It’s that time of year again – what to do for the Christmas party for the team, customers, gifts of appreciation for your favourite accountant (just kidding), etc. Here are our top tips for a generous and tax effective Christmas season: 

For your business

What to do for customers?

The most effective way of sharing the Christmas joy with customers is not necessarily the most tax effective. If, for example, you take your client out or entertain them in any way, it’s not tax deductible and you can’t claim back the GST.  There are specific rules designed to prevent deductions and GST credits from being claimed when the expenses relate to entertainment, regardless of whether there is an expectation of generating goodwill and increased business sales. Restaurants, a show, golf, and corporate race days all fall into the ‘entertainment’ category.

However, if you send your customer a gift, then the gift is tax deductible as long as there is an expectation that the business will benefit (assuming the gift does not amount to entertainment).

What to do for your team?

Christmas is expensive. Some businesses simply can’t afford to do much because cashflow is too tight.  Expectations are high so if you are doing something then it’s best not to exacerbate cashflow problems and take advantage of any tax benefits or concessions you can.

 

Christmas parties

Christmas parties constitute “entertainment benefits” and to the extent that the expenditure relates to employees or their associates attending the function, the expenses may be subject to fringe benefits tax (FBT) unless an exemption (e.g. the “minor benefits” exemption) applies.

A minor benefit is one that is provided to an employee or their associate (e.g. spouse) on an “infrequent” or “irregular” basis, which is not a reward for services, and the cost is kept below $300 (inclusive of GST) per benefit.

Entertainment expenses are not tax-deductible unless they are subject to FBT. This means that expenses incurred in providing a Christmas party are not generally deductible where the minor benefit FBT exemption applies.

	Exempt from FBT?	Tax deductible	GST credits
Christmas party on employer premises on a weekday
Employees	Yes	No	No
Associates of employee (spouses etc.)	Yes, if <$300 per head	No	No
Customers	N/A	No	No
Christmas party (employer premises on a weekend or external venue)
Employees	Yes, if <$300 per head	No	No
Associates (spouses etc.)	Yes, if <$300 per head	No	No
Customers	N/A	No	No
Christmas gifts (assuming the gift doesn’t involve entertainment)
Employees	Yes, if <$300 per head	Yes	Yes
Associates (spouses etc.)	Yes, if <$300 per head	Yes	Yes
Customers	N/A	Yes	Yes

 

If you really want to avoid tax on your work Christmas party then host it in the office on a workday. This way, Fringe Benefits Tax (FBT) is unlikely to apply regardless of how much you spend per person.

If your work Christmas party is out of the office, keep the cost of your celebrations below $300 per person if you want to avoid paying FBT.  The downside is that the business cannot claim deductions or GST credits for the expenses if there is no FBT payable in relation to the party.

If your business hosts slightly more extravagant parties and goes above the $300 per person minor benefit limit, you will pay FBT but you can also claim a tax deduction and GST credits for the cost of the event.

Christmas gifts for staff

Generally, it is considered that the best tax outcome for businesses is to give employees non-entertainment type gifts that cost less than $300 (inclusive of GST) per employee, as the cost is fully tax-deductible, with no FBT payable and GST credits can be claimed. The gifts at Christmas parties are usually exempt from FBT because they are not provided on a frequent or regular basis, and the gift is not provided to the employees wholly or principally as a reward for their services rendered.

If you’re considering gifts of cash to your employees, this will be treated as salary and wages – PAYG withholding is triggered and the amount is subject to the superannuation guarantee.