It pays to think ahead when planning for Christmas functions and employee gifts, in order to minimise the impact of FBT on the festive season. Tax expert Joylon Dare explains how.
Changes in the rules in recent years have resulted in uncertainty around how to arrange benefits for employees that also stack up from a tax perspective. But one remaining area to reward your employees without experiencing negative tax consequences is with Christmas gifts and with the office Christmas party.
For those employers who keep a record of which employees receives which entertainment benefits, there can be significant advantages available under the rules regarding what are called “minor and infrequent” concessions. Essentially, these concessions mean that many benefits provided to employees around the silly season are not subject to fringe benefits tax (FBT). This effectively cuts the employer’s cost of providing them, by half, without halving any of the pleasure employees experience when receiving them.
It pays to consider the best way of accounting for food and drink at office Christmas parties. Many employees elect for a “50/50” method of apportioning food and drink at office Christmas parties, as it is simple to administer.
However, while it is easy to calculate, it also penalises employers who regularly provide benefits to employees at other times of the year that are less than the “minor” threshold of $300.
If you are an employer who frequently provides gifts to your employees that are less than $300, you can ensure they are in fact FBT free by using an alternative method of accounting for them. This is called the “specific identification” method.
Using the more onerous specific identification method means it may be possible to treat benefits of less than $300 as FBT-free under the “minor benefits” exemption.
Slicing and dicing your way to “minor”
Of course, not much Christmas cheer can shared around for $300. But the good news is, for FBT purposes, every employee gets a separate “benefit” which can be separately valued to work out what is “minor”.
Additionally, the Tax Office says employees and their partners should be separated for testing the $300 “minor” threshold. This can mean twice the fun for everyone just by inviting partners to the Christmas party, without twice the tax pain.
Although it may seem an onerous requirement, if the Christmas party is the major piece of entertainment in your workplace for the year, the FBT savings can be significant just by keeping a record of who received what entertainment, when.
But that’s not all…
Many employers choose to provide a gift as well as a Christmas party to employees. The good news is that gift and entertainment are considered to be different kinds of benefits from an FBT perspective, providing a second opportunity to access the minor benefits concessions.
Whether you choose to use either the “50 / 50” or the “specific identification” method, the minor benefit will still apply to gifts.
Gifts that keep on giving – a real world example
Take for example an employer who has $300 per head to spend and uses the 50/50 method for meal entertainment and does not provide gifts to employees frequently.
If the Christmas party is $300 per head, $150 of this will be subject to FBT. However, if the employer provided a $150 bottle of wine plus an amount of $150 per head dinner, FBT would be payable only on the $75 “meal entertainment” component. This is because the bottle of wine could be considered as a gift, and could be separately considered under the minor benefit concessions.
As is so often the case with tax related matters, it is important to keep documentation of meal entertainment costs, and who attended any functions, for the whole year. This ensures you are able to take advantage of the “specific identification” method (which requires these records), to ensure you achieve a better FBT outcome than the easier “50/50” method.
Joylon Dare is a partner with accountants and business and financial advisers HLB Mann Judd Sydney. www.hlb.com.au