It’s that time of the year!
As the festive season fall upon us, no doubt one of the foremost thoughts on everyone’s mind is that of the annual company Christmas party – and the associated fringe benefits tax headaches that would surely ensue next year!
If you don’t want to have a New Year tax hangover, read on.
Tell me more about it.
If you have provided benefits to your employees by way of food and drinks, recreation and/or gifts, the costs of these may be subject to fringe benefits tax or ‘FBT’. No, the tax-man is not trying to steal Christmas, in fact there are plenty of opportunities to be exempted from FBT – if you follow the rules!
Let’s see how you can have the (Christmas) cake and eat it too… in tax-terms.
What should I do?
As with all investigations, you should apply the “5 Ws” line of questioning:
Who are you entertaining?
FBT only applies to entertainment provided to employees and their family and friends (associates). If entertainment is provided to clients, it is not subject to FBT.
What is being provided?
If only food and drinks are being provided, it is classified as a ‘meal entertainment’ benefit, whereas entertainment of any other form that includes a recreational component would be a general expense payment or property fringe benefit.
Where is the entertainment held?
There is significant difference between entertainment held on-site at your business premises versus entertainment provided at an off-site venue. This also extends to taxi costs paid by the employer for employees to travel to/from the entertainment venue.
When are you providing entertainment?
Consider whether the entertainment is being provided on a normal business day during business hours, or is it provided outside of normal business hours such as after work or on a weekend. This timing is important as it can impact how your staff entertainment costs are taxed for FBT.
Why is the entertainment being provided?
Surely it’s because we all deserve a chance to see our friends and colleagues in person after a long and gruelling year, and it’s the festive season after all! But what this point is getting at is whether the entertainment was for recreation or whether any components are for business related reasons.
How can I be exempted from FBT for the Christmas party?
The most important exemption to FBT you should be aware of is that of the ‘minor & infrequent’ exemption, or “M&I”. This exemption in short provides an exemption from FBT where the amount of meal entertainment provided is less than $300 per person and it is provided in a sufficiently infrequent nature that it would be “unreasonable to treat it as being subject to FBT”. M&I also extends to allow an exemption on property fringe benefit, where the employer has provided benefits of any company paid-for gifts of less than $300 in value per person.
Did you know? A company director is also an employee for FBT purposes even if they do not receive a salary or director’s fee, meaning the employer is also liable for FBT on directors.
One key area that most businesses stumble at when it comes to the M&I exemption is that M&I for meal entertainment is not available if you have chosen to calculate the taxable value of meal entertainment costs using the 50:50 split method.
To ensure you are eligible to choose the appropriate exemption on your Christmas party related expenses, you must:
- Ensure you keep proper records of the attendees of all entertainment expenses, including cost per head, number of staff/associates/clients in attendance, on-site or off-site, and whether it is during business hours.
- Ensure you elect to treat meal entertainment expenses using the actual method instead of 50:50 split method, and keep the appropriate records of the attendance as noted above.
- Ensure you keep the total per-head cost of the event to less than $300 per person. You may consider providing gifts and awards at a separate event, or instead consider providing bonuses via salary payments instead of an expensive gift.
Unsure where to start? Let Prosperity Advisers help you sort it out instead!
Don’t wait until your FBT returns are due. Make it your New Year’s Resolution to come and talk to the Prosperity team so we can review your FBT reporting obligations and advise you on how to better manage your FBT record keeping methods and to maximise tax efficiency in your business!