It’s a wonderful time of year and to keep it merry and bright here’s how to avoid the FBT Christmas Grinch. Perhaps you’ve planned everything early, or maybe you’re still deciding what to do for the Christmas party for the team? Or gifts for your customers? Here are our top tips to help you have both a generous and tax effective Christmas season.
What Christmas activities are exempt from FBT
Let’s start with this table showing you what Christmas activities are exempt from FBT (Fringe Benefit Tax) and which are tax deductible. This is for businesses registered for GST (not tax exempt) that are not using the 50-50 split method for meals and entertainment.
Your business customers vs. the FBT Christmas Grinch
The parameters are clear but what can you do for your business customers and your team to be generous and still avoid the FBT Christmas Grinch?
How can you share the Christmas joy with your customers?
Often, the simple go-to way of sharing the Christmas joy with customers is not necessarily the most tax effective. For example, if you take your client out for lunch or dinner, or entertain them in any way, it’s not tax deductible. Nor can you claim back the GST. The ATO has specific rules designed to prevent deductions and GST credits from being claimed when the expenses relate to entertainment. Regardless of whether the business expects to generate goodwill and increase their sales because of the activity. Meals in restaurants, a show, a round of golf, or a corporate race day all fall into the ‘entertainment’ category.
Now you feel like the FBT Christmas Grinch has visited!
Wait, you do have other options. Should you send your customer a gift, then the gift is tax deductible if there is an expectation that the business will benefit. However, the nature of the gift should not amount to entertainment. You can increase the impact of the gift by organising to deliver it yourself. A heartfelt and personally delivered Christmas wish will mean so much more to your customers.
Not every business can afford to splash out on gifts for their customers. From a marketing perspective, if your budget is tight, it may be better to focus on giving gifts to the customers you believe deliver the most value to your business. Rather than dividing the budget across every customer and only spending a small amount on each of them, regardless of their value to your business.
The key is to make it count! If you are going to invest in Christmas gifts, then make it something memorable and appropriate to your business.
Depending on your customer age and stage of life, they may not want for anything. Preferring not to get more ‘stuff’. A great option would then be to donate to a suitable charity on behalf of your customers and claim this donation as a tax deduction for your business. Or you could make a donation on behalf of your customers and let them to receive the tax deduction. Donations to deductible gift recipients (DGRs) above $2 are often tax deductible. The added benefit is these contributions can make a powerful difference for charities and the causes they support.
Your business staff vs. the FBT Christmas Grinch
Whether you thinking events or gifts, you may feel that the Christmas Grinch has already visited because everything is so expensive. You’re not alone if you are one of the businesses that simply can’t afford to do very much because your cashflow is too tight. It’s understandable that staff expectations may be high. However, if you are planning to do something then it’s best to act in moderation and not to exacerbate cashflow problems. As well as take advantage of any tax benefits or concessions that are available.
Christmas parties and the FBT Christmas Grinch
The way to stay ahead of the FBT Christmas Grinch and avoid tax on your work Christmas party is to host the function it in the office on a workday. Then Fringe Benefits Tax (FBT) is unlikely to apply.
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 overindulging in your hospitality and Christmas cheer, the cost of their ride home is exempt from FBT. Safe and saving!
If your work Christmas party is held at a venue away from the office, the way to avoid paying FBT is to keep the cost of your celebrations below $300 per person. The downside of this approach is that the business cannot claim deductions or GST credits for the party expenses if there is no FBT payable.
For a party is held somewhere other than your business premises, taxi travel is considered 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 potentially all be FBT-free. Just remember that the minor benefits exemption requires several factors to be considered, including the total value of associated benefits provided across the FBT year.
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 a party and the cost goes above the $300 per person minor benefit limit, you will need to pay FBT. However, in this instance you can also claim a tax deduction and GST credits for the cost of the event. Just bear in mind that deductions are only useful to offset against tax. If your business is paying no or limited amounts of tax, a tax deduction is not going to help offset the cost of the party.
What about FBT and Christmas gifts for staff?
The minor benefit threshold for FBT is and expense of $300, so spending anything at or above this level on a gift will mean that your Christmas generosity will also result in a gift to the Tax Office! Be aware that the tax rate of 47% will apply to the whole amount that you spend, not just the amount in excess of $300.
In addition, to qualify as a minor benefit, gifts also must be ad hoc. Therefore, no monthly gym memberships or giving one person multiple gift vouchers amounting to $300 or more.
Were you thinking about giving your staff a cash bonus to thank them for their efforts in the business? Be aware that staff gifts of cash from your business are treated as salary and wages by the ATO. PAYG withholding is triggered and the amount is also subject to the superannuation guarantee.
Off course all employees like to feel valued and appreciated. It’s good to think about how you can reward them and what the value would be to your team, aside from the tax issues! The most appreciated gifts are usually the ones that means something to the individual. And don’t underestimate the value of a sincere personal message that can have as much impact as a standard gift.
Who can help me avoid the FBT Christmas Grinch?
You don’t have to navigate the FBT rules about Christmas parties and gifts on your own. Speak to your accountant as soon as possible to understand your tax obligations, manage your cash flow and avoid any surprises.
You can also look at some other year end strategies we've posted.
The ABA Team is always ready to help businesses and we are experts in tax strategy and FBT. Don’t delay, contact us today and keep the FBT Christmas Grinch away!