As a lot of business owners know, its staff and clients are crucial to the business’ success. Although they aren’t listed as an asset on the business’ balance sheet, they can literally make or break any business. It makes sense then, that business owners should do their best to celebrate and reward their valuable staff and clients. Christmas is a great opportunity to do this. The only problem is, some of these initiates can attract unwanted tax outcomes…
The problem
Probably the hardest tax for most business owners to get their head around is Fringe Benefits Tax. In a nutshell, this tax penalises businesses for providing non-cash benefits to employees, clients and their associates. It applies to a range of different scenarios, but some common ones are where the business owner provides meal entertainment and/or recreation. It just so happens that these benefits often tend to occur around Christmas, and usually centre around the work Christmas party.
The effect
Where these benefits are significant (i.e. $300+ per head), the business is able to claim GST and an income tax deduction, however it also needs to pay Fringe Benefits Tax. The business will then be required measure the value of these benefits provided, prepare a Fringe Benefits Tax Return and pay approximately 47% tax on them. Ouch!
Where the benefits are < $300 per head, the treatment isn’t quite so harsh. In these situations, the business isn’t required to pay Fringe Benefits Tax. However, it also isn’t able to claim GST or an income tax deduction on this expenditure.
Neither situation is ideal…
A better way
Rather than provide employees, clients and associates with benefits that will hurt tax wise, businesses should focus on more tax-effective rewards. There’s two main aspects to this:
- Work Christmas party – the ATO distinguishes between work parties held offsite and work parties held onsite on a work day. Although offsite parties attract all the negative effects described above, onsite parties on a working day provided to current staff have far more favourable tax treatment. An employer could, for example, provide a Christmas lunch onsite (even with the provision of alcohol) on a working day to current employees, without attracting Fringe Benefits Tax at all. Furthermore, the employer would still be entitled to a full GST claim and income tax deduction.
- Giving non-entertainment gifts – as previously mentioned, the provision of entertainment attracts Fringe Benefits Tax implications. For this reason, giving entertainment gifts also creates negative tax outcomes – e.g. theatre or musical tickets, movie tickets, tickets to sporting events, flights & accommodation, club memberships, etc. These types of gifts should be avoided wherever possible. Alternatively, business owners are able to claim GST (where applicable) and a full income tax deduction for gifts of < $300 for non-entertainment items – e.g. Christmas hampers, bottle of wine or spirits, gift vouchers, flowers, etc.
Our opinion
It’s always a good idea to keep good staff and clients happy. Christmas celebrations and gifts can be a great way to do this. Business owners should try to focus on providing celebrations and gifts that don’t have negative tax consequences. Where this isn’t possible or practical, they should be aware of the tax implications that their choices create. A good business advisor will help any business owner to plan out the best approach to delivering their Christmas cheer.
