Are gifts to your employees, clients, and suppliers claimable as a business expense?

 

I am getting asked this question for the past 2 months so I decided to write a blog post about it. Christmas parties (or other festivities) and presents to staff might raise questions in your mind about how it will affect the tax liabilities of your business. If you would like to avoid any nasty surprises, read on. Here are some general comments about these issues:

An assumption is that the business has not elected to use either the ‘50-50 split’ or ‘12 week register’ methods for FBT purposes.

CHRISTMAS PARTIES

Christmas parties constitute "entertainment benefits" and to the extent that the expenditure relates to employees or their associates attending the function, the expenses may be subject to fringe benefits tax (FBT) unless an exemption (e.g. the "minor benefits" exemption) applies.

A minor benefit is provided to an employee or their associate (e.g. spouse) on an “infrequent” or “irregular” basis, which is not a reward for services, and at a cost less than $300 (inclusive of GST) “per benefit”.

Entertainment expenses are not tax-deductible unless they are subject to FBT. This means that expenses incurred in providing a Christmas party are not generally deductible where the minor benefit FBT exemption applies.

Scinario1. A Christmas party (or other festive occasions) held by your business on its premises or at a venue leased for this purpose does not result in any taxable fringe benefit to the employees. This is because it is provided under an arrangement where you reimburse the employee for costs incurred. Out-of-pocket expenses can be claimed as a deduction in the employee's income tax return. For employees – No FBT as it is an exempt property benefit. No tax deduction and no GST credits

For associates – FBT applies as the cost per head is equal to or more than $300. Claim tax deduction and GST credits

For clients – no FBT, no income tax deduction and no GST credits

Scinario2. Christmas parties (or other festive occasions) held by your business off-site requires you to make an apportionment between an entertainment expense and a private or domestic expense for  FBT purposes. If the FBT-exempt entertainment expense is more than 25% of the total cost, the whole cost will be subject to FBT and there will be no offsetting tax deduction or GST entitlement.

For employees – FBT applies as the “entertainment” component is greater than 25%.  No FBT as the cost is less than $300 per head (where the minor benefits exemption applies). No tax deduction and no GST credits.

For associates - No FBT as the cost is less than $300 per head (where the minor benefits exemption applies). No tax deduction and no GST credits

For Clients - No FBT, no income tax deduction, and no GST credits

Where employees are also provided with a hamper (non-entertainment gift) costing $150 per person - Hamper Costs – No FBT (where the minor benefits exemption applies), claiming a tax deduction and GST credits.

I hope this answers your question but if you are looking for more information or want to discuss your scenario in greater detail. Please feel free to reach out to one our experts at iKeep Bookkeeping.