Unlocking festive cheer – which Fringe Benefits Tax implications apply to Christmas festivities?

Thinking of being Kris Kringle this festive season? 

When planning for these festivities, it is important for employers to be aware of the Fringe Benefits Tax (“FBT”) implications as well as the tax deductibility of providing these benefits.    

The good news is that some of these benefits can potentially be exempt from FBT which may enable employers to still reward their employees without worrying about additional tax costs post-Christmas. 

FBT Implications

Meal Entertainment

Under the Fringe Benefits Tax Assessment Act 1986 (“FBT Act”) employers must choose how they calculate their FBT meal entertainment liability. The most commonly used methods are the 50/50 method or the actual method. 

50/50 Method         
The 50/50 split method requires that employers:

• Capture all meal entertainment expenditure;
• Remove any amounts considered sustenance (e.g. morning tea, lunch provided during training);
• Remove any amounts which relate to meals while travelling
• And multiply the amount by 50%

Under this method, regardless of where the meal entertainment occurs or who attends, 50% of the total expenditure is subject to FBT.  The portion subject to FBT (50%) is deductible for income tax purposes. 

Remember, when applying the 50/50 method, you cannot apply the following exemptions:

• Property exemption available for food and drink consumed on business premises.   This means that even if the function is held on the employer’s premises the food and drink for employees is not automatically exempt from FBT;
• The minor benefit exemption; and
• The general taxi travel exemption (for travel to and from the employer’s premises) cannot apply if the travel relates to a meal entertainment event (as it is in connection with the provision of entertainment). This principle also applies to recreational entertainment and entertainment facility leasing expenses.

Actual Method

Under the actual method, only the entertainment provided to employees and their associates is subject to FBT. This method requires employers to keep meticulous records for each occasion, including attendees and location (unless their process of recording appropriately splits between offsite and onsite entertainment).  A lot of employers may choose this method due to the availability of various exemptions.

Minor Benefits Exemption

This exemption offers one of the greatest reductions in FBT when using the actual method. Minor benefits provided to employees are exempt if the taxable value is less than $300 (GST inclusive), and the benefits are infrequently provided and/or difficult to record and value. Entertainment benefits and other gifts are considered separately for the purpose of applying the minor benefits exemption. Not all employers can utilise the minor benefit exemption with respect to entertainment, thus it is important that employers who are rebatable or exempt are aware of any restrictions or limitations with utilising an exemption. 

Frequency and regularity of the minor benefit

The more frequently and regularly a particular benefit is provided, the less likely the benefit will qualify as an exempt benefit. The ATO has not provided a specific number on what would constitute ‘frequent’ for meal entertainment, but a common rule of thumb is that an employee would be considered frequent if they receive meal entertainment once a month or more (or 12+ times per annum).

Property Benefits Exemption

An exempt benefit arises where food and drink is provided and consumed by current employees on working days at the employers’ premise - this takes care of Friday night drinks in the office! While this does not include associates, depending on the amount per head, they may still be exempt under the minor benefits exemption.

To use the actual method, it is vital that you keep records of benefits provided for five years after they are prepared, obtained or the transactions completed.

Christmas Events

During this time of year, there is an increase in meal and recreational entertainment, which can include the traditional Christmas party as well as more casual drinks, team and client lunches and dinners.

Where an employer values meal entertainment using the actual method, the implications will usually be as follows:

Event on business premises

Event off business premises

*One off events for employees may be able to apply the minor benefit exemption, even where records of attendees have not been maintained due to volume. We recommend employers maintain detailed position papers of any approach taken.

The golden rule for the tax deductibility of entertainment is where employers have paid FBT, it is tax deductible!

Gifts

Before putting on the Santa hat and getting into the spirit of giving, it is important to consider various implications when choosing gifts for your employees and clients. If the gifts are non-entertainment in nature, employers are entitled to claim the gifts as tax deductions and any GST credits regardless of the costs, however there can still be FBT implications as summarised below.

Entertainment Gifts

Non-Entertainment Gifts

FBT Implications

Gifts provided to employees, or their associate will typically constitute a property fringe benefit (if minor benefits does not apply).

Tips:

• Be aware that for the minor, infrequent and irregular exemption to apply the gift, the value must be under $300 including GST i.e. $299.99 or less;
• Gift hampers included at Christmas parties are treated separately when utilising minor benefits exemptions. Although if the total cost per head is more than the cap, each benefit should be considered separately when applying the exemption; and
• While Christmas is a great time to reward your team for all their hard work, it is best to limit them to gifts that are not related to recreation or entertainment.

For more information about Fringe Benefits Tax:

If you require further information regarding Fringe Benefits Tax, please contact your local RSM advisor.