Christmas is just round the corner and with it comes the Christmas party season.
Over the next few weeks, thousands of Australian small businesses will pay for their staff to let their hair down at the annual end of year celebration, particularly as this is the first Christmas post-COVID for many.
There will be embarrassing moments, regrets and probably a hangover or two. But if your business is forking out for a festive fling, there is also a tax hangover looming on the horizon.
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Here’s everything you need to know about the tax implication on your business this festive season.
Employee gifts and entertainment: The Christmas tax consequences
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.
But, provided the cost per employee is less than $300, no FBT will be due. This is because of the so-called minor benefits exemption.
The minor benefits exemption applies to each benefit provided (including spouses or partners who might also attend). 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. But 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.
What about travel costs?
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.
Is the Christmas party tax deductible?
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.
Clients and suppliers: The Christmas tax consequences
If you hold a bash for clients and suppliers, there is no FBT (because this is only relevant where a benefit is provided to employees and their associates) but the costs aren’t income tax deductible because the provision of entertainment isn’t tax deductible.
Ok, but how about gifts?
If you give festive gifts to clients and suppliers, you can generally claim a tax deduction for the cost of those gifts where the gift is given with a view to generating future income in the business. So, if you give a festive gift of a decent bottle of malt whisky to your best customer, with a view to building goodwill which leads to more sales next year, the cost of the malt is tax deductible.
Your business can’t claim a deduction for gifts of capital items, such as a piece of technology (a tablet computer for instance) and nor can you claim a deduction if the gift is for private purposes – so if your best customer is also your brother-in-law, you might struggle to get the deduction.
The dividing line between a gift (such as giving a bottle of wine) and the provision of entertainment (such as taking the client to a bar and buying a bottle of wine to drink) can be hazy, particularly where the “gift” is, for instance, a voucher for a meal in a restaurant or a theatre show.
I'm confused what category my spending falls into...
Talk to your accountant if you’re not sure whether you’re giving a gift or providing entertainment.
As you can see, Christmas can be a surprisingly taxing time for small businesses if you’re not careful.
Follow the advice above and you should be able to avoid an unwelcome festive tax bill but remember the information above is general in nature so if you ‘d like specific advice, talk to your accountant at H&R Block.
Mark Chapman is director of tax communications at H&R Block.