It’s that festive time of year where celebration and generosity abound however it’s important to remember that the ATO isn’t always as merry as the guy in the red suit.

It is likely that you are celebrating with your clients and employees and that your business is footing the bill for these expenses in the form of gifts and Christmas parties. Many business owners believe that  these expenses are tax deductible. Unfortunately they aren’t and more importantly they could actually cost you more if you get caught by fringe benefits tax (‘FBT’).

We have outlined below some key considerations when providing gifts and entertainment to clients and employees at Christmas and the rest of the year.

Client Gifts

You can claim a deduction for the cost of gifts provided to customers if they are incurred with the purpose of advertising your business and generating goodwill and future business opportunities. You need to demonstrate that the expenses are incurred with the intention of generating future assessable income.

The main exception is where the gift is classified as ‘entertainment’ in which case you should refer to our guidance above.

Entertainment Expenses

Put simply meal entertainment expenses are not deductible unless you pay fringe benefits tax (‘FBT’) on them.

Minor FBT exempt benefits

A minor benefit is a benefit that has a value of less than $300. The other main criteria is that the benefit is provided infrequently and irregularly’. But remember that if a benefit is exempt from FBT, you cannot claim it as an income tax deduction, nor can you claim any GST credits arising from these ‘supplies’.

More examples of exempt benefits can be found here (see bottom of the page).

Christmas Parties

A good example is work Christmas parties. Christmas entertainment up to the value of $300 for each employee is generally exempt from FBT. So throwing a party where the cost per head is less than $300 should escape the FBT. This should also be the case where an employee’s spouse attends the function.

The ATO’s guidance also allows for you to provide a gift to each employee of up to $300 which is considered separately to the $300 limit for the Christmas party. You can find more guidance from the ATO on Christmas parties here.

We re-iterate that these benefits are exempt from FBT and they are not deductible for income tax purposes nor can you claim any GST credits arising from these ‘supplies’.

All other FBT benefits

For all other meal entertainment benefits you are required to pay FBT. Your obligations are to keep records of all entertainment expenses and then remit to the ATO the amount of FBT payable on the expenses.

As a simplified example, this could mean that an entertainment expense with a value of $100 could actually cost the business $186.92 after FBT is paid. In this example the total expense ($186.92) is deductible for income tax purposes.

Meal entertainment quick reference guide

The following table gives a simplified summary of the FBT and income tax consequences from providing entertainment to employees and others.

SituationIncome taxFBT
Employee takes two clients to lunch at a restaurant – cost $150Employee’s portion
$50 tax deductibleClient’s portion
$100 non-deductible
Employee’s portion
$50 fringe benefitClient’s portion
No FBT
Employee has meal in restaurant while travelling on business tripTax deductibleNo FBT (‘otherwise deductible’ rule)
Employee has meal in an ‘in-house canteen’Tax deductibleExempt from FBT
Employer provides sandwiches and juice for working lunch in office (not entertainment)Tax deductibleExempt from FBT
Employer provides substantial lunch with wine for employees in office but not in ‘canteen’Non-deductibleExempt from FBT
Employer provides social function for employees in officeNon-deductibleExempt from FBT
Employer provides social function for employees and associates in officeCost per employee
Non-deductibleCost per associate
Tax deductible
Cost per employee
Exempt benefitCost per associate
Taxable fringe benefit

Client Guidance

Our clients can obtain additional information by logging in to LiveAdvisor and access more information about this topic as well as a range of proprietary information and resources from us. Alternatively clients should contact us for specific information in relation to their circumstances as part of their Business Essentials Plan.

 
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Disclaimer

Please refer to our disclaimer in relation to the information provided in this article.

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