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Christmas is just round the corner and with it comes the Christmas party season. But what are the tax implications of all the parties, gifts and donations that will occur over the next few weeks? This is what accountants should be advising.
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The tax implications of Christmas parties, gifts and donations
02 December 2024
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Employees
If a business holds a Christmas function for staff off-site, for example at a hotel, restaurant or function centre, the cost of providing the party would normally be treated as a fringe benefit, with fringe benefits tax (FBT) payable by the employer. However, provided the cost per employee is less than $300, no FBT will be due. This is because of the so-called minor benefits exemption. This exemption also applies if spouses or partners come along to the party.
The minor benefits exemption applies to each benefit provided. What that means in practice is that if the business spends $290 per head on the party and then gives a gift to each employee valued at a further $290, then both expenses are free of FBT.
If the business spends more than $300 per head on the function, the whole lot will be subject to FBT, not just the excess.
The costs (such as food and drink) of a Christmas party are exempt from FBT if they are provided on a working day on business premises and consumed by current employees. If spouses or other guests of employees are entitled to attend, there could be an FBT liability unless the cost is covered by the minor benefits exemption (above).
If the business also covers the cost of taxi fares to and from the festivities, these costs will count as part of the $300 per head limit if the function is off-site but will be exempt from FBT if the party is at the business’s premises.
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If the cost of the Christmas party is exempt from FBT, it isn’t tax deductible for income tax purposes. Nor can the business claim GST credits for the costs incurred.
Confusingly, even though gifts to employees are also covered by the FBT exemption, they generally ARE tax deductible and a GST credit can be claimed.
None of this generally impacts on the employee’s own tax position. They can eat, drink and be merry knowing that the tax consequences usually fall only on the employer.
And what about clients and suppliers?
If a business holds a party for clients and suppliers, there is no FBT (which is only relevant where a benefit is provided to employees and their associates) but the costs aren’t income tax deductible. This is because the provision of entertainment isn’t tax deductible.
If festive gifts are provided to clients and suppliers, a tax deduction can generally be claimed for the cost of those gifts where the gift is given with a view to generating future income in the business. So, if the business gives a festive gift of a decent bottle of malt whisky to its best customer, with a view to building goodwill which leads to more sales next year, the cost of the malt is tax deductible.
A business can’t claim a deduction for gifts of capital items, such as a piece of technology (a tablet computer for instance) and nor can it claim a deduction if the gift is for private purposes – so if the best customer is also the client’s brother-in-law, it might be a struggle to get the deduction.
The dividing line between a gift (such as giving a bottle of wine) and the provision of entertainment (such as taking the client to a bar and purchasing a bottle of wine for consumption in the bar) can be hazy, particularly where the “gift” is, for instance, a voucher for a meal in a restaurant or a theatre show. This emphasises the importance of the client getting professional advice to remove the uncertainty.
Charitable donations
A tax deduction can only be claimed for gifts or donations to organisations which are deductible gift recipients (DGRs). Check whether an organisation is a DGR here: Deductible gift recipients | ABN Lookup (business.gov.au). Most major charities are DGRs.
When a gift is made, you do not receive a material benefit in return for the payment. This is contrasted with a contribution (for example, purchasing a ticket to attend a fundraising dinner) where a benefit is received in return.
To claim a tax deduction for a gift, it must meet these conditions:
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The gift must be made to a deductible gift recipient (DGR).
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The gift must truly be a gift. A gift is a voluntary transfer of money or property where you receive nothing in return.
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The gift must be money or property, which includes financial assets such as shares.
A gift or donation cannot provide you with a personal benefit, such as:
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raffle tickets
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items such as chocolates and pens
Businesses should follow the advice above if they want to avoid an unwelcome festive tax bill however they should remember that the information above is general in nature and it is always better to talk to their accountant if they want specific information.
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