With the holiday season upon us, it is customary for businesses to present their customers, suppliers, staff, and associates with gifts. Christmas parties are also a tradition for many businesses come December.

However, end-of-the-year related costs for a business carry a wide range of tax treatments. The following guidelines will help you to apply the correct Goods and Services Tax (GST), employee Fringe Benefits Tax (FBT) and Income Tax treatment to gifts and Christmas functions and avoid receiving a visit from the ATO on Christmas Eve.

Gifts

The tax treatment attributed to gifts differs on a range of factors:

  • Firstly: Is the gift entertainment?

Tickets to sporting events and theme parks fit under these criteria.  Perhaps surprisingly meals at restaurants are also considered entertainment.

  • Secondly: Is the gift to an employee or associate, or would it be for a client or supplier, i.e., an unrelated party?

If you present clients or suppliers with non-entertainment gifts, your expenses are eligible for an income tax deduction and GST input tax credit claim.

The table below clarifies the tax conditions for gifts given to unrelated parties.

 Clients/Suppliers
EntertainmentNon-entertainment
Income Tax DeductionNoYes
GST Input Tax Credit ClaimNoYes

Gifts to employee/associates have a more complex tax treatment and may be subject to FBT depending on whether the gift is entertainment and if the gift costs more of less than the $300 minor fringe benefit exemption amount.

The table below describes the tax treatment for employee/associate gifts.

 Employees & Associates
Up to $300 per person costOver $300 per person cost
EntertainmentNon-entertainmentEntertainmentNon-entertainment
Income Tax DeductionNoYesYesYes
GST Input Tax Credit ClaimNoYesYesYes
Fringe Benefits TaxNoNo*YesYes

*Must satisfy the FBT criteria for the minor fringe benefit exemption.

Christmas Function

Many businesses will host a Christmas function for their clients, suppliers, staff, and associates. Often, the event will be held at an offsite venue (a bar or a restaurant, for instance) and will likely be considered entertainment for tax purposes.

To better illustrate the tax treatment of Christmas functions we have outlined below two of the most common scenarios and their associated treatments:

Scenario 1

Example: Christmas Party for 25 people held at a bar with the total cost of $5,000. The event is attended by 15 employees/associates and 10 clients/suppliers and had a $200 cost per person.

The tax treatment for the Christmas party would be as follows:

  • The event constitutes entertainment; therefore, an income tax deduction and GST input tax credits cannot be claimed.
  • The cost per employee/associate is below $300. Assuming all other conditions are met, the FBT minor benefits exemption can be applied for the expenses related to employees/associates, and FBT does not apply.

Scenario 2

Example: Christmas Party for 25 people held at a 5-star restaurant and bar located in the CBD, with the total cost of $15,000. The event is attended by 15 employees/associates and 10 clients/suppliers and had a cost of $600 cost per person.

The tax treatment for the Christmas party would be as follows:

  • The cost per employee/associate is over $300. Therefore, FBT applies to the portion of the cost attributable to employee/associates. Using the actual cost method, this value would be $9,000. (15 x $600) *
  • This component of the cost will be eligible for an income tax deduction and GST input tax credits claim.
  • The remaining cost for client/suppliers of $6,000, is not subject to FBT, however will also be ineligible for an income deduction and GST input tax credits claims as it constitutes entertainment.

*Under the FBT act, various methods are available to calculate the FBT payable on meal entertainment. The above scenario assumes the cost per person is a flat $600 per person with no variation for specific individual costs.

Contact Us

Applying the correct taxation treatment on your Christmas expenses can save you from complications with the ATO. However, if conditions fee overly complicated or if you are unsure of how to treat the transactions, our experienced team of accountants can help you make the best decision for your business success.

Contact us today by calling (07)3394 2311 or clicking ‘Contact Us’.