December is that time when many businesses wind down and culminate the year. It’s a month we all look forward to as we get to spend time in a social setting without the busyness of work humming away. Across small- and medium-sized enterprises in Australia, providing Christmas parties and gifts to both clients and staff is quite common.
Many businesses, however, mistake of thinking that these costs are automatically tax-deductible. The costs can either be subject to Fringe Benefits Tax or deductible for tax. This is why businesses hire a tax agent in Sydney.
In this post, we’ll go over fringe benefit tax and how it works in connection with tax deductions.
Fringe Benefits in Australia
Fringe benefits are a form of tax that Australian companies pay in lieu of benefits they offer their employees on top of the compensation paid to them. Companies across Australia usually give fringe benefits to their employees for increasing general job satisfaction. Irrespective of whether or not the company had income tax liability, fringe benefits are paid in addition to income tax.
There’s a long list of taxable fringe benefits, with each category having different variation rules for taxability. The following are different types of fringe benefits that are subject to tax:
- Car and parking expenses
- Entertainment
- Housing and food
- Loans and debt waivers
These benefits can include the employer’s contribution to the superannuation fund, access to crèche services, telephone reimbursements, health insurance, tuition assistance, childcare reimbursements, employee stock options, and employee discounts, among others.
It’s worth noting that there’s also a residual category to cover non-listed categories of benefits. Basically, any non-business benefits will be taxable as well.
Are the costs for Christmas parties really tax-deductible?
It’s important for all small- and medium-sized businesses to know that holding a Christmas party off-premises for their staff is regarded as an entertainment expense. But this expense is not tax-deductible unless it is associated with paying Fringe Benefits Tax.
If the cost of the party is less than $300 per employee (provided that similar celebrations are also infrequent), then an exemption may be available for Fringe Benefits Tax (FBT). Simply put, if the expenses are not associated with paying FBT, then they will not be tax-deductible.
This means that if an employer is feeling generous and throws a party that costs $300 or more per employee, then they can claim the cost as a tax deduction but will have to pay FBT. If a company plans to run a function for clients and referrers alike, there are no set FBT implications for these individuals. But then, the costs are not income tax deductible either.
What about Christmas gifts?
Companies usually allot costs for the provision of Christmas gifts to their employees. Broadly speaking, Christmas gifts fall in the entertainment category.
Christmas gifts that are entertainment
The provision of gifts is a little bit complicated. Is it a gift or entertainment? It’s important to consider whether the gift is entertainment (movie tickets, theatre tickets, concert tickets, airline tickets, and many more) or actually a gift such as a pen or Christmas hamper, chocolate box, or gift voucher.
Christmas gifts that are not entertainment
All gifts provided to employees are subject to the Fringe Tax Benefit. Unless the cost of the gift is less than $300 per employee, then the minor benefit exemption applies. As for gifts provided to clients, they are not subject to FBT. Generally, they are tax-deductible regardless of spend.
This is where a tax agent in Sydney come in: to provide FBT guidance to SMEs (small- to medium-sized enterprises).
How to calculate, pay, and report Fringe Benefit Tax?
When filing for an FBT return, it will be necessary for a business or a tax agent to calculate the FBT for all items and expenses. The following are the steps involved in calculating, reporting, and paying for FBT:
- Finding the taxable value of each separate fringe benefit;
- Working out the total taxable value of all the fringe benefits (Note: Employers have the option to claim a GST credit for fringe benefits and also those not available for GST credit.); and Calculating the grossed-up taxable value or the amount that an employee would have to earn at the applicable tax rate to buy the benefits post-tax.
- Ranging from 47-49%, the grossed-up tax rate is different for GST and non-GST benefits. As such, some benefits will have a different rate (like car expenses).
Once the calculations are made, employers can then report the amounts via their FBT return. This can be done through a tax agent, by post, or with enabled software. Payment must be made by May unless an instalment payment method is set.
Do you need assistance with your business’ Fringe Benefit Tax?
There are several things to consider when planning a Christmas party for employees or giving Christmas gifts to employees and clients. It’s important to be aware of the rules surrounding FBT. You’d be surprised at how much you can save in tax if you’re careful about where you choose to have your company’s Christmas party or the type of present you want to give to clients and employees.
If you’re looking for a tax agent or a tax accountant in Mascot, NSW, and surrounding areas, quit searching “tax agent near me” and get in touch with Practical Accountants.
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