As the Christmas season fast approaches, benefits are typically provided to employees and clients by employers, by associates of employers, or under an arrangement with a third party in the form of entertainment and gifts. These benefits often attract Fringe Benefits Tax (FBT).
The FBT implications of providing such benefits sometimes are not fully understood by businesses. When the FBT exposure is not effectively managed, it could result in significant unexpected additional costs to businesses. We have provided two simple case studies below to illustrate the differences in outcomes:
Example 1 – Gift cards provided by an employer
Company A and Company B have 100 employees each. Both businesses provide their employees with a gift card at Christmas time as a thank you for their contribution to the company’s success for the past year. Such gift cards are provided only once a year.
| Company A | Company B | |
| $250 | $300 | |
| Gift cards value | Gift cards value | |
| There were no additional administration fees or charges associated with the gift cards | There were no additional administration fees or charges associated with the gift cards | |
| As the value of each gift card is under $300 and it is provided once a year, this benefit qualifies for the minor, irregular and infrequent exemption from FBT. Accordingly, all gift cards provided to the employees would be exempt from FBT. | As the value of each gift card is equal to $300 (i.e. not under $300), FBT will be payable on the total. | |
| Number of gift cards provided | 100 | 100 |
| Value of each gift card | $250 | $300 |
| Total | $25,000 | $30,000 |
| FBT | $0 | $26,604* |
| Total cost to the business | $25,000 | $56,604 |
* The FBT calculation is as follows: $30,000 * 1.8868 * 47% = $26,604. Generally, gift cards are not subject to GST and therefore, the Type 2 gross up rate is applied.
Example 2– Christmas party
Company A and Company B invited their employees to their respective annual Christmas parties held at reception venues (off business premises). Both used an external event management provider. In both instances, transport to the venue from the office was organised for the employees. The respective Christmas parties were each attended by 100 employees and both companies were invoiced a total of $31,000.
| Company A | Company B | |||
| Tax invoice supplied by the event management provider with breakdown of costs inclusive of GST | Tax invoice supplied by the event management provider with the total costs amount inclusive of GST | |||
| Food and Drinks | $20,000 | Total cost of Christmas party | $31,000 | |
| Entertainment | $5,000 | |||
| Transport to the venue from the office | $2,000 | |||
| Management fee charged by event manager | $4,000 | |||
| The management fee charged by the event management company is not considered to be a benefit provided to the employees and is not included in the taxable value. Consequently, the cost per head of the Christmas Party works out to be $270 (i.e. ($20,000 + $5,000 + $2,000)/100). | As Company B was not provided with a breakdown of costs for the Christmas Party, the total invoiced amount becomes the taxable value for FBT purposes. Accordingly, the cost per person is $310. | |||
| As the cost per person is under $300 and the benefit is provided once a year, this benefit qualifies for the minor, infrequent and irregular exemption, and will not attract FBT. | As the cost per person is greater than $300, the minor benefit exemption does not apply, and the benefit is subject to FBT in full. | |||
| Total costs | $31,000 | $31,000 | ||
| Costs subject to FBT | $27,000* | $31,000 | ||
| Number of employees attended | 100 | 100 | ||
| Cost per person | $270 | $310 | ||
| FBT | $0* | $30,309** | ||
| Total cost to the business | $31,000 | $61,309*** | ||
* Costs are not subject to FBT. They are exempt under the minor benefits rule.
** The FBT calculation is as follows: $31,000 * 2.0802 * 47% = $30,309. Christmas party costs are subject to GST, therefore, the Type 1 gross up rate is applied.
*** The above calculations assume that the Actual Method for valuing meal entertainment is used. In some circumstances, it might be more advantageous to use the 50/50 split method. However, a business’ total annual meal entertainment expenditure must be considered to determine which valuation method produces the lowest taxable value.
As evident from the above examples, the total cost of company B has nearly doubled due to the FBT liability incurred in providing fringe benefits valued equal to or more than $300 per head.
It is important to understand the FBT rules and implications for the business when providing various benefits to employees. With appropriate planning, costs can be significantly reduced where FBT is avoided.
To help you identify and analyse your entertainment expenditure, we have provided some notes in respect of the FBT, GST Input Tax Credits (GST ITC), and income tax deductibility implications associated with festive season celebrations. These rules would equally apply to any other meal entertainment provided throughout the year.
Giving gifts to clients and employees
The table below summarises the tax treatment of gifts provided to clients and employees (or their associates).
| Gifts – Not entertainment (e.g. hamper, bottle of wine) |
Gifts – Entertainment (e.g. movie / theatre tickets, restaurant voucher)* |
|||
| Client | No FBT | No FBT | ||
| Deductible | Not deductible | |||
| GST ITC available | No GST ITC | |||
| Employee or Associate (e.g. Spouse /Partner / Family Member) | Less than $300 (GST incl) |
$300 or more (GST incl) |
Less than $300 (GST incl) |
$300 or more (GST incl) |
| No FBT | Subject to FBT | No FBT | Subject to FBT | |
| Deductible | Deductible | Not deductible | Deductible | |
| GST ITC available | GST ITC available | No GST ITC | GST ITC available | |
*This assumes the entertainment is not meal entertainment or if it is meal entertainment, that the actual method is used. If the entertainment constitutes meal entertainment and the 50/50 split method or register method are used, the costs must be included as per the method requirements. Please note that the application of the minor benefits rule is limited for income tax exempt businesses in relation to entertainment benefits.
Christmas parties and year end functions
The correct tax treatment of costs associated with Christmas functions depends on whether the employer is concessionally taxed for FBT and income tax purposes, and the method chosen by the employer to value meal entertainment for FBT purposes (there are three methods: 50/50 Split, Actual or Register) and whether benefits are provided to employees, associates or clients.
The table below summarises the treatment for an ordinary business taxpayer (i.e. it does not apply to income tax exempt businesses). Please remember to keep necessary documentation on file such as attendance lists to allow the calculation to be made correctly, accurately, and be substantiated in the event of a tax
office audit.
Entertainment costs (e.g., Christmas party costs) are only tax deductible, and GST ITC are only available to the extent that the costs are subject to FBT. Where event costs are exempt from FBT, there should be no income tax deduction nor any GST ITC entitlement.
| Entertainment function | ||
| Less than $300 per head | $300 or more per head | $300 or more per head |
| (GST inclusive) on or off | (GST inclusive) on | (GST inclusive) off |
| business premises | business premises | business premises |
| Actual method | ||
| Employee or Associate | Employee | Employee or Associate |
| Minor benefit for employee and associate costs – exempt from FBT. | Exempt benefit for employee costs, no FBT. | Costs are subject to FBT. |
| Not deductible. | Not deductible. | Deductible. |
| No GST ITC. | No GST ITC. | GST ITC available. |
| Associate | ||
| FBT is payable on associate costs and is deductible. | ||
| GST ITC available. | ||
| Client | ||
| No FBT on client costs. | ||
| Not deductible. | ||
| No GST ITC. | ||
| 50/50 Split method | ||
| Employee / Associate / Client | ||
| Include all GST inclusive costs. 50% subject to FBT and 50% exempt. | ||
| The portion subject to FBT is deductible with GST ITC available. | ||
| The portion of costs not subject to FBT is not deductible with no GST ITC available. | ||
| Register method | ||
| Employee / Associate / Client | ||
| Include all GST inclusive costs. | ||
| Register percentage subject to FBT is deductible with GST ITC available. | ||
| The portion of costs not included for FBT is not deductible with no GST ITC available. | ||
Note: The table is designed to apply to most common circumstances and is only meant to indicate the likely FBT treatment. Employers should seek independent tax advice on their specific circumstances before entering into any arrangement or transaction.
The tax treatment for income tax exempt employers
The FBT treatment of entertainment costs for income tax exempt employers (who are taxable for FBT purposes) is substantially similar to that of an income tax paying employer where the 50/50 Split or Register Methods are chosen. However, where the Actual Method is used, FBT is generally payable on costs relating to the employee and any associate(s) regardless of the cost or location of the function (i.e. the minor benefit and food and drink consumed on premises exemptions are not available to income tax exempt employers). Under this method, the costs relating to the entertainment of clients should remain not subject to FBT.
Pitcher Partners recommend businesses undertake the following:
- Consider the type of entertainment benefits to be provided to employees within the business;
- Contact a member of our employment taxes team ahead of providing employee benefits and as part of your planning to discuss various options to ensure that benefits are provided in the most efficient manner from an FBT perspective;
- Consider the FBT implications and record keeping requirements; and
- Where applicable, ensure that internal communication takes place between various parts of the business (for example, human resources and finance teams) before fringe benefits are being provided to employees.
