Fringe Benefits Tax - Beware the Christmas Grinch!

By Ali Suleyman - December 3, 2018

‘Tis the season for staff and client entertainment and a good time for us to provide you with a few tips aimed to help you avoid unexpected surprises when preparing your Fringe Benefits Tax (“FBT”) return.

At this time of year, additional benefits are typically provided to employees and clients in the form of entertainment and gifts. The FBT implications of providing such benefits are not always understood by businesses. When the FBT exposure is not effectively mitigated, it could result in significant and avoidable additional cost to businesses.

We provide two examples below to illustrate this point.

Example 1 – Gift cards provided by an employer

Company A and Company B have 100 employees each. Both businesses provide their employees with a gift card at Christmas time as a thank you for their contribution to the company’s success for the past year. Such gift cards are provided only once a year. Company A provided gift cards at a value of $250 and Company B provided gift cards at a value of $300. There were no additional administration fees or charges associated with the gift cards.

Company A

On the basis that the value of each gift card is under $300 and it is provided once a year, this benefit qualifies for the minor, irregular and infrequent exemption from FBT. Accordingly, all gift cards provided to employees would be exempt from FBT.

Company B

On the basis that the value of each gift card is equal to $300 (i.e. not under $300), FBT will be payable on the total value of gift cards.

The calculation of the total cost to each business is outlined below.

Company A Company B
Number of gift cards provided 100 100
Value of each gift card $250 $300
Total $25,000 $30,000
FBT $0 $26,604*
Total cost to the business $25,000 $56,604
*The FBT calculation is as follows: $30,000 * 1.8868 * 47% = $26,604. Generally, gift cards are not subject to GST and therefore, the Type 2 gross up rate is applied.

As evident from the above example, FBT nearly doubles the cost for Company B of providing the Christmas gifts.

Example 2 - Christmas Party

Company A and Company B invited their employees to their respective annual Christmas parties held at reception venues (off business premises). Both Companies used an external event management provider. In both instances, transport to the venue from the office was organised for the employees. The respective Christmas parties were attended by 100 employees.

Company A received an invoice from its event management provider with the following GST inclusive breakdown of costs:

Food and drinks $20,000
Entertainment $5,000
Transport to the venue from the office $2,000
Management fee charged by event manager $4,000
Total $31,000

Company B received an invoice from its event management provider for the total GST inclusive cost of the Christmas Party, being $31,000. No breakdown of costs was provided by the event management company.

Company A

In determining a taxable value of Christmas Party for FBT purposes, Company A needs to consider costs of all benefits provided to the employees, including Food and Drink, Entertainment and Transport. The management fee charged by the event management company is not considered to be a benefit provided to the employees and is not included in the taxable value. On this basis, the per head cost of the Christmas Party works out to be $270 (i.e. ($20,000 + $5,000 + $2,000)/100).

As the cost per person is under $300 and the benefit is provided once a year, this benefit qualifies for the minor, infrequent and irregular exemption, and will not attract FBT.

Company B

As Company B was not provided with a breakdown of costs for the Christmas Party, the total value of the invoice becomes the taxable value for FBT purposes. Accordingly, the cost per person is $310. As the cost per person is greater than $300, the minor benefit exemption does not apply, and the benefit is subject to FBT in full. 

The calculation of the total cost to each business is outlined below.

Company A Company B
Food and drinks* $20,000  
Entertainment* $5,000  
Transport to the venue* $2,000  
Management fee $4,000  
Total costs $31,000 $31,000
Costs subject to FBT $27,000 $31,000
Number of employees attended 100 100
Cost per person $270 $310
FBT $0 $30,309**
Total cost to the business $31,000 $61,309***
*Costs subject to FBT.
** The FBT calculation is as follows: $31,000 * 2.0802 * 47% = $30,309. Christmas party costs are subject to GST, therefore, the Type 1 gross up rate is applied.
*** The above calculations assume that the Actual Method for valuing meal entertainment is used. In some circumstances it might be more advantageous to use the 50/50 Split method. However, business’ total annual meal entertainment expenditure has to be considered in order to determine which valuation method produces the lowest taxable value.

As demonstrated above, FBT essentially doubles the cost of providing the Christmas party for employees. It is important to understand the FBT rules and implications for the business when providing various benefits to employees. With proper planning, costs can be significantly reduced where FBT is avoided.

To help you identify and analyse your entertainment expenditure, we have provided some notes in respect of the FBT, GST Input Tax Credits (GST ITC) and income tax deductibility implications associated with festive season celebrations.

Giving gifts to clients and employees

The table below summarises the tax treatment of gifts provided to clients and employees (or their associates).

Gifts
Recipient Gifts - Not Entertainment
(e.g. hamper, bottle of wine)
Gifts - Entertainment*
(e.g. movie/theatre tickets, restaurant voucher)
Client

No FBT

Deductible

GST ITC available

No FBT

Not deductible

No GST ITC

Empoloyee or Associate
(e.g. Spouse/ Partner/ Family Member)
<$300
(GST incl)
$300 or more
(GST incl)
<$300
(GST incl)
$300 or more
(GST incl)

No FBT

Deductible

GST ITC available

Subject to FBT

Deductible

GST ITC available

No FBT

Not deductible
No GST ITC

Subject to FBT

Deductible

GST ITC available

*This assumes the entertainment is not meal entertainment or if it is meal entertainment, that the actual method is used. If the entertainment constitutes meal entertainment and the 50/50 split method or register method are used, the costs must be included as per the method requirements. Please note that the application of the minor benefits rule is limited for income tax exempt businesses in relation entertainment benefits.

Christmas parties/year-end functions

The correct tax treatment of costs associated with Christmas functions can be confusing as it depends on whether the employer is concessionally taxed for FBT and income tax purposes, and the method chosen by the employer to value meal entertainment for FBT purposes (there are three methods: 50/50 Split, Actual or Register) and whether benefits are provided to employees, associates or clients.

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 allow 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 ITC are 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 GST ITC entitlement.

  Actual Method 50/50 Split Method Register Method
Entertainment Function
< $300 per head (GST inclusive)
on or off business premises
Employee or Associate Employee, Associate, Client Employee, Associate, Client

Minor Benefit for employee and associate costs - exempt from FBT.

Not deductible.

No GST ITC.

Include all GST inclusive costs. 50% subject to FBT and 50% exempt. The portion subject to FBT is deductible.

GST ITC available.

The portion of costs not subject to FBT is not deductible.

No GST ITC.

Include all GST inclusive costs. Register percentage subject to FBT is deductible.

GST ITC available.

The portion of costs not included for FBT is not deductible.

No GST ITC.

Client

No FBT on client costs.

Not deductible.

No GST ITC.

Entertainment Function
= or > $300 per head (GST inclusive)
on business premises
Employee Employee, Associate, Client Employee, Associate, Client

Exempt Benefit for employee costs, no FBT.

Not deductible.

No GST ITC.

Include all GST inclusive costs. 50% subject to FBT and 50% exempt.

The portion subject to FBT is deductible.

GST ITC available.

The portion of costs not subject to FBT is not deductible.

No GST ITC.

Include all GST inclusive costs.

Register percentage subject to FBT is deductible.

GST ITC available.

The portion of costs not subject to FBT is not deductible.

No GST ITC.

Associate

FBT is payable on associate costs and is deductible.

GST ITC available.

Client

No FBT on client costs.

Not deductible.

No GST ITC.

Entertainment Function
= or > $300 per head
off business premises
Employee and Associate Employee, Associate, Client Employee, Associate, Client

Employee and associate costs are subject to FBT.

Deductible.

GST ITC available.

Include all GST inclusive costs. 50% subject to FBT and 50% exempt.

The portion subject to FBT is deductible.

GST ITC available.

The portion of costs not subject to FBT is not deductible.

No GST ITC.

Include all GST inclousive costs. Register percentage subject to FBT is deductible.

The portion of costs not subject to FBT is not deductible.

No GST ITC.

Client

No FBT on client costs.

Not deductible.

No GST ITC.

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 income tax exempt employers

The FBT treatment of 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 exemptions 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. 

Pitcher Partners recommendations

We recommend businesses to undertake the following:

  • Consider the type of entertainment benefits to be provided to employees within the business;
  • Contact a member of our employment taxes team ahead of providing employee benefits and as part of your planning to discuss various options to ensure that benefits are provided in the most efficient manner from an FBT perspective;
  • Consider the FBT implications and record keeping requirements; and
  • Where applicable, ensure that internal communication takes place between various parts of the business (for example, human resources and finance teams) before fringe benefits are provided to employees.

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