The tax outcomes for client gifts, employee gifts and Christmas parties are so complicated and confusing. We’ve simplified things for you below.
At this time of the year it is common to provide gifts to existing clients and customers as a thank you for their business.
As the gift is an expense to your business, it is generally considered to be a tax deduction. The ATO has considered the act of gift making to clients, and several cases exist where the tax treatment has been tested in the courts. If there is an expectation that the gift will either generate future business from the client or motivate them to refer your services to others, it is considered that the expense of the gift was in the nature of business promotion and is a tax deduction.
It should be noted that the gift does not constitute the provision of entertainment which is a non-taxable deduction.
Christmas parties for your team
This is where it starts to get complicated.
The ATO’s view is that the cost of a Christmas party is tax deductible only to the extent that it is subject to FBT. As a result, Christmas party costs that are exempt from FBT (where the costs relate to exempt minor benefits and exempt property benefits) cannot be claimed as a tax deduction.
If you are not a tax-exempt organisation and do not use the 50-50 split method for meal entertainment, the following explanations may help you determine whether there are FBT implications arising from a Christmas party.
Exempt Property Benefits. The costs (such as food and drink) associated with Christmas parties are exempt from FBT if they are provided on a working day, on your business premises and consumed by current employees. These costs are known as an “Exempt Property Benefit”. The property benefit exemption is only available for employees, not family members.
Exempt Benefits – Minor Benefits. The provision of a Christmas party to an employee may be a minor benefit and exempt if the cost of the party is less than $300 per employee and certain conditions are met. The benefit provided to an associate of the employee may also be a minor benefit and exempt if the cost of the party for each associate of an employee is less than $300. The threshold of less than $300 applies to each benefit provided, not to the total value of all associated benefits.
Gifts provided to employees at a Christmas party. The giving of a gift to an employee at Christmas time may be a minor benefit that is an “exempt benefit” where the value of the gift is less than $300.
Where a Christmas gift is provided to an employee at a Christmas party, the benefits are associated benefits, but each benefit needs to be considered separately to determine if they are less than $300 in value. If both the Christmas party and the gift are less than $300 in value each and the other conditions of a minor benefit are met, they will both be exempt benefits.
ACTION PLAN: If you are unsure about the FBT implications of your Christmas party or gifts, please contact our Team today, and they can assist you!