Christmas parties and gifts

[Mry]

I wrote an article on Christmas parties and gifts for a local bookkeeper and thought it might be of interest for those here. For those of us who like gifting ourselves things from our trusts, the part on Christmas gifts is especially interesting.

Christmas parties and gifts

If the Christmas ads haven’t already informed you, Christmas is arriving soon. For most of us this is a time to spend with family and perhaps take some time off, but I am sure that most of you have been wondering about the tax treatment of Christmas parties. Rest assured, this article is to inform you and relieve you of at least one pre-Christmas stress.

There are two types of treatment for parties – they are either non-deductible and do not attract Fringe Benefits Tax (FBT), or they do attract fringe benefits tax and are deductible (which also allows you to claim back GST if you are registered). Which costs more? Speak to your accountant, but in a working example by the National Tax and Accountant’s Association for a company, the cost for a party that attracted FBT cost 36% more than a non-deductible party.

If you have a Christmas party at work for employees and non-employees (ie clients and suppliers), all costs are non-deductible and do not attract FBT exempt. If associates attend (eg family members), if the per-head cost for them is under $100, the cost will also be non-deductible and FBT-free, but if the per-head cost is over $100, it will attract FBT but be deductible.

However, if you go off-site for a Christmas party such as a restaurant, the treatment is the same, except this time employees and associates will both be subject to FBT (and the cost of the meal deductible) if the per-head cost is over $100. Note that if an employee brings their associates and the cost per head for that employee plus their associate(s) goes over $100, FBT will be charged and the cost will be non-deductible. For example, if the cost per head is $40, John and his wife (total $80) will not attract FBT and the cost will be non-deductible, but Jim and his two children (total $120) will attract FBT and the cost will be deductible.

If you find that the party you plan will attract FBT, speak to your accountant about your costs and possible alternatives such as paying for the party from private funds.

Christmas gifts

This is a topic with good news for all. Thanks to TD 94/55 and MT 2042, you can provide non-entertainment gifts to employees and associates and gain a full deduction for them and as long as the cost is below $100, they will not attract GST. You can even claim back the GST on the purchase. The gifts the ATO suggests are items such as Christmas hampers, a bottle of whisky, gift vouchers, perfume, pen set, etc. You can provide non-entertainment gifts to non-employees such as suppliers and claim a full deduction and no FBT for as much as you want.

However, entertainment gifts such as cinema tickets, sporting events and holiday accommodation are treated differently. You can claim a deduction for these if given to employees but you cannot claim the GST on these items and if the cost is below $100, it will not attract FBT. Entertainment gifts to non-employees is FBT exempt and non-deductible.

If you provide money such as bonuses, they will be taxed as salary and wages as per normal, but note that bonuses are not subject to the 9% superannuation guarantee charge.

The warning here is that if gifts are provided in connection with a Christmas party, the cost is added to the per-head cost of the party and may exceed the $100 threshold and attract FBT. For example, a per-head party cost of $80 with a gift of $35 will exceed the $100 threshold and attract FBT. The ATO has suggested that gifts should be given at a different time to avoid liability (they have stated that hampers given two weeks before Christmas parties will not be added to the per-head cost of a party).

Note that Christmas time is not the only time you can provide gifts with this treatment – you can do it all year round as long as the gifts are provided on an infrequent and irregular basis from employer funds. It is perfectly legal for a taxpayer with a company that employs him/her to go out to the movies and have the company or trust pay for the trip and claim a deduction as long as the cost of the outing is below $100. Just remember that it must be on an infrequent and irregular basis.

Also note that for the $100 thresholds listed above, from the 1st of April 2007 onwards the threshold goes up to $300.

 

[Petal]

On a similar topic, for those on the forum that have their own business are you as confused as I am with the tax treatment of business meals??

We were using the company money to pay for business meals eg hubby would take 2 clients to lunch. I then find out that we cannot do that. We can only claim for meals and get a GST deduction if we are overnight and only for our meals (as we are both directors).

I then thought that we could use the company money for clients but not claim a GST credit but today was told if we do that, at the end of the year they add that money back on and we pay company tax on it!!

As an example to illustrate if at the end of next Financial year we end up with a profit of $10,000 and on our MYOB accounts we claimed $2,000 for business meals (nb this does not inlcude the ones when we are away overnight) then our accountants will change our records to show that we had a profit of $12,000 and we pay 30% company tax on that!! So we might as well just pay for client meals with our personal account which we have been doing

I guess this happens because it was abused when the "long lunch" was rife.

Is this how others see it????

 

[coastymike]

Petal,

Wrong in my opinion. If operating through a company and your company provide 'meal enetertainment' benefits then the employer (in your case a company) may choose between one of three methods to determine their FBT liability in respect of benefits they provide. These are –

• a ratio based on 12 weeks of record keeping;
• a 50/50 split; or
• actual expenditure.

A lot of people use the 50/50 method because it is the easiest to use. So using your example this is how it works.

If you elect to use the 50/50 split method, $1,000 will be subject to FBT and can be claimed as an income tax deduction. The other 50% or $1,000 will not be subject to FBT and cannot be claimed as an income tax deduction.

FBT on the $1,000 will be 48.5% (will change next year) on the grossed up value. Grossed up value will be $1,000 x 2.1292 = $ 2,129.20 of which the company will pay $ 1,032.66 in FBT (round to say $1,033).

So for the company result will be

$10,000 Profit

Add Back $1,000 non deductible 'meal entertainment'

Less FBT Paid $1,033.00

Adjusted Net Profit $ 9,967.00

Tax on Adjusted Net profit $ 2,990

So total taxes are $2,990K plus FBT of $1K = $3,990k

In your scenario total taxes are $12,000 x 0.30 = $3,600 plus whatever tax is payable at your marginal tax rate on the extra $2k. If you were on the top tax rate of 48.5% then you would pay $ 970 in personal tax so total taxes would be $ 4,570. $580 worse off than the company paying the fbt.

Laziness in my opinion. However if you are on lower marginal tax rates than the highest rate then it may be better to put these to your wages.