It’s beginning to look a lot like FBT at Christmas time

By Elena Bogomolova - December 7, 2017

‘Tis the season for businesses to analyse their arrangements carefully to avoid any unexpected surprises when it comes time to prepare and lodge their fringe benefits tax (“FBT”) return.

The holiday season has snuck up on us following an extremely busy year. For those involved with employment taxes, it is an opportune time to begin collecting necessary information and planning for the 31 March 2018 year end.

The management of FBT obligations is often seen as an additional compliance task, which is not prioritised to the extent of other compliance obligations such as income taxes, goods and services taxes (GST) and pay as you go (PAYG) withholding.  However, FBT obligations that are not appropriately managed or accounted for can impose significant costs on businesses.

Over the festive period, entertainment benefits are typically provided to employees in the form of food, drinks and other entertainment activities.  Businesses will usually bundle ancillary costs such as the following as part of the costs of entertainment:

  • 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
  • clean up costs.

However, these ancillary costs may, in certain circumstances,  be excluded from the value of entertainment benefits provided to employees.  Therefore, to properly manage the FBT obligations of your business, we recommend careful analysis of all components of entertainment costs to ensure the appropriate FBT treatment.  

To assist you with your analysis of 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

Employee 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).

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 is 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

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

Not deductible.

No GST ITC.

No FBT on client costs.

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.

Entertainment Function
= or > $300 per head (GST inclusive)

on business premises

Exempt Benefit for employee costs, no FBT.

Not deductible.

No GST ITC.

FBT is payable on associate costs and is deductible.

GST ITC available.

No FBT on client costs.

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.

Entertainment Function
= or > $300 per head

off business premises

Employee and associate costs are subject to FBT.

Deductible.

GST ITC available.

No FBT on client costs.

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.

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 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. 

2017/18 FBT rates

The FBT rate decreased from 49% to 47% effective 1 April 2017, as a result of removal of the 2% Budget Repair Levy. The FBT gross up rates subsequently decreased to 2.0802 for Type 1 and 1.8868 for Type 2 benefits. Employer systems and processes should be modified to reflect this change, particularly in respect of pay related software applications.

Similarly, from 1 April 2017, the current cap per employee of $17,667 and $31,177 decreased to $17,000 and $30,000 for certain non-profit employers.

If you have queries in relation to any of the above, please contact your Pitcher Partners advisor or a member of Pitcher Partners employment taxes team. 


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