggered and the amount is subject to the superannuation guarantee.
Aside from the tax issues, think about what will be of value to your team. The most appreciated gift is the one that means something to the individual. Giving a bottle of wine to someone who doesn't drink, chocolates to a health fanatic, or time off to someone with excess leave, isn't going to garner much in the way of goodwill. A sincere personal message will often have a greater impact than a uniform gift.
For more information about managing FBT at Christmas, please contact us on 02 9957 4033.
This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.