What you can give this Christmas - without a big tax bill

Introduction

After a challenging 2020, 2021 has proved to be yet another difficult year for all, marked by lockdowns, uncertainty and frustration. Yet, as Australia continues to emerge from lockdown and life returns to some semblance of normality, there is all the more reason for business to celebrate what their employees and stakeholders have achieved this past year.

Although the tax implications of pre-Christmas events and gifts can be a minefield, there are still plenty of ways in which businesses can express their well wishes and appreciation this festive season. This article outlines the FBT rules that are relevant at this time of year and the kinds of benefits employers can provide to their employees, their employees’ associates and clients without incurring a substantial FBT liability in the process.

A brief look at Fringe Benefits Tax (FBT) 

FBT is a tax paid by employers on the taxable value of fringe benefits, other than salary or wages, provided to their employees and their employees’ associates (such as family) in respect of their employment during an FBT year (1 April to 31 March). Section 136(1) of the Fringe Benefits Tax Assessment Act 1986 (Cth) (FBTAA) defines an employee by reference to the PAYG withholding system. This means that directors are considered to be employees for FBT purposes.

The ATO has simplified the method statement prescribed by the FBTAA here. It explains how to calculate how much FBT employers must pay on the provision of fringe benefits. Broadly, the FBT payable is the fringe benefits taxable amount multiplied by the FBT rate (currently 47%).

The fringe benefits taxable amount is calculated by totalling:

• the grossed-up taxable value of type 1 aggregate fringe benefits amount; and
• the grossed-up taxable value of type 2 aggregate fringe benefits amount.

Notes

1 There are two types of gross-up rates:¹

• Type 1 aggregate fringe benefits amount — the total taxable value of all the fringe benefits for which you are entitled to claim GST input tax credits; 
• Type 2 aggregate fringe benefits amount — the total taxable value of all the fringe benefits for which you cannot claim GST input tax credits. 

2. The rules for calculating the taxable value of a fringe benefit vary according to the type of benefit. 

3. The above formula grosses up the taxable value of the benefit provided to reflect the gross salary an employee would need to earn to pay for the benefit after paying tax. 

4. Further information on calculating an FBT liability is available from the ATO website. 

FBT, GST and income tax

Section 32-5 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) prevents a deduction for a loss or an outgoing incurred in respect of providing entertainment. However, a deduction is allowed by s 32-20 for the loss or outgoing if it is incurred in respect of providing entertainment by way of providing it as a fringe benefit.

It follows that an employer who is registered for GST is generally:

• not entitled to claim GST input tax credits on entertainment expenses that are not provided as fringe benefits, because the amounts are non-deductible under s 32-5;²
• entitled to claim GST input tax credits on entertainment expenses that are provided as fringe benefits because the amounts are deductible under s 32-20.

Methods for calculating FBT on meal entertainment benefits

Broadly, providing entertainment by way of food and drink, or accommodation or travel in connection with such entertainment, is an expense payment fringe benefit, a property benefit, a residual benefit or a tax-exempt body entertainment benefit.

However, the employer may choose³ to value food, drink and associated accommodation or travel as ‘meal entertainment’ under specific valuation rules contained in Division 9A of Part III of the FBTAA (Division 9A).

Division 9A provides for two valuation methods:

• the ‘50/50 split method’; or
• if the employer makes a further election — the ‘12 week register method’.

If the employer does not elect into Division 9A, they are subject to the actual value method under the valuation rules for expense payment fringe benefits, property benefits, residual benefits or 
tax-exempt body entertainment benefits.

Actual value method

Under this method, the employer needs to keep a record of attendees at each event and calculate the taxable value of the meal entertainment benefits provided. Employers will need to record information such as:

• Date of the event
• Names and status of each attendee (i.e. whether they were an employee, an associate of an employee or a client)
• Costs to hold the event.

50/50 split method (must elect)

Under the 50/50 split method, the taxable value is taken to be 50% of the total meal entertainment benefits provided during the FBT year, regardless of the actual taxable value of the benefits provided. If this method is chosen, the employer cannot then avail themselves of FBT concessions such as the $300 minor benefits exemption or the exemption for property benefits provided and consumed on a working day on the employer’s premises.

12 week register method (must elect)

Under the 12 week register method, the employer is required to track the attendees at events over a 12-week period to calculate the percentage of the total meal entertainment expenditure during that period that is subject to FBT. This percentage is then used to calculate the taxable value of the total meal entertainment costs for the entire FBT year.

As for the 50/50 split method, if the 12 week register method is chosen, the employer cannot then avail themselves of FBT concessions such as the $300 minor benefits exemption or the exemption for property benefits provided and consumed on a working day on the employer’s premises.

Exempt benefits

Relevantly, and mentioned briefly above, the FBTAA provides for two exemptions from FBT (outlined below) that may be of interest to employers during the Christmas period. Note that an income tax deduction or GST input tax credits cannot be claimed if the benefit is meal entertainment and exempt from FBT.

$300 minor benefits exemption

A benefit qualifies for the minor benefits exemption⁴ where its value is less than $300 (including GST), it does not reward an employee for their performance or service and it is provided on an irregular and infrequent basis.⁵  Benefits provided to either employees or their associates may qualify for the minor benefits exemption.

Entertainment benefits and other gifts are considered separately for the purposes of applying the minor benefits exemption. For example, if an employer holds an event that costs $290 per person and gifts each attending employee a hamper valued at $200, each benefit constitutes a minor benefit and therefore both are exempt from FBT.

Further, when determining if the notional taxable value of the benefit provided to an employee is less than $300, benefits provided to associates are not included. This means the $300 limit applies separately to employees from their associates. Accordingly, when this is combined with the above rule about entertainment benefits and other gifts being considered separately, an employer can provide a (less than) $300 gift to each of the employee and their associate and hold an event at a nearby restaurant at a cost of (less than) $300 each; a total benefit of (less than) $1,200 that is exempt from FBT.

Importantly, the $300 minor benefits exemption is not available to employers who elect to value their meal entertainment fringe benefits under Division 9A. This is because, once the decision is made to value the benefits using the 50/50 split method or the 12 week register method, those valuation methods apply to all the meal entertainment fringe benefits. The employer cannot then ‘cherry pick’ some of those benefits to which they would like to apply the $300 minor benefits exemption.

Exempt property benefits for employees

Where an employee is provided with, and consumes, a property benefit (such as food and drink) on their employer’s business premises on a working day, the benefit is an exempt property benefit and therefore exempt from FBT.⁶

This exemption does not extend to property benefits provided to associates of employees. However, these benefits may still be exempt from FBT under the minor benefits exemption.

As with the minor benefits exemption, the exempt property benefits rule is not available to employers who elect to value their meal entertainment fringe benefits under Division 9A. This is because, once the decision is made to value the benefits using the 50/50 split method or the 12 week register method, those valuation methods apply to all the meal entertainment fringe benefits. The employer cannot then ‘cherry pick’ some of those benefits to which they would like to apply the exempt property benefits rule.

FBT and Christmas

During the festive season, employers often provide the following types of benefits to their employees:

1. Christmas parties
2. Christmas gifts.

The following sections describe the tax implications of these types of benefits, assuming that the actual value method for FBT is being used. Where the employer chooses to use the 50/50 split method or the 12 week register method in Division 9A, they will not be able to avail themselves of the exemptions discussed below.

Christmas parties

Christmas parties are a great way for teams and colleagues to re-connect after long periods of working from home. The location of the Christmas party (i.e. on-site or off-site) has a significant bearing on the tax implications. These costs are regarded as meal entertainment benefits for FBT purposes.

Christmas party on-site

As mentioned above, where an event is held on the business premises during a working day, meal entertainment benefits provided to employees are exempt from FBT, regardless of their cost. Business looking to spend $300 or more (including GST) per person at their Christmas party may wish to consider restricting the event to employees only and holding it on-site during a working day.

If any associates of employees are attending, their costs are subject to FBT unless the minor benefits exemption applies. This means business seeking to avoid FBT will need to keep the cost of the event below $300 per person (including GST).

Meal entertainment costs for clients are not subject to FBT; but nor are income tax deductions or GST input tax credits available.

Christmas party off-site

Where a business chooses to hold its Christmas party off-site, the exempt property benefit for employees is no longer available. As a result, the employer may spend less than $300 per person (including GST) without paying FBT under the minor benefits exemption. This applies to both employees and their associates attending the event, but the $300 limit applies to the employee and their associate separately.

As noted above, client meal entertainment costs are not subject to FBT and are not income tax deductible; but nor can you claim GST input tax credits for these expenses.

Costs of transport to and from the event

Generally, the costs of travel to and from events are subject to FBT unless it is to and from the employee’s place of work. This means that if your Christmas event is held on-site, the costs of paying for your employees’ travel to and from the event are exempt from FBT.

However, the tax implications are different where the event is held off-site. If employees are travelling from work to the event and then home, only the trip between their workplace and the event is exempt from FBT.⁷ Where the employee is travelling between their home and the location of the Christmas party, the entire trip is subject to FBT.

Travel costs may be exempt from FBT under the minor benefit exemption where the total entertainment costs per person (i.e. for the Christmas party and the transport costs combined) remains less than $300 (including GST).

The travel costs of associates to and from the event is subject to FBT, regardless of where the event is being held and the taxable value of the benefit.

Summary

Table 1 below outlines the tax treatment of benefits provided to employees, their associates and clients when hosting a Christmas party, assuming that the actual value method for FBT is being used. Where the employer chooses to use the 50/50 split method or the 12 week register method in Division 9A, they will not be able to avail themselves of the exemptions set out below.

TABLE 1: Tax treatment of entertainment costs