With Christmas and the festive season just around the corner, business owners are getting ready for their end of year celebrations. Knowing the rules around Fringe Benefits Tax (FBT), Goods and Services Tax (GST) credits, and what’s tax deductible https://www.colledges.com.au/accounting-taxation/ will help you plan enjoyable summer festivities with staff and clients, without unnecessary tax surprises.
First, let’s clarify these three important terms:
1. Tax Deductible
Anything you spend on the business which helps the business to operate day to day to earn income, is a tax deduction, which then results in taxable income to determine the amount of tax you pay at the end of the financial year. This includes things like office equipment, rent, insurances, and equipment used for the business.
However, expenses such as entertainment and meals may be treated differently for tax deductibility purposes. More on the entertainment rule below.
2. The Entertainment Rule
Attending functions, events, or restaurants with staff or clients, where there is food, drinks or entertainment provided, is generally considered meal entertainment. In most cases, these expenses are not tax deductible and are likely subject to FBT.
Having said this, the FBT, income tax and GST payable depends on whether the food is considered a light snack, or a meal and the location itself. There is also a limit of $300 per head to consider. If the cost of the meal or function is more than $300 per head, then it is likely that it will not be tax deductible and that FBT will apply.
3. Fringe Benefits Tax (FBT)
FBT is paid on any benefit an employer gives to their employees, outside their salary. These fringe benefits include things such as cars, meals, gym memberships amongst others. They are all subject to FBT. Likewise, some Christmas parties can be considered entertainment and subject to FBT and may not be tax deductible.
Here’s a summary:
| Event | FBT | Tax deductible? | GST credits? |
| Christmas party onsite – on a workday with light snacks and no alcohol | FBT exempt provided the expenditure in minor typically less than $300 incl GST per head | No | No |
| Christmas party onsite – with food and alcohol | FBT exempt provided the expenditure in minor typically less than $300 incl GST per head | No | No |
| Christmas party offsite | FBT exempt provided the expenditure in minor typically less than $300 incl GST per head | No | No |
| Christmas gifts for clients | FBT exempt | Yes, provided they are minor in value and there is the connection to current income or future income Extravagant gifts may not be deductible. Example if the client received a $25 gift and from $500 of invoices then deductible. If say $2500 gift for $500 of invoices, then unlikely unless linked to future income say a new large order! | Yes. GST credits apply. |
Christmas gifts for staff | FBT exempt provided the expenditure in minor typically less than $300 incl GST per head | Yes it is tax deductible. | Yes. GST credits apply. |
| Christmas cash bonus for staff | Cash bonuses are considered part of a salary and are therefore a tax deduction. Staff will be taxed at their normal tax rate. Note that bonus impact on other salary oncosts such as payroll tax and work cover for example | Tax deductible as salary expense. | Not applicable. |
| Christmas gift cards for staff | FBT exempt provided the expenditure in minor typically less than $300 incl GST per head | Yes it is tax deductible. | Yes. GST credits apply. |
The table below from the ATO provides the factors to determine when food or drink is entertainment and key factors of Why, What, When and Where. Note: Why and What are the critical ones!
| Factor | Less likely to be entertainment | More likely to be entertainment |
| Why are you providing the food or drink for employees? | So employees can complete the working day in comfort | In a social situation where the purpose is for employees to enjoy themselves |
| What type of food or drink are you providing? | Light food and refreshments, no alcohol | Elaborate food or meal, alcohol |
| When are you providing the food or drink? | During work time or overtime, or while employee is traveling for work | Outside work time |
| Where are you providing the food or drink? | On your business premises or at the employee’s usual workplace | Off your business premises, such as at a function room, hotel or restaurant, or consumed with other forms of entertainment |
Read more on the ATO website: When is food, drink and recreation considered entertainment? | Australian Taxation Office
Give us a call if you need advice about your work Christmas plans
The rules around Christmas deductions and entertainment can be open to interpretation, so please call us on 9851 6500 or email us at hello@colledges.com.au for more information. We’ll help you understand potential tax implications so that you can run a Christmas event your staff and clients will thoroughly enjoy, and one that doesn’t come with any financial surprises!
