It’s that time of year again:
- What to do for the Christmas party
- What to do for your team, your customers,
- Gifts of appreciation for your favourite AAG Advisers (just kidding).
Often we are weighing up Tax (Fringe Benefits, Income Tax, GST) with business decisions and personal decisions. As a very wise person said, sometimes lifestyle costs you money!
This means at times, you have to weigh up the tax cost, versus the impact on you / the business.
Here are our top tips for a generous and tax-effective Christmas season:
Tax & Christmas
For GST-registered businesses (not tax-exempt) that are not using the 50-50 split method for meal entertainment.
| Exempt from FBT? | Tax deductible | GST credits | |
| Christmas party on employer premises on a weekday | |||
| Employees | Yes | No | No |
| Associates of employee (spouses etc.) | If <$300 per head | If $300 or more per head | If $300 or more per head |
| Customers | N/A | No | No |
| Christmas party (employer premises on a weekend or external venue) | |||
| Employees | If <$300 per head | If $300 or more per head | If $300 or more per head |
| Associates (spouses etc.) | If <$300 per head | If $300 or more per head | If $300 or more per head |
| Customers | N/A | No | No |
| Christmas gifts (assuming the gift doesn’t involve entertainment) | |||
| Employees | If <$300 per head | Yes | Yes |
| Associates (spouses etc.) | If <$300 per head | Yes | Yes |
| Customers | N/A | Yes | Yes |
| Christmas lunch with customer at external venue | |||
| Employees | If <$300 per head | If $300 or more per head | If $300 or more per head |
| Associates (spouses etc.) | If <$300 per head | If $300 or more per head | If $300 or more per head |
| Customers | N/A | No | No |
For your business
What to do for customers?
The most effective way of sharing Christmas joy with customers is not necessarily the most tax effective. If, for example, you take your client out or entertain them in any way, it’s not tax-deductible, and you can’t claim back the GST. There are specific rules designed to prevent deductions and GST credits from being claimed when the expenses related to entertainment, regardless of whether there is an expectation of generating goodwill and increased business sales. Restaurants, a show, golf, and corporate race days all fall into the ‘entertainment’ category.
However, suppose you send your customer a gift. In that case, the gift is tax-deductible as long as there is an expectation that the business will benefit (assuming the gift does not amount to entertainment). Even better, why don’t you deliver the gift yourself to your best customers and personally wish them a Merry Christmas? It will have a much more significant impact even if they are unavailable and the receptionist tells them you delivered the gift.
From a marketing perspective, if your budget is tight, it’s better to focus on the customers you believe deliver the most value to your business rather than spending a small amount on every customer regardless of value. If you invest in Christmas gifts, then make it something people remember and appropriate to your business.
You could also donate on behalf of your customers (where your business takes the tax deduction) or for your customers (where they receive the tax deduction). Donations to deductible gift recipients (DGRs) above $2 are often tax deductible and can make an active difference to a cause.
What to do for your team?
Christmas is expensive. Some businesses simply can’t afford to do much because cash flow is too tight. Expectations are high, so if you are doing something, then it’s best not to exacerbate cashflow problems and take advantage of any tax benefits or concessions you can.
Christmas parties
If you really want to avoid tax on your work Christmas party, then host it in the office on a workday. This way, Fringe Benefits Tax (FBT) is unlikely to apply regardless of how much you spend per person.
Also, taxi travel that starts or finishes at an employee’s place of work is exempt from FBT. So, if you have a few team members that need to be loaded into a taxi after overindulging in Christmas cheer, the ride home is exempt from FBT.
If your work Christmas party is out of the office, keep the cost of your celebrations below $300 per person if you want to avoid paying FBT. The downside is that the business cannot claim deductions or GST credits for the expenses if there is no FBT payable in relation to the party.
If the party is held somewhere other than your business premises, then the taxi travel is taken to be a separate benefit from the party itself and any Christmas gifts you have provided. In theory, this means that if the cost of each item per person is below $300, then the gift, party and taxi travel can potentially all be FBT-free. Just remember that the minor benefits exemption requires a number of factors to be considered, including the total value of associated benefits provided across the FBT year.
If entertainment is provided to employees and an FBT exemption applies, you will not be able to claim tax deductions or GST credits for the expenses.
If your business hosts slightly more extravagant parties and goes above the $300 per person minor benefit limit, you will pay FBT, but you can also claim a tax deduction and GST credits for the cost of the event. Just bear in mind that deductions are only useful to offset against tax. If your business is paying no or limited amounts of tax, a tax deduction will not help offset the party’s cost.
Christmas gifts for staff
$300 is the minor benefits threshold for FBT, so anything at or above this level will mean that your Christmas generosity will result in a gift to the Tax Office as well at a rate of 47%. To qualify as a minor benefit, gifts also have to be ad hoc – no monthly gym memberships or giving one person multiple gift vouchers amounting to $300 or more.
Gifts of cash from the business are treated as salary and wages – PAYG withholding is triggered, and the amount is subject to the superannuation guarantee.
Aside from the tax issues, think about what will be of value to your team. The most appreciated gift is the one that means something to the individual. Giving a bottle of wine to someone who doesn’t drink, chocolates to a health fanatic, or time off to someone with excess leave, isn’t going to garner much in the way of goodwill. So, no tax deduction, and the person doesn’t appreciate it either!
