19 Dec Tax considerations during the festive season
The festival season is approaching, and many businesses are gearing up to celebrate with their staff through parties or events. While the festivities are enjoyable, it’s important to consider the tax implications associated with providing “entertainment” to both staff and clients.
What is “Entertainment”?
The term “entertainment” is defined in both the Income Tax Act and the Fringe Benefits Tax (FBT) Act. According to the relevant legislation, entertainment can encompass food, drink, or recreation, including any accommodation and travel related to these activities.
Can Entertainment be Tax Deductible?
In general, entertainment expenses are not tax-deductible, and some may attract FBT. Examples of entertainment include hosting a Christmas party for staff and clients or organising a day out to mark a business milestone.
Entertainment expenses can be tax-deductible to the extent that FBT is payable. Typically, providing employees with food and drink falls under entertainment and is not tax-deductible. However, if the provided items are not primarily for the employee’s enjoyment – such as staff amenity expenses like tea and coffee – these may be deductible.
When determining whether providing food and drink is considered entertainment, four key factors should be considered: “why,” “what,” “where,” and “when.” The first two factors (“why” and “what”) are particularly important.
Does Entertainment Attract Fringe Benefits Tax (FBT)?
Not all entertainment expenses attract FBT. The “minor benefits exemption” is one such FBT exemption, where expenses under $300 per employee, deemed unreasonable as fringe benefits, do not need to be reported.
For instance, if a Christmas party costs $150 per head and is held on a workday, it may be exempt from FBT as a minor benefit. However, if the cost exceeds $300 per head, it should be treated as a taxable fringe benefit.
Exemptions for Treating Staff during Christmas
Certain non-cash benefits may be exempt from FBT during the festive season, including minor benefits exemptions, exempt property benefits, and exempt transport benefits.
1. Minor benefits exemptions – as mentioned above, if the benefit provided is less than $300 per employee and it is unreasonable to be treated as a fringe benefit, then it is exempt from FBT.
2. Exempt transport benefits – where the employer provides a taxi ride home if the celebration is held at the employer’s premises.
3. Exempt property benefit – where the food and drink are provided by the employer and consumed on the employer’s business premises on a business day.
Calculating Taxable Value for FBT Purposes
To calculate FBT on entertainment-related benefits, determine the taxable value of the benefits provided. Methods include using the actual value of benefits paid or employing meal entertainment valuation rules, such as the 50:50 split method or the 12-week method.
Recordkeeping for Employers
Employers are required to maintain documentation to identify recipients of meal entertainment benefits, including an attendance register or equivalent for each entertainment event. The minor benefits exemption cannot be applied without proper recipient identification.
In conclusion, while life is not all about tax, spending money on non-deductible expenses can still be valuable for team building, employee recognition, and client relationships. As you enjoy this festive season, consult with your trusted onefocus advisor to explore how we can assist in managing your taxation affairs.