Christmas Parties Fringe Benefit Tax & Income Tax Implications

November 22 2016  by Lauren Reeve - Accountant

With Christmas fast approaching, many employers and businesses will be planning to reward employees with a celebratory Christmas party or event. While it is important to take the time to celebrate this season, it pays to be aware of the Fringe Benefits Tax (FBT) and income tax implications of such celebrations.

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CHRISTMAS PARTIES, GIFTS, FBT AND THE TAX IMPLICATIONS

Christmas Gifts

Depending on their characteristics and who they are provided to, gifts given at Christmas time may or may not be subject to FBT. Gifts provided to employees and their associates will be subject to FBT except where the $300 minor benefits exemption applies. When considering the minor benefits exemption, the costs of gifts should be looked at separately to the Christmas party. A tax deduction will not be available.

Gifts provided to clients and suppliers are not subject to FBT. Gifts of property (hampers, alcohol, vouchers and flowers etc.) will be tax deductible, however gifts of entertainment (tickets to theatre, amusement parks, sporting events and movies etc.) are not.

Christmas Party

The examples below discuss the FBT and tax implications that can arise as a result of various Christmas party scenarios:

Christmas party on business premises

Outcome

Current employees attend only

For employees – No FBT implication as it is an exempt property benefit. There is no tax deduction and therefore no GST claimable.

Current employees and their families attend. Cost per person <$300 (GST incl)

For employees – As above.

For families – No FBT implication as the benefit is considered minor and infrequent. There is no tax deduction and therefore no GST claimable.

Current employees, their families and clients attend. Cost per person > $300 (GST incl)

For employees – As above.

For families – A taxable fringe benefit arises. The amount subject to FBT is tax deductible and GST is claimable.

Clients – Considered entertainment however there is no FBT implication. No tax deduction and therefore no GST claimable.

Christmas party held off business premises

Outcome

Current employees attend only. Cost per person <$300 (GST incl)

For employees – No FBT implication as the benefit is considered minor and infrequent. There is no tax deduction and therefore no GST claimable.

Current employees, their families and clients attend. Cost per person <$300 (GST incl)

For employees – As above.

For families – No FBT implication as the benefit is considered minor and infrequent. There is no tax deduction and therefore no GST claimable.

Clients – Considered entertainment however there is no FBT implication. No tax deduction and therefore no GST claimable.

Current employees, their families and clients attend. Cost per person > $300 (GST incl)

For employees – A taxable fringe benefit arises.

For families – A taxable fringe benefit arises. The amount subject to FBT is tax deductible and GST is claimable.

Clients – Considered entertainment however there is no FBT implication. No tax deduction and therefore no GST claimable.

Recreation Expenditure

Recreation expenditure (i.e. hiring a band, DJ, comedian or other entertainer for a Christmas party) is generally dealt with under the Actual Method where only the portion of entertainment provided to employees and their associates is subject to FBT.

ENTERTAINMENT EXPENDITURE

For FBT purposes, the provision of entertainment means by way of food, drink or recreation as well as accommodation or travel in connection with the provision of entertainment.

Provision of Food or Drink

In considering the provision food and drink, the factors of ‘what, when, where and why’ must be considered:

  • What: Is the food and drink provided a light meal such as tea and coffee or a substantial meal such as a three course meal with a glass of wine?
  • When: Is the food and drink provided during business hours?
  • Where: Is the food and drink provided on business premises or at a café or in a function room?
  • Why: Is the food and drink provided for refreshments or for social interaction and enjoyment?

Light meals and non-alcoholic refreshments provided to employees or clients during a meeting on business premises are not considered entertainment. These costs are therefore not subject to FBT and are tax deductible.

Alternatively, where food or drink is more substantial and provided for social interaction or as part of a social function, it is more likely to be characterized as an entertainment expense (i.e. a three course meal provided to employees off premises after work hours or Christmas Parties).

NOTE: Where alcohol is provided, both food and drink will generally be classified as entertainment.

Recreation
Recreation includes sport and similar leisure-time pursuits as well as amusement in vehicles, golf games, theatre and movie tickets, or a harbour cruise etc.

MEAL ENTERTAINMENT

Employers can choose to classify fringe benefits arising from the provision of meal entertainment as 'meal entertainment fringe benefits'.

Specifically, the provision of meal entertainment means:

  • Providing entertainment by way of food or drink (as discussed above).
  • Providing accommodation or travel in connection with, or to facilitate the provision of, such entertainment.
  • Paying or reimbursing expenses incurred by employees for the above.

NOTE: The provision of entertainment by way of recreation is not considered to be the provision of meal entertainment.

If you choose to classify a fringe benefit as a ‘meal entertainment fringe benefit’ and value it under one of the below listed methods during an FBT year (1 April to 31 March), you must value all fringe benefits arising from the provision of meal entertainment under the same method

New Legislation

From 1 April 2016, there has been major changes to the FBT treatment of salary packaged meal entertainment and entertainment facility leasing expense (EFLE) benefits. This includes the introduction of a $5,000 cap and significant changes to the valuation methods available for use (discussed below). These changes only apply to meal entertainment or EFLE benefits provided under a salary packaging arrangement. The new separate single grossed-up cap of $5,000 is applied in addition to the existing caps that are available to employees per FBT year with any excess benefits subject to FBT.

FBT AND ENTERTAINMENT – THE VALUATION METHODS

Under the FBT Act, employers must choose how they calculate their FBT entertainment liability. There are three methods that can be used by businesses to value and record meal entertainment fringe benefits:

  • Actual Method
  • 50/50 Split Method*
  • 12 Week Register Method*

*NOTE: Under the new changes to the salary packaged meal entertainment and EFLE benefits there is no longer an option to use the 50/50 Split Method or the 12 Week Register Method. To value the benefit provided the employer must use the actual method. This is only relevant where benefits are provided under a salary packaging arrangement.

The two most commonly-used methods are the Actual Method and the 50/50 Split Method:

Under the actual method, only the meal entertainment provided to staff and their associates (excluding client entertainment, property and minor benefits) is subject to FBT. Expenditure for non-employees (eg. clients and suppliers) is not liable for FBT and not tax deductible. Employers can calculate how much their meal entertainment relates to staff entertainment on the basis of either:

  • The exact cost attributed to each person; or
  • A ‘per head’ appointment (where an exact allocation cannot be easily made).

Actual Method – Entertainment at Employer’s Premises

FBT

Tax Deduction

Current Employees

   

Food and Drink on a work day (entertainment)

No

No

Food and Drink on a work day (not entertainment)

No

Yes

Recreation

   

· Cost of benefit per guest < $300

No

No

· Cost of benefit per guest $300+

Yes

Yes

Taxi Travel (single trip that begins or ends at work)

No

No

Employee Associates

   

Food, Drink & Recreation

   

· Cost of benefit per guest < $300

No

No

· Cost of benefit per guest $300+

Yes

Yes

Clients & Suppliers

   

Food, Drink, Recreation and Travel (entertainment)

No

No

 

Actual Method – Entertainment at Restaurant orVenue

FBT

Tax Deduction

Current Employees & Associates

   

Food, Drink, Recreation and Travel (venue from home)

   

Cost of benefit per guest < $300

No

No

Cost of benefit per guest $300+

Yes

Yes

Clients & Suppliers

   

Food, Drink, Recreation and Travel (entertainment)

No

No

50/50 Split Method

Under the 50/50 Split Method, 50% of the total meal entertainment expenditure is subject to FBT is tax deductible, irrespective of where the party is held or who is attending. As FBT is calculated based on the total value of meal entertainment, the minor benefits exemption and property benefits exemption are not available under this method.

50/50 Split Method – Entertainment at Any Premises

FBT

Tax Deduction

Current Employees, Associates, Clients & Suppliers

   

Food, Drink, EFLE Recreation & Travel

50%

50%


FBT EXEMPTIONS AVAILABLE

The following FBT exemptions are available for the provision of entertainment:

Minor Benefits Exemption

The minor benefit exemption provides an exemption from FBT for benefits to employees and their associates if its value is less than $300 (per benefit, per person). It must also be considered that the benefit is infrequent and irregular. If the minor benefit exemption applies to entertainment expenditure and exempts the benefit from FBT its value is not deductible for income tax purposes.

Property Benefits Exemption

Food or drink provided to current employees on business premises on a working day are exempt from FBT regardless of where the food is prepared or if entertainment arises from its provision. This exemption does not apply to food or drink provided to associates of employees or employers making a meal entertainment election. Where you provide food and drink on the same occasion to both employees and their associates, you may have to apportion the expenditure on a per head basis.

Taxi Travel Exemption

Any benefit arising from taxi travel by an employee is an exempt benefit if the travel is a single trip beginning or ending at the employee's place of work.

Disclaimer: The contents herein are intended for general information only and should not be construed as legal or accounting advice. Vicca Chartered Accountants bears no responsibility for any loss that might occur from reliance on information contained in this publication. Please do not reproduce, transmit or distribute the contents herein in any form without prior permission from the firm.

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Disclaimer: The contents herein are intended for general information only and should not be construed as legal or accounting advice. Vicca Chartered Accountants Brisbane bears no responsibility for any loss that might occur from reliance on information contained in this publication. Please do not reproduce, transmit or distribute the contents herein in any form without prior permission from Vicca Chartered Accountants, Taxation Accountants Brisbane Australia.

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