November 2023 – Accounting and SMSF Roundup

Christmas Parties and FBT

With work Christmas parties just around the corner, we look at the tax treatment of such occasions.

Key concepts

To begin with, there are two critical issues to understand.

1. Entertainment

Typically, fringe benefits tax (FBT) will only apply to a party if it involves the provision of ‘entertainment’. This means the provision of (a) entertainment by way of food, drink, or recreation, or (b) accommodation or travel in respect of such entertainment, such as taxis, hotel accommodations, etc.

In this case, recreation includes amusement, sport and similar leisure-time pursuits and provides recreation and entertainment in vehicles, vessels or aircraft (for example, joy flights, sightseeing tours, harbour cruises).

2. Minor Benefits

In simple terms, a minor benefit is provided to an employee/associate (spouse) if done so on an infrequent or irregular basis (typically, no more than twice per year), and the cost is less than $300 inclusive of GST per employee/associate. This is $300 per expense (i.e., $300 per meal and drinks and a separate $300 per accommodation, etc.).

Note that for this piece, we will assume the employer (like most employers) uses the Actual method to calculate FBT, whereby FBT is paid only to employees and their associates (not clients or other outside individuals).

Venue

1. Business premises

Holding your Christmas party on the business premises on a working day (logically, Friday after work) usually gives an employer the most tax-effective outcome. Expenses such as food and drink are exempt from FBT for employees with no dollar limit, but no tax deduction or GST credit can be claimed. The reason why FBT does not apply is because there is typically no “recreational” component in play. Thus, the following rules apply to parties on the business premises:

Employees	Tax Treatment
Food and drink per person (no dollar limit) –	No FBT applies, no tax deduction, and no GST credit is claimable.
Recreation (e.g., band) per person < $300 –	No FBT, no deduction, no GST credit.
Recreation $300 or more –	FBT applies, is tax deductible, and GST credit is available.
Associates
Food and drink <$300 per person –	No FBT, no deduction, no GST credit
Food and drink $300 or more	FBT applies, is tax deductible and GST credit available
Recreation <$300-	No FBT, no tax deduction, no GST
Recreation >$300-	FBT applies, is tax deductible and GST credit available.

EXAMPLE – Christmas party on business premises

A company holds a Christmas lunch on its business premises on a working day.

• Employees, their partners and clients attend.
• The company provides food and drink and taxi travel home.
• The cost per head is $125.

Entertainment is being provided. A party for employees, associates and clients is entertainment because the purpose of the function is for the people attending to enjoy themselves.

Employees – no FBT; exemption applies.

The employer doesn’t pay FBT for the following:

• food and drink for employees, because it is provided and consumed on a working day on the business premises.
• taxi travel because there is a specific FBT exemption for taxi travel directly to or from the workplace.

Associates – no FBT; exemption applies.

The employer doesn’t pay FBT for the food, drink and taxi travel provided to the employees’ partners (associates) because it is a minor benefit – that is, it has a value of less than $300, and it would be unreasonable to treat it as a fringe benefit.

Clients – no FBT

There is no FBT on benefits provided to clients.

Income tax and GST credits

The employer can’t claim an income tax deduction or GST credits for the food, drink or taxi travel provided for employees, associates, or clients.

2. Offsite (e.g., restaurant)

The party is held offsite, and the tax treatment is slightly different as follows:

Employees	Tax Treatment
Food and drink <$300 per person –	No FBT, no deduction, no GST credit.
Food and drink $300 or more –	FBT applies, tax-deductible, GST credit available.
Recreation (e.g., band) <$300 –	No FBT, no deduction, no GST credit.
Recreation $300 or more –	FBT applies, tax-deductible, GST credit available.
Associates
Food and drink <$300 per person-	No FBT, no deduction, no GST credit.
Food and drink $300 or more –	FBT applies, tax-deductible, GST credit available.
Recreation <$300 –	No FBT, no deduction, no GST.
Recreation >$300 or more –	FBT applies, tax-deductible, GST credit available.

Clients

Irrespective of the cost or the party’s location (business premises or offsite) under the Actual method, there is no FBT, nor is there a tax deduction or GST credit available for food and drink or any recreation component provided to clients or suppliers. The reason for this is that FBT applies to employment. As a result, clients and suppliers fall outside the FBT system (except where the employer elects to use the 50/50 method to calculate their FBT liability).