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Festive tax

Celebrations at the end of the year can attract unexpected taxes. Gayle Bryant investigates the real cost of the festive season.

 

When it comes to the end of the year, it's normal for employers to want to reward staff for their hard work with a festive season party and perhaps a small bonus with which to send them on their holiday break. However, the real cost of doing this may be higher than first thought.

Generally, there are three popular ways employers show their appreciation of staff at this time of year: hosting a Christmas party; providing gifts such as hampers or bottles of wine; and offering cash bonuses.

Tony Fittler, a Tax Partner with HLB Mann Judd, says when it comes to rewarding staff at this time of year, employers usually lose out by either having to pay fringe benefits tax (FBT) or doing without a tax deduction. This often depends on where they decide to hold their end-of-year party or if/when they present an employee with a gift.

"With all three types of rewards, the ruling an employer needs to be aware of is the minor benefits exemption ruling," says Fittler.

The minor benefits exemption ruling ensures small and infrequently provided benefits to employees are not subject to FBT. From 1 April 2007, the government is set to increase the minor benefits exemption threshold from $100 per employee to $300 per employee.

Employers wishing to host festive season parties need to first work out whether they should be held on the premises of the business or offsite. The physical location of the party affects the FBT treatment of the party's expenses.

Offsite events

If the party is held somewhere apart from the actual business premises – say a restaurant – the total cost of the event is added up and divided by the number of employees who attend. Included in the total cost is all food and drink. If the total cost is less than $100 including GST per employee, then no FBT is payable.

According to Andrew Purdon, Tax Partner with KPMG, there is a concession that relates to Christmas parties that takes the cost of entertainment into consideration. "As long as the food and drink is less than $100 per person and the entertainment – such as a band hired separately by the employer – is less than $25 a person, then the minor benefits exemption threshold is extended to $125 a person," he says.

The total cost of the offsite party is averaged across all employees so employers don't need to specify how much each individual staff member costs.

"You do need to keep receipts if you are going to specify the minor benefits exemption ruling," Fittler says. "It is up to the employer to prove they are FBT-exempt."

If spouses attend the function, then a couple is counted as one person for the purpose of calculating the tax liability. Therefore, the cost per couple still has to be less than $100 to avoid paying FBT.

"If the cost is greater than $100, then the business will have to pay FBT which is currently 46.5 per cent including the Medicare levy," Fittler says. "However, the cost then becomes tax-deductible and you can also claim GST input credits. FBT is payable on the full amount."

Employers sometimes want to impress clients at this time of year by hosting a lavish function at an expensive hotel. Many advertising agencies compete to put on the most expensive end-of-year party imaginable, sometimes with well-known bands or acts performing and an open bar.

"If clients attend a festive season party then there is no FBT payable for their costs. However, the cost is non-deductible," says Fittler. He adds there is also no upper limit to what you can spend on a party.

Onsite events

If a party is held at the premises of the organisation, all food and drink provided to employees is considered to be FBT-free. However, the event is non-deductible and no GST input tax credits are available.

Gifts to employees

Many employers like to give gifts or vouchers as a way of rewarding staff. If these gifts are valued at less than $100 they are free of FBT, again provided they come under the minor benefits exemption ruling – which means they are given infrequently.  But gifts worth $1,000 or more will be subject to FBT. In both cases, the cost is deductible to an employer but does not attract tax exemption.

When choosing gifts you need to choose carefully. "If you decide to give a gift to your employee then it is deductible as long as it is not a type of entertainment such as theatre tickets or a night out at a restaurant," Fittler says. "Hampers and wine tend to be the safest gifts. Gift vouchers come under the same minor benefits exemption ruling.

He adds while this sounds cut and dried, the way gifts are treated does depend on where the gift is physically given to the employee. "If it is given at the-end-of-year party, and the party is offsite then the value of the gift is added to the total cost per person of the party," he says. "This may mean the totally cost becomes more than $100 and FBT is therefore payable on the full amount."

If the gift is presented to the employee on the premises, and provided the gift is worth less than $100, then no FBT is payable. This is because gifts that are presented within the practice are considered to be office property and therefore tax deductible. From 1 April 2007, this amount increases to $300 per employee.

Purdon says because there is a risk the amount of the gift may be added to the cost of the party, it is often safer for an employer to give a gift on a different day.

Cash bonuses

While we all like to receive cash as a reward, employees receiving a cash bonus have to pay tax on it at their marginal tax rate.

If a Christmas bonus is deemed to be an annual bonus, then the employer can apply the PAYG rate calculated as if the payment was spread across the year – thus meaning the employee isn't disadvantaged by losing a large proportion of it to tax.

What an employee does with their bonus is up to them. One option is to place it into super. Purdon says although cash bonuses can be placed into super, such an arrangement has to be pre-arranged with their employer.

"Effectively an employee has to say in advance that if they are to receive a cash bonus, they would like it placed into their super account," he says. "Deciding this after a bonus is received is too late as the Tax Office does not allow this."