It’s that time of year again, where we remind you about the all-important details surrounding Fringe Benefits Tax (FBT) and how it applies to your festive celebrations. Whether you’re planning a Christmas party for your employees, handing out thoughtful gifts, or entertaining clients, understanding the FBT rules can help you avoid unexpected tax surprises.
What is Fringe Benefits Tax (FBT)?
FBT is a tax that employers pay on non-cash benefits provided to employees (and their associates) as part of their employment. From Christmas parties to gifts, these “fringe benefits” are subject to specific rules to ensure all forms of compensation are taxed fairly.
Christmas Parties: A Festive Gathering with Tax Implications
On Business Premises:
Parties held at your workplace on a business day, exclusively for current employees, are FBT-exempt.
However, GST is not claimable on these entertainment-related expenses, and the cost is not tax-deductible.
Off-Site Christmas Parties:
Costs below $300 per person qualify for the minor benefits exemption and are FBT-exempt.
If the cost exceeds $300 per head, FBT applies to the full cost for employees and their associates.
Costs for clients at these parties are FBT-exempt, but these expenses are non-deductible.
Gifts: The Joy of Giving Without the Tax Hangover
Employee Gifts
- Gifts under $300 per person qualify for the minor benefits exemption and are exempt from FBT.
- Gifts exceeding this amount will attract FBT, but the cost becomes tax-deductible, and GST credits can be claimed.
- Cash bonuses, unlike gifts, are treated as taxable income for the employee and are not considered fringe benefits.
Client Gifts
Gifts provided to clients are not subject to FBT and remain fully tax-deductible, with GST credits claimable.
The “Otherwise Deductible” Rule
If an expense would have been tax-deductible to the employee had they paid for it themselves, the expense is considered “otherwise deductible,” exempting it from FBT. For example:
- Work-related travel meals: Tax-deductible and exempt from FBT.
- Reimbursements for work-related expenses: Exempt from FBT, provided they meet deductibility criteria.
Key Guidelines for Reasonable Client Gifts
Business Purpose Must Be Clear: The gift must be given in the context of maintaining or building a business relationship with the client. Gifts given purely for personal reasons (e.g., to friends or family disguised as “clients”) do not qualify as business expenses.
The nature of the gift should align with business practices in your industry. Common examples include:
- Hampers
- Wine or alcohol
- Gift cards
- Event tickets
- Branded promotional items (e.g., stationery, calendars, or merchandise)
Value Should Be Reasonable! Gifts must be proportionate to the size of your business and the nature of the client relationship.
For example, a $50 hamper may be reasonable for most small businesses, but a $5,000 gift for a minor client would likely be seen as excessive. Extravagant or personal items (e.g., luxury watches, designer handbags) may raise red flags unless justified as normal in your industry.
The gift should not be given in exchange for a specific benefit or transaction, as this may blur the line between a genuine gift and a kickback or bribe, which could have tax and legal implications.
Keep clear records, such as:
- The name of the client receiving the gift.
- The business relationship (e.g., they are a long-standing client or someone you are nurturing for future work).
- Receipts or invoices showing the gift’s purchase.
Avoiding Personal Use
The gift must be specifically for the client. Gifts purchased for personal use by the business owner or employees cannot be claimed as client gifts.
The ATO may scrutinise claims if:
- The gift is unusually expensive or lavish without justification.
- There’s no clear documentation of the client relationship.
- The gift type seems inappropriate for a business context (e.g., luxury jewellery for a non-corporate client).
- The volume of client gifts claimed is disproportionately high for the size of the business.
Tips to Stay Compliant
- Set a Policy: Have a clear internal policy on client gifting that aligns with ATO guidelines.
- Stick to Common Practices: Focus on gifts that are industry-standard and unlikely to raise questions.
- Keep Detailed Records: Ensure you document everything, including the purpose of the gift and the client details.
- Consult Your Accountant: If you’re unsure about the reasonableness of a gift, get professional advice before claiming it.
Celebrate the Smart Way
By understanding the rules around FBT, Christmas parties, and gifts, you can spread holiday cheer without the worry of unexpected tax liabilities. Stick to the $300 minor benefits rule, keep detailed records, and consider how the otherwise deductible rule might apply to your expenses.
Still have questions? Get in touch with our team to ensure your celebrations are as joyful—and tax-smart—as possible! 🎄
