This has been a tough year for employers and employees alike. You may be thinking of rewarding your employees with gifts or a party. Considering the tax implications of this is important (and complicated). Read this before you start planning.

Photo by Christine Jou on Unsplash

THE END OF YEAR STAFF PARTY

As business owners we may want to thank our employees and show our appreciation for what they have done for us over a long and challenging year. Often an end of year function seems to be a great idea allowing for everyone to unwind and reflect.

It will be interesting to see how we are going to plan a staff party this year with all of the restrictions that are in place, however that is a conversation for another blog and another person.

Holding a party may be a great idea. But the cost of holding a staff party is generally regarded as entertainment expenditure and:

  • It is not tax deductible
  • You must pay fringe benefits tax (FBT) if the cost per person is more than $300, which doesn’t fall under the “minor benefits” exemption.

The minor benefits exemption is a minor benefit is one that is provided to staff or their associates, for example their spouse or partner, on an “infrequent” or “irregular” basis, is not considered a reward for services, and the cost is less than $300 “per benefit” inclusive of GST.

SITUATION DOES FBT APPY?
A party is held on a working day at your business premises and only employees attendThere is no FBT payable as this is an exempt benefit. There is no tax deduction.
A 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
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
There is no tax deduction.
A 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 per head is less than $300 so the minor benefit exemption applies.
There is no tax deduction
A party is held at a local restaurant and only employees as well as their families attend. The cost of food and drinks is $100/headThere is no FBT payable as the cost/head is less than $300 so the minor benefit exemption applies.
There is no tax deduction.
A party is held at an expensive restaurant in the city. Only employees attend the party.
The cost of food and drinks 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 party is held at an expensive restaurant in the city. Employees and their families attend the party.
The cost of food and drinks 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.

GIFTS

It is important to understand that gifts are classed as either:

  • Non entertainment gifts
  • Entertainment gifts

Non-Entertainment Gifts

Non-entertainment gifts given to staff (including working directors) are usually exempt from FBT where the total cost is less than $300 inclusive of GST per staff member. A tax deduction and GST credit can also be claimed.

These types of gifts can include, flowers, wine, beer, perfumes, gift vouchers and hampers.

The $300 minor benefits exemption also separately applies to any gifts provided to associates meaning that a similar gift can also be provided to a spouse or partner of the staff member with the same favourable tax outcome.

What happens when the “non-entertainment gift” is $300 or more GST inclusive?

Providing employees “non-entertainment gifts” of $300 or more GST inclusive is less tax effective. A tax deduction and GST credit can still be claimed, but FBT is payable at the rate of 47 percent on the grossed-up value.

Entertainment Gifts

Providing entertainment gifts to your staff is less favourable than giving non-entertainment gifts. Entertainment gifts include items of “recreation” such as tickets to a musical, theatre, live play, movie, sporting events or providing a holiday.

If the cost for each staff member and their associate is less than $300 GST inclusive each, FBT is not payable, but you can’t claim tax deduction or GST credit. However, if the cost for the staff member and their associate is $300 or more GST inclusive each, a tax deduction and GST credit can still be claimed, but FBT is payable at the rate of 47 percent on the grossed-up value.

What is the most tax effective way for you to recognise your employees this year?

The best tax outcome for your business this Christmas is to give staff non-entertainment type gifts that cost less than $300 GST inclusive per staff member as this is fully tax deductible with no FBT payable.

But these favourable tax rules don’t apply to gifts to sole proprietors and partners in a partnership as they cannot be employees of themselves.