How to be nice (not naughty) at Christmas with tax

It’s Christmas. So much to do.

There is the office Christmas party to organise. There are gifts to buy for all the team. There are hampers and other Christmas gifts to give to key clients and suppliers. But wait! My accountant says that some of this might not be tax deductible. Some of it might attract Fringe Benefits Tax (‘FBT’).

Here are the basics of Christmas and tax.

Let’s start with what can be the biggest expenditure – the staff Christmas party. You want it to be a memorable occasion and not let skimping on everything destroy the fun – but there are limits if you want the best tax outcome.

The starting point in the analysis is, generally, the provision of entertainment by way of food, drink or recreation is not a deductible expense under Australian tax law. However, if the entertainment is an employee benefit, this is deductible, but only if it is a ‘fringe benefit’ as defined.

Here’s where this gets a bit complex. We must now turn to the FBT law.

Under the FBT law, anything provided to an employee, or their associate is a ‘benefit’. So, a Christmas party is a benefit. However, there is a section in the FBT law that makes an employee benefit exempt from FBT if its value is less than $300 and it is provided (broadly) on an infrequent and irregular basis. The ATO generally considers that Christmas parties where the value per head is less than $300 are covered by the FBT exemption.

But, if the FBT exemption applies, the provision of the benefit is no longer a ‘fringe benefit’ as defined. This means that the general rule where a fringe benefit is deductible to an employer does not apply. Accordingly, a Christmas party that is held off-premises is not tax deductible. If the value per head of the Christmas party is less than $300, there will be no FBT payable.

There are other rules in the FBT law that allow you to have your meal entertainment 50% subject to FBT and claim a 50% deduction. Further there is another provision that permits you to keep a logbook to work out the percentage subject to FBT. These rules are not discussed here.

Where there is a Christmas gathering on work premises, this can be deductible and not subject to FBT. Nevertheless, there are a number of conditions that apply to this. The issues include whether entertainment is being provided, whether there is an ‘in-house dining facility’, whether the gathering is being held on a working day and whether the gathering is a party or social function. The extent of non-employees attending the function is also relevant.

Turning to Christmas gifts, gifts to employees will nearly always be deductible provided it can be said the cost of the gift is incurred in deriving the employer’s income. Employee benefits will normally fall into this category.

Such gifts can be subject to FBT if they have a value of $300 or more. If the value is less than $300, they will be exempt from FBT provided it can be said that the provision of the gift, broadly, is minor or infrequent. A Christmas gift under the value of $300 will normally be considered FBT exempt by the ATO. It should also be noted that the ATO does not think you need to add the value of the Christmas party to the value of the Christmas gift in determining whether the value is $300 or more. The ATO has ruled that each benefit needs to be considered separately when considering the $300 FBT exemption rule.

Considering Christmas gifts to clients and other business associates, these would normally be tax deductible provided they do not constitute the provision of entertainment. Food and drink given as a gift would not normally be considered as the provision of entertainment. Rather it is the provision of property.

If a gift to a client or an employee is highly valuable or extravagant, this will not necessarily cause the gift not to be tax deductible. However, the extravagance of the gift may raise the issue of whether there is more than one purpose in making the gift. That is, is there another purpose other than deriving the assessable income of the business making the gift? If the ATO concludes that there is another purpose, it may apportion the deductibility of the cost of the gift between the purpose of deriving assessable income and other purposes.

Gifts can become the provision of entertainment when they are such things as movie, sporting or concert tickets.

Disclaimer: This content provides general information only, current at the time of production. Any advice in it has been prepared without taking into account your personal circumstances. You should seek professional advice before acting on any material.