Employers wishing to be generous to staff and clients at Christmas may find themselves subject to Fringe Benefits Tax (FBT) as a result of their generosity, warns CPA Australia.
Employers wishing to be generous to staff and clients at Christmas may find themselves subject to Fringe Benefits Tax (FBT) as a result of their generosity, warns CPA Australia.
FBT is charged at the equivalent of the highest tax rate, around 48.5 per cent, potentially adding significantly to the cost of a gift or party.
As a general principle, you are less likely to need to pay FBT if you spend less than $100 on gifts and if you choose to hold your Christmas party on work premises on a workday.
However, life is rarely so black and white, so CPA Australia has compiled some guidelines to help employers understand their FBT obligations.
Please note that these are guidelines only, and it would be wise to check your circumstances with a CPA.
If you wish to give your staff a gift at Christmas, a gift that costs less than $100 will not be subject to Fringe Benefits Tax. You can also claim an input tax credit to compensate for the GST you paid when you purchased the good, which would be equal to 1/11 of the purchase price. You are not required to account for GST on the gift to your employee.
However, if you choose to give a gift that is worth over $100 you will be charged FBT. For instance, if you purchase a gift to the value of $101 (including GST), you will need to pay FBT on the full $101, which would total around $104.30 (101 X gross up rate of 2.1292 X 48.5%).
However, you will be able to claim an input tax credit of $9.18 (1/11 of the $101), meaning that the total cost of providing the gift is $196.12 ($101 + $104.30 FBT - $9.18 input tax credit). The net cost of providing the benefit is equivalent to giving the employee $196.12 cash, which, after deducting 48.5 per cent tax would leave the employee with $101.
These rules apply regardless of whether the gift is made as a voucher or as a good such as a case of wine.
If you wish to provide a client or business associate with a gift, you will not be subject to FBT, no matter how much you spend.
You will still not need to charge GST and you can also claim an input tax credit for the GST paid on the purchase.
The situation becomes more complex if you are planning to hold a Christmas party.
Firstly, you need to have determined which method of Fringe Benefit Tax calculation you will be using for the entire FBT year.
The method of calculation must be adhered to throughout the FBT year and will need to be used to calculate FBT costs for a Christmas party/function.
There are two main alternatives.
The first is the 50/50 method – where FBT is paid on 50 per cent of all meal entertainment, whether it is provided to staff, their families or non-employees such as clients.
This 50 per cent plus the FBT will be deductible for income tax purposes by the employer.
The other 50 per cent will not be subject to FBT and will not be deductible.
This rule covers meal entertainment only, and doesn’t include other costs such as room hire or entertainment, which would be subject to FBT to the extent that the costs relate to employees and associates.
Such costs are FBT exempt to the extent that they are spent on clients, but are not deductible for income tax purposes.
The second alternative is where the employer chooses to pay FBT on the full value of all entertainment, including meals, provided to employees and their families, but pays no FBT on entertainment provided to clients.
In this case, at a Christmas party where there are no other exemptions, if 70 per cent of attendees are employees, the employer will pay FBT on 70 per cent of the total entertainment costs.
In either case, the employer will be entitled to an input tax credit for entertainment provided, to the extent that it is deductible for income tax purposes. When and where you hold your Christmas function, how much you spend per person and whom you invite may all affect your FBT liabilities.
If you hold the function away from the workplace, such as at a restaurant, and the cost comes to more than $100 for the employee, their spouse and/or children combined, then the cost would be subject to FBT under the entertainment rules but an income tax deduction would be allowed.
If the cost is less than $100, it is FBT exempt, but no income tax deduction is allowed.
The situation may become more complicated if you also invite clients and business contacts to the party.
There will be no difference for meal entertainment if you are using the 50/50 FBT calculation method.
However, for other entertainment, or for all entertainment if you are using the alternative method, you will need to apportion costs by determining the number of employees and associates, who will be subject to FBT, and others such as clients, who you can entertain without paying FBT.
Where the entertainment is subject to FBT, an income tax deduction is available. However, an income tax deduction is generally unavailable where no FBT applies to the entertainment.
If your Christmas party takes place at the work premises, certain exemptions may apply.
If the event is held on a working day, all costs will be FBT exempt.
However, FBT will apply if the party is held on a non-working day and will need to be determined according to the type of FBT calculation you have chosen to use for the FBT year.
FBT is charged at the equivalent of the highest tax rate, around 48.5 per cent, potentially adding significantly to the cost of a gift or party.
As a general principle, you are less likely to need to pay FBT if you spend less than $100 on gifts and if you choose to hold your Christmas party on work premises on a workday.
However, life is rarely so black and white, so CPA Australia has compiled some guidelines to help employers understand their FBT obligations.
Please note that these are guidelines only, and it would be wise to check your circumstances with a CPA.
If you wish to give your staff a gift at Christmas, a gift that costs less than $100 will not be subject to Fringe Benefits Tax. You can also claim an input tax credit to compensate for the GST you paid when you purchased the good, which would be equal to 1/11 of the purchase price. You are not required to account for GST on the gift to your employee.
However, if you choose to give a gift that is worth over $100 you will be charged FBT. For instance, if you purchase a gift to the value of $101 (including GST), you will need to pay FBT on the full $101, which would total around $104.30 (101 X gross up rate of 2.1292 X 48.5%).
However, you will be able to claim an input tax credit of $9.18 (1/11 of the $101), meaning that the total cost of providing the gift is $196.12 ($101 + $104.30 FBT - $9.18 input tax credit). The net cost of providing the benefit is equivalent to giving the employee $196.12 cash, which, after deducting 48.5 per cent tax would leave the employee with $101.
These rules apply regardless of whether the gift is made as a voucher or as a good such as a case of wine.
If you wish to provide a client or business associate with a gift, you will not be subject to FBT, no matter how much you spend.
You will still not need to charge GST and you can also claim an input tax credit for the GST paid on the purchase.
The situation becomes more complex if you are planning to hold a Christmas party.
Firstly, you need to have determined which method of Fringe Benefit Tax calculation you will be using for the entire FBT year.
The method of calculation must be adhered to throughout the FBT year and will need to be used to calculate FBT costs for a Christmas party/function.
There are two main alternatives.
The first is the 50/50 method – where FBT is paid on 50 per cent of all meal entertainment, whether it is provided to staff, their families or non-employees such as clients.
This 50 per cent plus the FBT will be deductible for income tax purposes by the employer.
The other 50 per cent will not be subject to FBT and will not be deductible.
This rule covers meal entertainment only, and doesn’t include other costs such as room hire or entertainment, which would be subject to FBT to the extent that the costs relate to employees and associates.
Such costs are FBT exempt to the extent that they are spent on clients, but are not deductible for income tax purposes.
The second alternative is where the employer chooses to pay FBT on the full value of all entertainment, including meals, provided to employees and their families, but pays no FBT on entertainment provided to clients.
In this case, at a Christmas party where there are no other exemptions, if 70 per cent of attendees are employees, the employer will pay FBT on 70 per cent of the total entertainment costs.
In either case, the employer will be entitled to an input tax credit for entertainment provided, to the extent that it is deductible for income tax purposes. When and where you hold your Christmas function, how much you spend per person and whom you invite may all affect your FBT liabilities.
If you hold the function away from the workplace, such as at a restaurant, and the cost comes to more than $100 for the employee, their spouse and/or children combined, then the cost would be subject to FBT under the entertainment rules but an income tax deduction would be allowed.
If the cost is less than $100, it is FBT exempt, but no income tax deduction is allowed.
The situation may become more complicated if you also invite clients and business contacts to the party.
There will be no difference for meal entertainment if you are using the 50/50 FBT calculation method.
However, for other entertainment, or for all entertainment if you are using the alternative method, you will need to apportion costs by determining the number of employees and associates, who will be subject to FBT, and others such as clients, who you can entertain without paying FBT.
Where the entertainment is subject to FBT, an income tax deduction is available. However, an income tax deduction is generally unavailable where no FBT applies to the entertainment.
If your Christmas party takes place at the work premises, certain exemptions may apply.
If the event is held on a working day, all costs will be FBT exempt.
However, FBT will apply if the party is held on a non-working day and will need to be determined according to the type of FBT calculation you have chosen to use for the FBT year.
