With the festive season upon us, so too are the Fringe Benefits Tax (FBT) implications associated with Christmas parties, client lunches, and gift giving and receiving. Now is the perfect time to consider FBT, and how these additional costs can be managed.
If your employees are attending client functions, business-led social functions, broader community events or receiving gifts, your business may be liable for FBT. Generally, benefits provided to employees (or their ‘associates’) are subject to FBT during these festive events, where the benefits are considered ‘entertainment’.
Food and drinks
When determining whether providing food or drink is ‘entertainment’, consider the following:
- Social situations are generally considered entertainment, as opposed to refreshments during working hours, which are generally not entertainment.
- Food or drink provided during work hours and on premises (or while travelling) are less likely to be entertainment. Events outside of work hours and off premises are generally considered entertainment.
If a fringe benefit does arise, there are two common ways that a business is able to value entertainment: the actual method or the 50/50 method.
Under the actual method, only entertainment provided to employees and their associates is subject to FBT. There is no specific ‘entertainment fringe benefit’ and as such, when a fringe benefit arises from providing an employee or their associate with entertainment by way of food, drink or recreation, this may give rise to a property fringe benefit or expense payment fringe benefit.
The advantage of using the actual method is the potential to utilise the minor benefits exemption. Minor benefits (those valued at less than $300 per head, inclusive of GST) which are infrequently provided, can be exempt from FBT. Therefore, if your business does not entertain employees often, this could significantly reduce the amount of FBT payable. It is important to remember, employees who frequently entertain may not be eligible for the minor benefits exemption. Furthermore, the actual method and the minor benefits exemption require detailed documentation to be maintained, which can be a burden for businesses.
Rather than apportioning the cost of meal entertainment based on employees versus non-employees, or by reference to where meals are consumed, many employers may choose to use the 50/50 method. This method values 50% of total entertainment expenditure incurred during the year as subject to FBT. This method is simple and can be effective where the business spends more on employee entertainment than client entertainment. However, you’re unable to use the minor benefit exemption under the 50/50 method.
Gifts provided to employees or their associates typically constitute a property fringe benefit and are therefore subject to FBT unless the minor benefits exemption applies.
The value of gifts should be considered separate to the per head cost of Christmas functions for the use of the minor benefits exemption. Gifts provided to clients are outside of the FBT rules.
Income tax deductibility
You can generally claim an income tax deduction and GST credits for the cost of providing entertainment that is a fringe benefit. Note that exempt benefits are not fringe benefits. Employers generally can’t claim an income tax deduction or GST credits for the cost of providing entertainment which is exempt from FBT (for example, entertainment amounts you have excluded using the minor benefits exemption).
Entertainment benefits provided to people other than employees or their associates (to clients for example) are not subject to FBT and are generally not income tax deductible for employers.
We hope this gives you guidance around managing FBT this festive season. If you have any questions or would like help determining your FBT liability, please call your local William Buck Tax Advisor.