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Christmas Parties and Gifts

Christmas is on the way and many employers will be planning their annual year end “bash”.  In addition, many businesses will be considering what gifts, if any, they will provide to clients and employees. However, an important issue to consider is the possible FBT and income tax implications of providing “entertainment” to staff and clients. One major consideration is the “less than $300” minor benefit exemption and the fact that the Tax Office now accepts that different benefits provided at (or about) the same time are not added together when applying this threshold. Basically, this means that a Christmas party and gifts may be exempt from FBT, even if provided at the same time, as long as each costs less than $300!

Christmas Parties – Electing To Use The 50/50 Method

Food and drink provided (irrespective of where the party is held or who is attending) – only 50% of the total expenditure is subject to FBT and is tax deductable.

 Under the 50/50 method, the following traps must be considered:

Christmas Parties – Actual Method

The actual method applies where an employer has not made an election to value their meal entertainment expenditure for FBT purposes under either the 50/50 split method or the 12 week register method.

Calculating the taxable value

FBT is generally only payable on that portion of meal entertainment provided to employees and their associates (e.g. family members). Therefore, FBT is not payable on entertainment provided to non-employees (e.g. clients)

Employers can calculate how much of their meal entertainment relates to employees and family members on the basis of either:

Recreation Expenditure – At A Christmas Party

Where an employer hires a band, a DJ, a comedian or any other entertainer, for a Christmas party or similar function, this expenditure is considered “recreation expenditure” and is generally dealt with under the actual method.

To the extent that any recreation expenditure relates to clients, suppliers, etc, there is no FBT and no tax deduction.

Exclusive use of premises or facilities

Where an employer hires or leases premises or other facilities (e.g. a reception centre, a boat, a cinema, or even a corporate box), for the exclusive use* of their own staff, family members and clients, their expenditure may be dealt with under the 50/50 method (instead of the actual method)

Note(*):  Such exclusive use qualifies the hiring costs as Entertainment Facility Leasing Expenses (‘EFLEs’)

Where the 50/50 split method is used for EFLEs, 50% of the employer’s EFLEs are:

irrespective of who is being entertained (e.g. employees, clients, suppliers or contractors).

Christmas Gifts

Gifts which ARE NOT consider to be entertainment

These generally included, for example:

Briefly, the general FBT and income tax consequences for these gifts are as follows:

Gifts which ARE consider to be entertainment

These generally include, for example:

Briefly, the general FBT and income tax consequences for these gifts are as follows:

The Minor Benefit Exemption

Generally speaking, where the value of a Christmas related benefit (e.g. food and drink, and a gift) provided to an employee or family member is less than $300, it will be exempt from FBT (subject to certain other conditions – refer S.58P of the FBTAA 1986 and TR 2007/12).

Surprisingly, for the purposes of the $300 minor benefit threshold, the following tips should be considered:

Example

An employer holds an external Christmas party for employees and their spouses.

The cost of food and drink per person is $250, and no other benefits are provided.

 Assuming the actual method is adopted:

In either case, no tax deductions will be allowed

 Assuming the 50/50 method is adopted:

Gift vouchers

What if employees with spouses are given a gift voucher (for their spouse) to the value of $150 (assuming this benefit is infrequent and irregular, etc.)?

Under the actual method for employees attending with their spouses – no FBT is payable because the cost of each separate benefit (including the voucher) is less than $300 (i.e. the benefits are not aggregated).

No deduction is allowed for the food and drink, but the voucher is deductible.

Assuming the 50/50 method is adopted:

Actual method – Entertainment – Employer’s premises
Current employees  
  food and drink on a working day No FBT, no tax deduction 
  recreation (e.g. band, DJ, comedian)  
    cost of benefit per guest <$300 No FBT, no tax deduction
    cost of benefit per guest $300+ FBT and tax deductible
  taxi travel (single trip that begins or ends at work No FBT, no tax deduction
Family members  
  food and drink  
    cost of benefit per guest <$300 No FBT, no tax deduction
    cost of benefit per guest $300+ FBT and tax deductible
  recreation (e.g. band, DJ, comedian)  
    cost of benefit per guest <$300 No FBT, no tax deduction
    cost of benefit per guest $300+ FBT and tax deductible
Clients, suppliers, etc  
  food and drink (whatever the cost) No FBT, no tax deduction
  recreation (e.g. band, DJ, comedian) No FBT, no tax deduction
  taxi travel No FBT, no tax deduction
Actual method – Entertainment – Employer’s premises
Current employees  
  food and drink – cost of benefit per guest <$300 No FBT, no tax deduction
  food and drink – cost of benefit per guest $300+ FBT and tax deductible
  recreation (e.g. band, DJ, comedian)  
    cost of benefit per guest <$300 No FBT, no tax deduction
    cost of benefit per guess $300+ FBT and tax deductible
   taxi travel (from venue to home)  
    cost of benefit per guest <$300 No FBT, no tax deduction
    cost of benefit per guest $300+ FBT and tax deductible
Family members  
  food and drink – cost of benefit per guest <$300 No FBT, no tax deduction
  food and drink – cost of benefit per guest $300+ FBT and tax deductible
  recreation (e.g. band, DJ, comedian)  
    cost of benefit per guest <$300 No FBT, no tax deduction
    cost of benefit per guess $300+ FBT and tax deductible
Clients, suppliers, etc.  
  food and drink (whatever the cost) No FBT, no tax deduction
   recreation (e.g. band, DJ, comedian) No FBT, no tax deduction
  taxi travel  No FBT, no tax deduction
50/50 method – Entertainment – Any premises
Current employees, family members, clients, suppliers, etc.  
  food and drink 50% FBT, 50% deductible
  recreation that is an EFLE (e.g. hire of a function centre or restaurant) 50% FBT, 50% deductible 
  taxi travel 50% FBT, 50% deductible
Entertainment Christmas gifts
Current employees  
  cost of gift <$300 No FBT, no tax deduction
  cost of gift $300+ FBT and tax deductible
Family members  
  cost of gift <$300 No FBT, no tax deduction
  cost of gift $300+ FBT and tax deductible
Clients, suppliers, etc. No FBT, no tax deduction
Non-entertainment Christmas gifts
Current employees  
  cost of gift <$300 No FBT, no tax deduction
  cost of gift $300+ FBT and tax deductible
Family members  
  cost of gift <$300 No FBT, no tax deduction
  cost of gift $300+ FBT and tax deductible
Clients, suppliers, etc. No FBT, no tax deduction

 Source:  Voice Edition 187, November 2009, published by the NTAA