Believe it or not, the holiday season is just around the corner!
Joyfully, the season of festivities & gift-giving extends beyond home and friends to our workplaces. Some companies choose to host parties exclusively for their employees, but others want to invite associates and/ or clients too – the more the merrier!
Before we all get carried away with celebrating the end of the year, let’s have a chat about the relationship between holiday parties and gifts, and the taxman. (Sounds boring, but we’ll make it as fun as we can… cue the holiday-themed GIFs).
Not to be a Scrooge, but the cost of holding a Christmas party is known as an “entertainment” expense. Hence, it is not tax-deductible & may be subject to fringe benefits tax (FBT). Whether the company chooses to celebrate with employees only, or with partners and others, the person-in-charge for the event needs to plan carefully & take into consideration the guidelines for a great, fringe benefit tax-free (FBT-free) Christmas party.
Let’s consider how.
Exempt property benefits
Food and beverage expenses, such as buffet & sparkling wines served at a party (yes please), may be exempt from FBT provided that the party is held on a working day, inside the business premises or worksite and are consumed by the company’s employees. On the other hand, the cost of associates attending the party is not exempt, unless considered to be a minor benefit.
As for the party venue being outside of the business premises or worksite (e.g restaurant), it can still be considered exempt under minor benefits provided that the cost of the party is below $300 per person.
Exempt benefit – minor benefits
Christmas party expenses may be considered minor benefits (& exempt) if the cost of the party is less than $300 per employee, provided certain conditions are met. The said benefit may be extended to the employee’s plus one, only if the cost for them is less than $300 as well.
For clients & suppliers on the other hand, regardless of the amount, there is no FBT payable to consider and the cost of providing the entertainment is NOT income tax-deductible.
Gifts: Entertainment & Non-entertainment
During Christmas parties, giving gifts to staff and others is one way to show appreciation for their contribution throughout the year. What favours are being distributed? Will they be entertainment or non-entertainment gifts? It pays to know the distinction between the two as they are treated differently for tax purposes.
Gifts like wine, food baskets, skincare and beauty products are considered non-entertainment gifts. These gifts are considered tax-deductible and not FBT payable if the amount is less than $300. On the other hand, gifts like a musical, live play or sporting events are “recreation” and are considered entertainment gifts. These are NOT tax-deductible & not FBT payable provided the amount is below $300. It should be noted that if the cost of entertainment gifts is $300 or more, it can be used to reduce tax BUT will be subject to FBT at 49%, grossed-up value.
Confused? In summary, it is best to give non-entertainment gifts at less than $300 because there is a tax deduction & no FBT is payable.
For clients & suppliers, non-entertainment gifts are outside of FBT rules as they are not considered your staff/employees.
Hosting a fringe benefit tax-free party is doable. You just need to plan ahead – BEFORE you get carried away with all the merriment! It’s the season to be jolly, after all!