When is Christmas Giving to Clients & Employees Tax Deductible?
As Christmas and the holiday season arrives businesses will show gratitude towards staff and clients for their loyalty service throughout the year. When structured right, businesses can enjoy tax benefits from their generosity whilst also avoiding Fringe Benefits Tax (FBT). The following is a general summary aiming to add a little simplicity to the tax treatment of Christmas giving.
Gifts to Staff
Non-entertainment gifts to staff (such as Christmas hampers, bottles of alcohol, gift vouchers, pen sets etc.), are tax-deductible and businesses can claim GST credits, irrespective of the cost. You should note that you can generally avoid paying FBT if you keep the gift under $300. FBT will apply should this threshold be exceeded.
Entertainment Gifts to Staff
Gifts of entertainment to staff (such as tickets to movies/theatre/amusement park/sporting events, holiday airline tickets etc.) which are under $300 in total will not attract FBT, but are not income tax-deductible, and you can not claim GST credits. FBT will apply if over $300 in value, however, a tax deduction and GST credits can be claimed. With the FBT rate sitting at 47%, the tax deduction and GST credits available is unlikely to provide a better tax outcome than avoiding FBT by keeping the gift under $300
Where Gifts are given to Clients/Customers/Contractors/Suppliers – No FBT is payable, irrespective of the type of gift and irrespective of the cost. However, where a gift constitutes entertainment, no GST or tax deduction can be claimed. Good tax planning suggests it’s better to provide non-entertainment gifts to clients (Christmas hampers, bottles of alcohol, gift vouchers, pen sets) thereby enjoying a tax deduction and GST credits.
In place of gifts, employers may host a Christmas Party for their staff ( and often including spouses) at a restaurant. Where this is the case, the Minor Benefits Exemption (MBE) provides that should the total cost remain under $300 per head (food and drinks) it will be generally exempt from FBT. To enjoy this exemption the employer must use the Actual Method for valuing FBT meal entertainment. The Actual Method is the default method for valuing meal entertainment, and no formal ATO election is required to use this method. Under the Actual Method, an employer pays FBT (in the absence of an exemption) on all taxable meal entertainment provided to employees and their associates such as spouses. The downside of using the MBE is that meal entertainment is not tax-deductible, and nor can you claim a GST credit. This MBE is not available if you elect to value your meal entertainment under the alternative 50/50 Method. Under this method, you pay FBT on only 50% of all taxable meal entertainment provided to employees, spouses AND clients, contractors, customers etc. irrespective of the cost. Likewise, you can only claim a 50% income tax deduction and 50% GST credits on such meal entertainment. However as stated earlier, with the FBT rate now at 47%, the 50% tax deduction and 50% GST credits available under the 50/50 Method is unlikely to provide a better after-tax result than the Actual Method where no FBT is payable.
Whilst no business should make tax planning the sole basis for recognising the contribution of stakeholders, effective planning by keeping per-head costs under $300 may mean achieving exemptions from FBT.
Contact the Holzworth Partners Tax team on ph 1 300 009 888for more information or guidance on tax planning for your events.