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Are Staff Gifts Tax Deductible?

Don’t let tax dampen your Christmas spirit! 

Find Out What You Need To Know To Claim Staff Gifts And Christmas Celebrations In 2021

After the stresses of COVID and a chain of lockdowns, we are all looking forward to enjoying our staff Christmas party and giving and maybe even receiving thank you gifts. At this time of year, many employers would like to know – are staff gifts tax deductible?

Unfortunately, as a party is “entertainment”, there are no tax-exempt parties – some tax must be paid.  But you can minimise tax by avoiding Fringe Benefits Tax (FBT) at 47% and not missing out on an income tax deduction and GST credit, which is usually the cheaper option, especially for small businesses.

You can save tax depending on:

  • Where your party is held
  • Who attends the party
  • How much it costs per head
  • The type of gift

Even if you are comfortable with these tax implications (after all it’s Christmas), it’s important that costs are recorded accurately so that the right tax is paid.

Christmas Parties

Is A Christmas Party At Your Business Premises Tax Deductible?

The costs (such as food and drink) associated with Christmas parties are exempt from Fringe Benefits Tax if they are provided on a working day on your business premises and consumed by current employees.

Minor benefit exemption applies only where it is both less than $300 in notional taxable value (that is, the value if it was taxable), and unreasonable to be treated as a fringe benefit. The cost of associates e.g., partners is not exempt unless it is an exempt minor benefit (see below).

Any costs of the party that are exempt from FBT cannot be claimed as an income tax deduction and no GST credit is permitted.

Notably, if current employees, their associates, and some clients attend a Christmas party held at your premises on a business day at a cost of $365 per head, there are no FBT implications for employees as it is an exempt property benefit.

A taxable fringe benefit will arise as the value is equal to or more than $300 for associates. There will be no FBT payable for clients and no income tax deduction.

At Your Business Premises
Who Cost FBT ? Income Tax Deduction ? GST Credit ?
Current employees n/a No No No
Associates eg employee partners <$300 No * No No
Associates eg employee partners >=$300 Yes Yes Yes
Clients n/a No No No

Assumes qualifies as an exempt minor benefit (see later)

Is a Party Not At Your Business Premises tax deductible?

A Christmas party for employees and their associates at say a restaurant will be subject to Fringe Benefits Tax unless the benefit is an exempt minor benefit.

An exempt minor benefit:

  • Has a taxable value of less than $300 inc GST and
  • Must meet certain conditions (see below)

The threshold of $300 applies to each benefit provided, not to the total value of all associated benefits.

Any costs of the party that are exempt from FBT cannot be claimed as an income tax deduction and no GST credit is permitted.

Not At Your Business Premises
Who Cost FBT ? Income Tax Deduction ? GST Credit ?
Current employees <$300 No * No No
Associates eg employee partners <$300 No * No No
Current employees >=$300 Yes Yes Yes
Associates eg employee partners >=$300 Yes Yes Yes
Clients n/a No No No

*Assumes qualifies as an exempt minor benefit (see later)

Conditions for minor benefit to be exempt

To be exempt, there is more to consider than just the cost of the minor benefit.  The ATO recognises the potential to avoid FBT by breaking a large benefit into smaller minor benefits or providing a series of minor benefits over a period of time.

To be exempt, a minor benefit is therefore subject to the question: Is it unreasonable to treat the minor benefit as a fringe benefit?  All 5 of these factors must be addressed in considering whether a minor benefit is an exempt minor benefit.

  1. If the same or similar minor benefits are frequent and regular
  2. The greater the total value of the same or similar minor benefits, the less likely they are to be considered an exempt minor benefit
  3. The greater the total value of other associated benefits, the less likely they are to be considered an exempt minor benefit
  4. The greater the practical difficulty in determining the value of the minor benefit and/or keeping the necessary records, the more likely they will be considered an exempt minor benefit
  5. The circumstances in which the benefits were provided e.g., an unexpected event or mainly as a reward for services

Staff Gifts Tax Deductible

Christmas Gifts to Employees

Employee gifts at Christmas may be wholly tax-free gifts where the value of the gift is less than $300 (minor benefit) and the gift is not classified as “entertainment” (exempt minor benefit).  There is no FBT payable, and the cost of the staff gift is tax-deductible and GST credits can be claimed.

Christmas Gifts to Customers

Customer gifts (and supplier gifts) at Christmas may be fully tax-deductible gifts if they are offered with the intention of generating future assessable income.  They must not be a personal gift or a gift of a capital nature or “entertainment”.

The most common non – entertainment gifts are bottles of alcohol, hampers, vouchers, flowers, and promotional goods.

Examples of “entertainment” gifts are tickets to the theatre, sporting events and holidays.

Gifts
Who Cost FBT ? Income Tax Deduction ? GST Credit ?
Employees & family

–       Not Entertainment

<$300 No Yes Yes
Employees & family

–       Not Entertainment

>=$300 Yes Yes Yes
Employees & family

–       Entertainment

<$300 No No No
Employees & family

–       Entertainment

>=$300 Yes Yes Yes
Customers, suppliers

–       Not Entertainment

n/a No Yes Yes
Customers, suppliers

–       Entertainment

n/a No No No

The widely applied principle is to keep gifts to employees under $300 and avoid entertainment for both employees and clients.

This is a summary intended for guidance.  If you want to find out more about which staff gifts (tax deductible), please contact a suitable professional and discuss your specific circumstances before acting on anything contained in this document.

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