As we approach the Christmas period, it is common for many Australian SMEs to provide Christmas parties and gifts to employees and clients, but many businesses make the mistake of thinking these costs are automatically tax-deductible.

Christmas parties

A Christmas party is considered ‘entertainment’ and in many cases is subject to fringe benefits tax (FBT). FBT is an additional tax paid by employers for some benefits, such as entertainment, that they provide to their team. Where FBT is paid, in most cases you can also receive a tax deduction for the cost of the benefit.

Generally, Christmas parties are entertainment and FBT applies. However, an exception to this rule may occur under the minor benefit exemption. For example, you may be exempt from FBT if your Christmas party is held on work premises and only employees attend, or if associates of the employee (e.g. friends and family) attend, as long as the cost per head of the benefit is less than $300.

The same applies for Christmas parties held off business premises; the benefit is exempt from FBT again under the minor benefit exemption, however, only if the cost per head for the employee (and associates, if any attend) is less than $300.

The following table highlights these situations in greater detail.

Situation

Does FBT apply?

A Christmas party is held on a working day at your business premises and only employees attend

There is no FBT payable as this is an exempt benefit. There is also no tax deduction.

A Christmas party is held on a working day at your business premises and employees as well as their families attend. The cost of food and drinks is $100/head

Employees – there is no FBT payable as this is an exempt benefit and no tax deduction (see above)

Families/Friends of employees – there is no FBT payable as the cost/head is less than $300 so the minor benefit exemption applies and no tax deduction

A Christmas party is held at a local restaurant and only employees attend. The cost of food and drinks is $100/head

There is no FBT payable as the cost/head is less than $300 so the minor benefit exemption applies. There is no tax deduction

A Christmas party is held at a local restaurant and only employees as well as their families attend. The cost of food and drinks is $100/head

There is no FBT payable as the cost/head is less than $300 so the minor benefit exemption applies. There is no tax deduction.

A Christmas party is held at an expensive restaurant in the city and the 7-course degustation menu with matching wines is ordered. Only employees attend the party. The cost of the 7-course degustation menu with matching wines is $350/head

FBT is payable in respect of the employees and their families as the minor benefits exemption will not apply, given that the benefit is more than $300/head. The cost is an allowable tax deduction.

A Christmas party is held at an expensive restaurant in the city and the 7-course degustation menu with matching wines is ordered. Employees and their families attend the party. The cost of the 7-course degustation menu with matching wines is $350/head

FBT is payable in respect of the employees and their families as the minor benefits exemption will not apply, given that the benefit is more than $300/head. The cost is an allowable tax deduction.

 

What about clients?

In the above table, we looked at employees and their families/friends, but what about if you invite clients along? The rules change a bit. In all cases, regardless of the cost of the party, entertaining clients is not subject to FBT and the cost is not tax-deductible. This means you can spend more or less than $300 per head on your Christmas lunch, and for clients, their lunch will be exempt from FBT and not tax-deductible.

 

Christmas Gifts

Is it a gift or entertainment?

Gifting can be a little bit trickier, as it is important to consider whether the gift is classed as a gift or entertainment. A gift generally includes things like a chocolate box, gift voucher, pen, or Christmas hamper. On the other hand, entertainment includes items such as movie tickets, concert tickets, airline tickets, theatre tickets, and many more.

Gifts that are not entertainment

Gifts provided to employees are subject to FBT, unless the cost of the gift is less than $300, in which case it falls under the minor benefit exemption and is exempt from FBT.

Where gifts are provided to clients, they are not subject to FBT and are tax-deductible regardless of spend.

Gifts that are considered entertainment

Similar to above, these items provided to employees are subject to FBT and are tax-deductible, unless the cost of the gift is less than $300, in which case the minor benefit exemption applies.

The difference arises, however, in terms of clients. Where these items are given to clients, they are not subject to FBT and are not tax-deductible, regardless of spend.