It’s that time of year again - what to do for the staff Christmas party, or gifts of appreciation for your customers and suppliers. Here are our top tips for a generous and tax effective Christmas season: 

Christmas gifts for customers

The most effective way of sharing the Christmas joy with customers is not necessarily the most tax effective. If, for example, you take your client out or entertain them in any way, it’s not tax deductible and you can’t claim back the GST. 

There are specific rules designed to prevent deductions and GST credits from being claimed when the expenses relate to entertainment, regardless of whether there is an expectation of generating goodwill and increased business sales. Restaurants, a show, golf, and corporate race days all fall into the ‘entertainment’ category.

However, if you send your customer a gift, then the gift is tax deductible as long as there is an expectation that the business will benefit (assuming the gift does not amount to entertainment).  Even better, why don’t you deliver the gift yourself for your best customers and personally wish them a Merry Christmas. 

If you are going to invest in Christmas gifts, then make it something people remember and appropriate to your business. You could also make a donation on behalf of your customers (where your business takes the tax deduction) or for your customers (where they receive the tax deduction).  Donations to deductible gift recipients (DGRs) above $2 are tax deductible.

Christmas parties for your team

To avoid Fringe Benefits Tax (FBT) on your work Christmas party, host it in the office on a workday. This way, FBT is unlikely to apply regardless of how much you spend per person.

Taxi travel that starts or finishes at an employee’s place of work is exempt from FBT.  So, if you have a few team members that need to be loaded into a taxi the ride home is exempt from FBT.

When hosting your staff Christmas party out of the office, to avoid paying FBT keep the cost of your celebrations below $300 per person. The business cannot claim deductions or GST credits for the expenses if there is no FBT payable in relation to the party. Similarly, if you are providing entertainment and an FBT exemption applies, you will not be able to claim tax deductions or GST credits for the expenses.

If the cost per person goes above the $300 minor benefit limit, you will pay FBT but you can also claim a tax deduction and GST credits for the cost of the event.  Keep in mind that deductions are only useful to offset against tax, so if your business is paying no tax or limited tax, a tax deduction is not going to help offset the cost of the party.

Gifts for staff

To qualify as a minor benefit, gifts must be ad hoc, this means that things like monthly gym memberships, or giving a person multiple gift vouchers amounting to $300 or more will not qualify.  If you exceed the $300 minor benefit threshold, for FBT purposes anything equal to or above this, will result in a liability to the Tax Office at a rate of 47%.

Gifts of cash from the business are treated as salary and wages, triggering PAYG withholding and the amount is subject to the superannuation guarantee.

If the staff party is held somewhere other than your business premises, then the taxi travel is a separate benefit from the party itself and any Christmas gifts you have provided. This means that if the cost of each item per person is below $300 then the gift, party and taxi travel can potentially all be FBT-free. Just remember that the minor benefits exemption requires a number of factors to be considered, including the total value of associated benefits provided across the FBT year.

In summary: 

FBT can be a complex area of tax, with expensive implications for your business if you don’t get it right. If you’re not sure how it applies to your business and would like some guidance contact our tax experts today.