Throwing a work Christmas party this year? Giving out some gifts? There’s a tax for that.
It’s called fringe benefits tax, and if you aren’t careful the taxman could come knocking.
Fringe benefits tax (FBT) is the tax employers pay on benefits they provide to employees, their family or other associates in addition to, or as part of, their salary or wages.
Work cars for employees’ private purposes, or paying for an employee’s private health insurance come under the FBT regime, but so do Christmas parties.
Here’s the good news: there are exemptions under FBT that could save your business some money.
The catch: it’s not exactly simple to determine what’s FBT exempt and what’s not. The tax office released a six-page document earlier this week trying to clear the air.
Here are a few tips and tricks to successfully navigate FBT reporting.
1. Venue matters
Whether your Christmas party is considered ‘entertainment’ or ‘non-entertainment’ is just as important from the ATO’s perspective as it is for your employees (haha).
In the tax office’s case though, you’ll be more likely to be FBT exempt if the premise your party is held at is classified as ‘non-entertainment’.
BDO tax partner Mark Molesworth explains if the party is at your office it’s more likely to be classified as ‘non-entertainment’, but FBT is complex, so that’s only general advice.
“This is taxation, there are exemptions to the exemptions,” Molesworth tells SmartCompany.
“It’s a matter of interpretation and application of the law to the facts and circumstance of a case.”
The ATO defines ‘entertainment’ with a few dot points on its website:
- Providing entertainment by way of food, drink or recreation;
- Providing accommodation or travel in connection with such entertainment; and
- Paying or reimbursing expenses incurred in obtaining something covered by either of the above.
2. A magic number: $300
When it comes to FBT, $300 is a pretty important number.
It’s basically the threshold for what classifies as a ‘minor benefit’ and what doesn’t.
That’s important because minor benefits are often exempt from FBT, but there are some conditions.
A minor benefit has to be infrequent and irregular, meaning you can’t throw a Christmas party-scale event every week and still say its minor.
Molesworth says a business that holds an end-of-financial-year (EOFY) party and a Christmas party should be okay on this front.
The total amount spent per head also has to be $300 or less, and this is for all similar expenses you’re claiming throughout that FBT reporting year for that employee, Molesworth says.
3. Go for ‘non-entertainment’ gifts for the best tax outcomes
He knows when you’re sleeping, he knows when you’re awake, he knows when you’ve been bad or good, he knows the FBT classification of your workplace Christmas gif— ahem, the tax office, that is.
Tickets to concerts, movie passes and holidays are classified as entertainment gifts by the ATO and are usually subject to FBT.
However, hampers, vouchers, bottles of wine and other similar gifts are classified as ‘non-entertainment’ and are generally exempt from FBT.
Molesworth says, generally, things that are considered ‘things’ are less likely to be considered ‘entertainment’.
There are also different rules depending on whether gifts are for employees, clients or suppliers.
For instance, employees carry an FBT obligation whereas clients and suppliers don’t.
To summarise, there are a few important questions to ask yourself before you throw your Christmas party.
- How much will it cost? Remember $300 is the magic number.
- Where is it, and when will it be held? At the office or outside of work?
- Who’s invited? Is it employees only? Are partners, clients and suppliers also invited?
- Giving gifts? How much are they worth, what type are they and who is receiving?
If this all seems a bit onerous, don’t worry, you aren’t alone. The Board of Taxation was asked to review FBT compliance costs by the government in February and is due to provide some advice early next year.
Unfortunately, that’s not in time for Christmas.
Molesworth says he hopes the board recommend a simplification of the law to the government.
“It really does put the silly in silly season, having to deal with all these really complex decisions,” he says.