Call me an accountant, but I love giving my clients a tax deduction. Unfortunately, many businesses are under the impression that you can throw any sort of party and buy any sort of gift and the ATO will give you a tax deduction for providing some Christmas cheer. I quite often hear the argument “but it’s for my employees. Its great for morale and building relationships to help my business succeed”. Whilst I agree completely, the tax law is primarily designed to not subsidy these costs by allowing a tax deduction and GST to be claimed.
The big distinction for business owners to understand is what is considered to be entertainment and what is considered to be a gift as the outcome varies significantly.
The following is considered to be entertainment:
- Restaurant meals/drinks
- Meals/Drinks at your business premise (in the context of a Christmas party)
- Tickets to events/tours
- Accommodation & Travel associated with entertainment
To determine the tax outcome of providing the above entertainment, you than need to determine if the entertainment provided is valued less than $300 (GST inc). If so, you do not need to pay Fringe Benefits Tax (FBT) to the ATO, however, you cannot claim a tax deduction and cannot claim GST.
If the value is greater than $300, than you will need to lodge an FBT return to the ATO to pay Fringe Benefits Tax, however, you can than claim a tax deduction and claim GST. Is this a desirable outcome? No. The FBT you will pay will outweigh the tax and GST savings and you will need to get your accountant to complete this extra work for you.
The following is considered to be a gift
- Christmas Hampers
- Alcohol (unopened and not consumed in an entertainment context)
- Gift Vouchers
- General retail items such as flowers, household items, personal coffee cups, etc
To determine the tax outcome of providing the above gift, you again, need to determine if the gift provided is valued less than $300 (GST inc). If so, you do not need to pay Fringe Benefits Tax (FBT) HOWEVER you CAN claim a tax deduction and CAN claim GST.
If the value is greater than $300, than you will need to lodge an FBT return to the ATO to pay Fringe Benefits Tax, claim a tax deduction and claim GST. Is this a desirable outcome? As above, no its not.
So whilst I strongly believe the staff Christmas party is an essential part of a businesses social calendar, if you are wanting to get a tax/GST benefit for your generosity, a gift under $300 is your best option.
As my clients would tell you, I love drawing and flowcharts to explain myself. So here is my Christmas gift to you:
The ATO has a slightly different view when it comes to entertainment and gifts to third parties E.g. Clients, Supplier, Contractors, etc
Entertainment, regardless of the cost, will not attract FBT and NO tax deduction or GST claim can be made.
Gifts, regardless of the cost, will not attract FBT HOWEVER, a tax deduction and GST claim CAN be made.
This advice is general in nature. You should consult with your accountant for clarification in regard to your specific circumstances.