Christmas is the time for giving, but not the time for a nasty new year Fringe Benefits Tax hangover.

Where can it go wrong – the thought is great, the tax outcomes not so much…

Author Michael Kerwin

Unless exempt, gifts to employees are generally considered a “Fringe Benefit” and subject to “Fringe Benefits Tax” (FBT) at the top marginal rate (49% current FBT year) on the “grossed up” value. In addition, gifts that constitute entertainment to employees (or clients) are not tax deductible.

Sounds terrible, but how do we not be the Christmas scrooge and avoid the wrath of FBT.

EMPLOYEES:

Assuming gifts to employees are infrequent & irregular, and the value of each gift is under $300 it is deemed to be a minor benefit and therefore exempt from FBT.

Furthermore, as long as the gift is not entertainment it will be tax deductible. NOTE: Company directors are also employees so feel free to shout yourself a pressie too.

While not exclusive, common forms of gifts that would be considered entertainment could include restaurant meals, movie tickets, sporting events and holidays. Avoid these types of gifts.

The following are some examples of gifts that would not be considered entertainment: – Gift packs – Alcohol – Department store gift cards

These will be your most tax effective kinds of gifts.

EXAMPLE STAFF GIFTS

CLIENTS:

The same entertainment provisions will apply regarding tax deductibility of items and ability to claim GST credits, so it is still beneficial to avoid “entertainment”.

FBT does not apply, so the only question will be whether the expenditure is tax deductible or not.

As the gift is an expense to your business it is generally considered tax deductible. The key to whether the ATO will also consider your gift tax deductible will be whether the gift is incurred in carrying on a business for the purpose of gaining or producing assessable income.

While no black & white boundaries, the guidance would be that the investment in the gift must be reasonable for the expected returns. The return being gaining or producing assessable income in the future.

CONCLUSION:

  1. Directors are employees, so don’t forget yourself;
  2. Avoid “entertainment”;
  3. Keep employee gifts <$300 per gift;
  4. Don’t forget birthdays, EOFY or other celebrations. While what constitutes irregular & infrequent is a question of fact, conservatively, one would think a few times a year would be OK;
  5. Ensure client gifts are reasonable in comparison to the likelihood of this producing future assessable income;
  6. Don’t forget charitable giving, the perfect gift for someone that has everything – just be sure to check the charity is a registered deductible gift recipient.