The do’s and don’ts of Christmas party tax deductions

end-of-year events

The ATO has recently put out a warning about the tax implications for the employer of holding a staff Christmas party. These events are a Fringe Benefits Tax (FBT) minefield and the ATO’s warnings are particularly timely given that we are now heading into the Christmas party season and thousands of Australian small businesses will pay for their staff to let their hair down at the annual end-of-year celebration. But could the Christmas party result in a tax hangover?

Here is my comprehensive guide to the tax consequences of Christmas for your business. First of all, I’ll consider entertainment for your employees and then I’ll consider your customers and suppliers.

Employees

If you throw a Christmas function for your staff off-site, for example at a hotel, restaurant or function centre, the cost of providing the party would normally be treated as a fringe benefit, with fringe benefits tax (FBT) payable by the employer. However, provided the cost per employee is less than $300, no FBT will be due. This is because of the so-called minor benefits exemption. This exemption also applies if spouses or partners come along to the party.

The minor benefits exemption applies to each benefit provided. What that means in practice is that if you’re feeling generous and spend $290 per head on the party and then give a gift to each employee valued at a further $290, then both expenses are free of FBT.

If you spend more than $300 per head on the function, the whole lot will be subject to FBT, not just the excess.

The costs (such as food and drink) of a Christmas party are exempt from FBT if they are provided on a working day on your business premises and consumed by current employees.  If spouses or other guests of employees are entitled to attend, there could be an FBT liability unless the cost is covered by the minor benefits exemption (above).

Employers must keep all records for the entertainment-related benefits you provide, including records of how you calculated the taxable value of the benefits. In particular, you should keep records showing:

  • The amount spent on each employee
  • Then and where the celebration is held
  • Who attends – is it just employees or are partners, clients or suppliers also invited?
  • The value and type of gifts provided.

If your business also covers the cost of taxi fares to and from the festivities, these costs will count as part of the $300 per head limit if the function is off-site but will be exempt from FBT if the party is at your premises.

The bad news is that if the cost of your Christmas party is exempt from FBT, it isn’t tax deductible for income tax purposes. Nor can the business claim GST credits for the costs incurred.

Confusingly, even though gifts to employees are also covered by the FBT exemption, they generally ARE tax deductible and a GST credit can be claimed.

None of this generally impacts on the employee’s own tax position. They can eat, drink and be merry knowing that the tax consequences usually fall only on the employer.

And what about your clients and suppliers?

If you hold a bash for clients and suppliers, there is no FBT (which is only relevant where a benefit is provided to employees and their associates) but the costs aren’t income tax deductible. This is because the provision of entertainment isn’t tax deductible.