Holiday Tax Rules Simplified: Entertainment, Gifts, and Fringe Benefits Explained

Deck the halls and prepare the countdown, for the festive season is swiftly approaching. In the spirit of merry Holiday cheer, many business owners may wish to mark the upcoming closing of the 2024 calendar year with gifts or events for staff or clients. In order to maintain compliance with tax regulations set out by the Australian Taxation Office (ATO) during your celebrations, there are a number of things to consider when planning business parties and purchasing client or employee gifts.

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Is It Considered Entertainment?

Business owners who want to avoid paying Fringe Benefits Tax (FBT) and who want to claim the expenses against business income may wish to avoid spending money on food, drink or recreation that are considered entertainment.

Determining if food or drink is considered entertainment

The Australian Taxation Office provides the factors laid out below for businesses to use to determine if food or drink provided to staff are considered entertainment. ‘Why’ and ‘what’ are the most important factors.

    
            Factor
            Less likely to be entertainment
            More likely to be entertainment
        
            Why are you providing the food or drink for employees?
            So employees can complete the working day in comfort
            In social situations where the purpose is for employees to enjoy themselves
        
            What type of food or drink are you providing?
            Light food and refreshments, no alcohol
            Elaborate food or meal, alcohol
        
            When are you providing the food or drink?
            During work time or overtime, or while employee is travelling for work
            Outside work time
        
            Where are you providing the food or drink?
            On your business premises or at the employee’s usual workplace
            Off your business premises, such as at a function room, or hotel or restaurant, or consumed with other forms of entertainment

Factor	Less likely to be entertainment	More likely to be entertainment
Why are you providing the food or drink for employees?	So employees can complete the working day in comfort	In social situations where the purpose is for employees to enjoy themselves
What type of food or drink are you providing?	Light food and refreshments, no alcohol	Elaborate food or meal, alcohol
When are you providing the food or drink?	During work time or overtime, or while employee is travelling for work	Outside work time
Where are you providing the food or drink?	On your business premises or at the employee’s usual workplace	Off your business premises, such as at a function room, or hotel or restaurant, or consumed with other forms of entertainment

[1]

Determining if recreation is considered entertainment

Recreation that is considered entertainment includes amusement, sport and similar leisure activities. These include:

· Golf games

· Gym memberships

· Theatre or movie tickets

· Harbour cruises

· Accommodation and travel in connection with entertaining clients or employees [1]

If food, drink or recreation expenses do not qualify as entertainment, they may be claimable as business expenses against income. [1]

Avoiding Fringe Benefits Tax

Fringe Benefits Tax (FBT) is a type of tax that employers may be required to pay on benefits provided either to employees or to employees’ family or other associates. Gifts and entertainment benefits can be considered benefits for FBT purposes. Therefore, in order to avoid FBT liability, businesses should consider the following:

Does a Minor Benefits Exemption Apply?

Central to the concept of Fringe Benefits is the concept of Minor Benefits Exemption (MBE). MBE applies where:

· the value is less than $300 including tax, and

· it is unreasonable for it to be treated as a Fringe Benefit. [2]

    
                Generally speaking, something is more likely to be considered unreasonable to treat as a Fringe Benefit if:
                it is not a frequent or regular expense
the total cumulative value of minor benefits provided is not high
it is not practical to determine the taxable value
the circumstances of the benefit do not imply that it could be considered primarily as compensation for work provided. [2]

For more information, see the ATO page on Minor Benefits Exemptions.

Parties

Employers planning festivities for their employees this Holiday season need not be tripped up by Fringe Benefits Tax – business party expenses that fall under one of the following criteria are FBT-free.

· If a party is held on a working day, on business premises, and only for current employees, FBT does not apply for the food and drink.

· If a party is held off business premises or includes associates of employees, and the cost for each person is less than $300 and would be unreasonable to be treated as a Fringe Benefit, the Minor Benefits Exemption applies and FBT does not apply.

· If a party includes clients, FBT does not apply for the costs relating to the clients. [3]

Gifts

The value of Holiday gifting is widely acknowledged, and employers looking to avoid paying Fringe Benefits Tax need not avoid gifting in its entirety. Businesses can avoid incurring FBT on gifts for employees by meeting the criteria below.

· If employee gifts are less than $300 per person and would be unreasonable to be treated as fringe benefits, the Minor Benefits Exemption applies and FBT does not apply. [3]

For more information on Fringe Benefits and Fringe Benefits Tax, you can refer to the ATO website or talk to a Tax Agent or Accountant.

Income Tax and GST Credits

Meeting the Minor Benefits Exemption criteria outlined above allows businesses to avoid incurring FBT on gifts provided to employees or on festivities classified as entertainment provided to employees and associates. However, employers should be aware that if these expenses are not subject to FBT, neither income tax deductions nor GST credits can be claimed. [4]

GST credits and income tax deductions also cannot be claimed on client entertainment. (Entertaining clients does not incur FBT.) However, gifts provided to clients – either present or former – may be deductible for income tax purposes if they are offered with the intention of generating future assessable income. Business owners should be aware that not all gifts are tax deductible: for example, gifts of a personal nature, or gifts considered to be entertainment, cannot be deducted. For more specific information on what client gifts can be claimed as business expenses for tax purposes, you may wish to speak to a Tax Agent or Accountant. [4]

We at QiBalance Bookkeeping wish you a wonderful Holiday season!