FBT, GST and the 2016/17 Festive Season

By Sheree Cant - November 24, 2016

With the holiday season fast approaching and the calendar year winding down, for those involved with employment taxes, now is an important time to collect necessary information and begin planning for the 2016/17 FBT year-end.

Recent media reports have suggested that businesses have been winding back their spending on traditional festive season celebrations.  While this may be one (extreme) way to avoid getting caught out with an unexpected FBT bill, it is important for businesses to analyse their arrangements carefully to avoid any unexpected headaches when it comes time to prepare and lodge the FBT return. 

For example, have you considered whether ancillary costs such as the following affect the total cost of your entertainment expenses:

  • setup fees or management fees paid to event managers;
  • transport to or from the event (e.g. buses, or taxi rides home);
  • security/first aid services; or 
  • clean up costs.

To help you with this analysis, we have also provided some comments in respect of the FBT, GST and income tax implications associated with festive season celebrations and gifts.

Giving Gifts (not entertainment)

The costs associated with providing most Christmas gifts (e.g. hampers, bottles of wine, gift cards etc.) to clients are not likely to give rise to any FBT liability.  Most gifts will generally be tax deductible to the business and GST input tax credits may be claimed, where appropriate.  

Gifts provided to employees and their associates (such as family members, partners etc.) are generally considered to be subject to FBT, and are likely to be tax deductible to the business and creditable for GST input tax credits purposes (if they are not considered entertainment in nature).  

That being said, where the gift has a value of less than $300 GST inclusive per person and is a once off gift, it is likely to be exempt from FBT under the minor benefits rule. The cost of these gifts generally continue to be tax deductible and input tax credits should be available.

Gifts which are typically regarded by the Commissioner to be entertainment in nature are items such as vouchers for recreational activities or tickets to shows, movies or other events.  There is generally no tax deduction or input tax credit available unless these the gifts are subject to FBT.

Other gifts may be exempt from FBT where they fall within specific limited exemptions within the FBT legislation (e.g. airport lounge memberships, tools of trade, etc.) irrespective of cost.

Christmas Party/Year-end Functions

The correct tax treatment of costs associated with Christmas functions can be confusing.  The treatment depends on whether the employer is concessionally taxed for FBT and income tax purposes and also the method chosen by the employer to value meal entertainment for FBT purposes (one of three methods - 50/50 Split, Actual or Register).   

The table below summarises the treatment for an ordinary business taxpayer (i.e. it does not apply to income tax exempt businesses). Please remember to keep necessary documentation on file such as attendance lists to enable the calculation to be made correctly, accurately and be substantiated in the event of a tax office audit.

Entertainment costs (e.g. Christmas party costs) are only tax deductible, and GST input tax credits only available, to the extent that the costs are subject to FBT.  Where event costs are exempt from FBT, there should be no income tax deduction nor any input tax credit entitlement.

 

Actual Method

50/50 Split Method

Register Method

Christmas Party 

< $300 per head (GST inclusive)
- on or off business premises

Minor Benefit for employee & associate costs - exempt from FBT. Non-deductible/no GST input tax credits.

No FBT on client costs. Non-deductible / no GST input tax credits.

Include all GST inclusive costs. 50% subject to FBT& 50% exempt. The portion subject to FBT is deductible / input tax credits are available.

The portion of costs not subject to FBT is non- deductible/no GST input tax credits.

Include all GST inclusive costs.  Register percentage subject to FBT. This portion is deductible / input tax credits are available.

The portion of costs not included for FBT is non- deductible/no GST input tax credits.

Christmas Party
= or > $300 per head (GST inclusive)
- on business premises

Exempt Benefit for employee costs - non- deductible / no GST input tax credits. FBT is payable on associate costs and is deductible / GST input tax credits available.

No FBT on client costs. Not deductible / no GST input tax credits.

Include all GST inclusive costs. 50% subject to FBT

& 50% exempt. The portion subject to FBT is deductible/input tax credits are available.

The portion of costs not subject to FBT is non- deductible/no GST input tax credits.

Include all GST inclusive costs.  Register percentage subject to FBT. This portion is deductible/input tax credits are available.

The portion of costs not included for FBT is non- deductible/no GST input tax credits.

Christmas Party
= or > $300 per head
- off business premises

FBT on employee & associate costs.  Costs are deductible/GST input tax credits available.

No FBT on client costs. Not deductible/no GST input tax credits.

Include all GST inclusive costs. 50% subject to FBT

& 50% exempt. The portion subject to FBT is deductible/input tax credits are available.

The portion of costs not subject to FBT is non- deductible/no GST input tax credits.

Include all GST inclusive costs.  Register percentage subject to FBT. This portion is deductible/input tax credits are available.

The portion of costs not included for FBT is non- deductible/no GST input tax credits.

Note: The table is designed to apply to most common circumstances and is only meant to provide an indication of the likely FBT treatment. Employers should seek independent tax advice on their specific circumstances before entering into any arrangement or transaction.

The tax treatment for an income tax exempt employer

The FBT treatment of festive season entertainment costs for income tax exempt employers (who are taxable for FBT purposes) is substantially similar to that of an income tax paying employer where the 50/50 Split or Register Methods are chosen.  However, where the Actual Method is used, FBT is generally payable on costs relating to the employee and any associate(s) regardless of the cost or location of the function (i.e. the minor benefit and food and drink consumed on premises exemption are not available to income tax exempt employers).  Under this method, the costs relating to the entertainment of clients should remain not subject to FBT. 

FBT rates 2016/17

  1. The FBT rate increased from 47% to 49% effective 1 April 2015 until 31 March 2017, as a result of a 2% Budget Repair Levy. The FBT gross up rates subsequently increased to 2.1463 for Type 1 and 1.9608 for Type 2 benefits. Employers’ systems should be modified to reflect this change, particularly pay related applications.
  2. From 1 April 2015 until 31 March 2017, for certain non-profit employers, the current cap per employee of $17,000 and $30,000 will increase to $17,667 and $31,177 respectively during that period.

Changes to entertainment benefits 2016/17

From 1 April 2016, there is a separate grossed up cap of $5,000 for salary sacrificed meal entertainment and entertainment facility leasing expenses (“Entertainment Benefits”) for employees. 

Once the FBT value of “Entertainment Benefits” exceeds the grossed up cap of $5,000, employers can use their existing fringe benefits tax (FBT) exemption or rebate cap, if any, to cover the difference. All “Entertainment Benefits” will also become reportable on employee payment summaries.

Employers that can currently provide effective salary packaging arrangements for “Entertainment Benefits”, such as public benevolent institutions and health promotion charities may wish to review and amend their salary packaging policies to reflect these significant changes.

Changes for small business entities (SBE)

If you are a Small Business Entity (SBE), the government has extended the FBT exemption with respect to eligible work-related items that are provided to employees. These changes took place from 1 April 2016. Under these changes, SBE employers will not be limited to providing one eligible work-related items that is a ‘portable electronic device’ (eg a laptop computer) to an employee per FBT year where the items have a ‘significantly identical function’. This means that multiple devices can be provided to an employee as an exempt benefit, so long as the item is primarily for use in the employee’s employment.


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