Tax & Christmas Party Planning

Christmas will be here before we know it, with smarter business owners already planning their end-of-year festivities. Celebrating the season can be team-building or just a bit of fun, but the well-prepared business owner will also know that a little tax planning can help make sure there’s no unforeseen tax problems.

The Christmas Party

There is no separate FBT category that relates to Christmas parties. While such social functions may result in FBT, income tax and GST outcomes, these are covered under the existing relevant legislation. The provision of “entertainment” at Christmas therefore mirrors the tax treatment such benefits will receive at other times of the year.

The ATO says that “meal entertainment”, and therefore an FBT liability, arises when food or drink is provided in a way that has the character of entertainment. In fact, the ATO holds that in most cases the mere provision of food or drink satisfies the “entertainment” test, but adds that there is a narrow category of cases where the mere provision of food or drink does not amount to entertainment.

For example, it considers that the provision of morning and afternoon tea to employees (and associates of employees) on a working day, either on the employer’s premises or at a worksite of the employer, is not entertainment. The provision of light meals (finger food, etc), for example in the context of providing a working lunch, is also not considered to be entertainment. Note however that providing any alcohol typically brings “entertainment” into the picture.

The implications of certain benefits provided at the year-end Christmas function for an employer may vary depending on:

• whether the function is provided at the employer’s premises or provided externally
• the cost of the function per attendee, and
• the basis that the employer is using in working out the taxable value of such benefits.

FBT implications

With a Christmas party, FBT applies to an employer when they provide a benefit to an employee or their associate (for example, family members).  Food, drink, entertainment and gifts provided at a Christmas party to employees and their associates may constitute either:

• an expense payment fringe benefit (eg. reimbursing an employee for expenses incurred or paying an expense on their behalf)
• a property fringe benefit (eg. provision of property such as meals or gifts by the employer), and
• a residual fringe benefit (eg. the provision of any right, privilege, service or facility such as the right to use a venue).

These benefits are generally valued for FBT purposes at their face value – typically referred to as an “actual basis” of valuation. However, an employer may elect to apply special valuation rules by using either the 50/50 split method or 12-week register method. Ask us about these two valuation methods and if they are suitable for your business. If the employer does not make an election, the taxable value is determined according to actual expenditure.

However “meal entertainment” fringe benefits provided at a Christmas function can be exempt from FBT if it is:

• a “minor benefit”
• an exempt property benefit is provided at the employer’s premises on a work day.

Minor benefits

Broadly, a minor benefit is one where it:

• has a notional taxable value of less than $300 (inclusive of GST)
• is provided on an “infrequent” or “irregular” basis
• is not a reward for services, and
• satisfies other relevant conditions (ask us for details).

Note that other benefits (such as gifts) provided at a Christmas party may be considered as separate minor benefits in addition to meals provided (referred to as an “associated benefit”).  In such cases, the $300 threshold generally applies separately to each benefit provided.

Exempt property benefit

A Christmas party held at the employer’s business premises on a working day where food and drink, including alcohol, is provided is generally deemed to be an exempt property benefit, and is therefore usually FBT-free. This is no different to the occasional Friday drinks at work.

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