Christmas and Tax

Categories: Small Business, Tax
30 November 2023

Apart from all the stress of finding the right Christmas presents for everyone, the business owner must also deal with the tax issues of Christmas! This is particularly so for the annual
work Christmas party and Christmas gifts.

So, what’s the problem?

The issue is all about whether payments by the employer for the function are tax deductible and whether any Fringe Benefits Tax is involved.

Christmas functions held on premises that are not the employer’s premises will usually not be tax deductible. This is because “entertainment” is being provided. “Entertainment” is defined to mean “entertainment by way of food, drink or recreation”. “Recreation” is defined to include amusement, sport or similar leisure-time pursuits.

An employer can choose to use the 50/50 rule or the 12-week register method for meal entertainment under the FBT law. This can make part of the expense tax deductible and part subject to FBT.

If the expense of the Christmas function is non-deductible because it is entertainment, no GST credits can be claimed in relation to the expense.

Fringe benefits
Perhaps the most difficult part of Christmas functions and gifts is working out whether Fringe Benefits Tax should be paid on any benefit provided to an employee or a person associated
with the employee, such as the employee’s spouse.

Under the FBT law, minor and infrequent benefits that have a value of $300 or less are not considered to be fringe benefits. The problem is that the provision that grants this exemption from FBT is complex and is full of vague terms. There is a taxation ruling – TR 2007/12 – which attempts to explain the Tax Office’s view of this provision – but it is 41 pages long!

Here is one of the examples from the ruling.

An employer provides each of its employees with a Christmas gift of less than $300 in value. The gifts are distributed at the annual staff Christmas party, which also has a value of less than $300 per employee. It is the employer’s policy to only provide gifts to employees at Christmas time.

Even though the employee is provided with a gift and attends a Christmas party, the ATO concludes that both the gift and the Christmas party are “minor benefits” and not subject to FBT.