Gifts and entertainment provided to employees and clients can dampen festive cheers if Fringe Benefits Tax (FBT) implications are not managed appropriately.
The upcoming holiday period provides an annual opportunity for businesses to provide gifts and entertainment to employees and clients. However, the FBT implications of providing these benefits can cause confusion and may lead to unexpected additional costs impacting the bottom line of businesses. We encourage businesses to be proactive in understanding and managing these obligations and this bulletin seeks to provide a guide on some of the more common scenarios to carefully monitor.
Christmas parties and year-end functions
Broadly, when determining the value of entertainment benefits the following factors are important to consider:
| Who | Who the entertainment is being provided to (e.g. employees, associates of employees or clients) |
| Where | Where the entertainment is being provided (on or off business premises) |
| What | What are the costs incurred in providing entertainment (e.g. food and drinks, venue hire, entertainment at the venue, transport and accommodation)
Are these costs greater or less than $300 (GST inclusive) Should each cost be considered separately or on aggregated basis? |
| Valuation method | Which valuation method is used by the business to work out the taxable value of entertainment benefits (e.g. Actual Value method, 50/50 method, 12-week register) |
Actual Value Method vs 50/50 Split Method
Most businesses use either the actual value or 50/50 split method in determining the FBT liability associated with entertainment benefits. This bulletin will therefore focus on these valuation methods.
The actual value method, as the name suggests, calculates the FBT payable by reference to the actual expenditure on entertainment benefits provided. Under this method, exemptions are available in relation to:
- client entertainment
- minor benefits (less than $300 per head, infrequent and irregular); and
- food and drink consumed on the employer’s business premises
Businesses should be aware that the actual method requires detailed records of entertainment provided to clients, employees and their associates, particularly if they wish to apply the above-mentioned concessions.
In contrast, the 50/50 split method simply subjects 50% of all entertainment costs to FBT. While it requires a lower level of record-keeping, businesses should also be aware that no exemptions are available under this method.
Care should also be taken where entertainment benefits are provided by third parties. Under limited circumstances businesses may be precluded from using the 50/50 split method altogether.
Impact on Income Tax and GST
Additionally, businesses should also consider income tax and GST implications arising from the provision of entertainment benefits
Broadly, entertainment expenses are not tax deductible unless subject to FBT. Generally, GST input tax credits are only available in relation to entertainment expenditure when it is subject to FBT. The portion which is not subject to FBT is not deductible for income tax purposes and there is no GST input tax credit entitlement.
The tables below summarise the FBT, income tax and GST treatment of entertainment benefits for business taxpayers (excluding income tax exempt organisations).
Table 1: Actual Value Method is used to determine the taxable value for FBT*
| Scenario 1 | Entertainment Function less than $300 per head (GST inclusive) on or off business premises |
||
| FBT exemption | Income tax deductible | GST ITC available | |
| Employee | Yes* | No | No |
| Associates | Yes* | No | No |
| Client | Yes | No | No |
|
Scenario 2 |
Entertainment Function $300 or more per head (GST inclusive) on business premises |
||
| FBT exemption | Income tax deductible | GST ITC available | |
| Employee | Yes | No | No |
| Associates | No | Yes | Yes |
| Client | Yes | No | No |
|
Scenario 3 |
Entertainment Function $300 or more per head (GST inclusive) off business premises |
||
| FBT exemption | Income tax deductible | GST ITC available | |
| Employee | No | Yes | Yes |
| Associates | No | Yes | Yes |
| Client | Yes | No | No |
Table 2: 50/50 Split Method*
| 50/50 Split method | All scenarios | Includes all GST inclusive costs | |
| 50% of the cost subject to FBT |
50% of the cost not subject to FBT |
||
| Employee | Income tax deductible GST ITC available |
Income tax non-deductible GST ITC not available |
|
| Associates | |||
| Client | |||
*The information provided in the tables would be applicable to most common circumstances and is only meant to indicate the likely FBT treatment. Employers should seek independent tax advice on their specific circumstances before entering into any arrangement or transaction.
Specific rules 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 method has been elected. However, under the Actual Value Method, 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. The costs relating to the entertainment of clients should remain not subject to FBT under this method.
Case Study – Christmas Party
Company A and Company B held their respective annual Christmas parties for their employees at reception venues (off business premises). Both 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 each attended by 100 employees and both companies were invoiced a total of $31,000. Both businesses use the actual value method to value their entertainment.
| Company A | Company B | ||
| Tax invoice supplied by event manager with breakdown of costs inclusive of GST. | Tax invoice supplied by event manager with the total costs amount inclusive of GST. | ||
| Food and drinks | $20,000 | Total Cost of Christmas Party | $31,000 |
| Entertainment | $5,000 | ||
| Transport to the venue from the office | $2,000 | ||
| Management fee charged by the event manager | $4,000 | ||
| Total costs | $31,000 | Total costs | $31,000 |
| The management fee charged by the event management company is not a benefit provided to the employees and is not included in the taxable value. The cost per head 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. | As Company B was not provided with a breakdown of costs for the Christmas Party, the total invoiced amount 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 benefits exemption does not apply, and the benefit is subject to FBT in full. | ||
| Costs subject to FBT | $27,000* | Costs subject to FBT | $31,000 |
| Costs per person | $270 | Costs per person | $310 |
| FBT | $0* | FBT | $30,309** |
| Total costs to the business | $31,000 | Total costs to the business | $61,309*** |
* Costs are not subject to FBT. They are exempt under the minor benefits rule.
** 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, a business’ total annual meal entertainment expenditure must be considered to determine which valuation method produces the lowest taxable value.
Giving gifts and the potential impact on businesses
Broadly the tax treatment of a gift will depend on the following factors, whether the gift is:
- Entertainment or non-entertainment type;
- Provided to employees, associates of employees or clients;
- Valued greater or less than $300 (if less than $300, is it also provided on an infrequent and irregular basis?)
The table below summarises the FBT, income tax and GST treatment of providing gifts to clients, employees or associates.
Non-entertainment Gifts (e.g. retail voucher, hamper, bottle of wine)
| Gifts | Employees or Associates | Client | |
| Less than $300 (incl. GST) |
$300 or more (incl. GST) |
||
| FBT exemption | Yes | No | Yes |
| Income tax deductible | Yes | Yes | Yes |
| GST ITC available | Yes | Yes | Yes |
Entertainment Gifts (E.g. movie/theatre tickets, restaurant voucher)*
| Gifts | Employees or Associates | Client | |
| Less than $300 (incl. GST) |
$300 or more (incl. GST) |
||
| FBT exemption | Yes | No | Yes |
| Income tax deductible | No | Yes | No |
| GST ITC available | No | Yes | No |
Case study – Giving gifts – Restaurant voucher
Company A and Company B have 100 employees each. Both businesses provide their employees with a restaurant voucher at Christmas time as a thank you for their contribution to the company’s success for the past year. A gift of this nature is provided only once a year and there were no additional administration fees or charges associated with the restaurant voucher. Both businesses use the actual value method to value their entertainment.
The restaurant voucher is an entertainment type gift, so an income tax deduction is not available, unless the voucher is subject to FBT. The gift voucher was not subject to GST.
| Company A | Company B | ||
| Provides 100 restaurant vouchers valued at $250 each. | Provides 100 restaurant vouchers valued at $300 each. | ||
| As the value of each restaurant voucher is under $300 and it is provided once a year, this benefit qualifies for the minor, irregular and infrequent exemption from FBT. | As the value of each restaurant voucher is equal to $300 (i.e. not under $300), the benefit is subject to FBT. | ||
| Total Value of benefit | $25,000 | Total Value of benefit | $30,000 |
| FBT | $0 | FBT | $26,604* |
| Total cost to the business | $25,000 | Total cost to the business | $56,604 |
| Income Tax Deduction | Not available | Total costs | Is available |
* 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.
Key takeaways
- Consider the type of entertainment benefits provided by the business.
- Consider the FBT implications and record-keeping
- It is important to understand the FBT, income tax deductibility and GST rules and implications for the business when providing various benefits to employees.
- With appropriate planning, costs to the business can be effectively managed by mitigating unintended tax consequences.
