Christmas parties and gifts: what's tax-free, what's deductible and when FBT applies

The end-of-year party and a gift for the team are a great way to say thanks. They also come with a few tax rules that catch business owners out every year. Here's how fringe benefits tax (FBT), income tax deductions and GST credits work for Christmas parties and gifts, so you can plan with no surprises.

The party: where and who matters

The ATO looks at three things: where the party is held, when, and who attends.

• On your premises, on a working day, current employees only. No FBT on the food and drink.
• Off your premises, or with partners attending. No FBT if it's a minor benefit, which generally means the cost is under $300 per person and it would be unreasonable to treat it as a fringe benefit.
• Clients. There's no FBT on the cost of entertaining clients.

Getting staff home safely is covered too: taxi travel directly to or from the workplace has its own FBT exemption.

The catch: no FBT usually means no deduction

Here's the trade-off many owners miss. If the party isn't subject to FBT, because it's exempt or a minor benefit, you can't claim an income tax deduction or GST credits for it. Entertaining clients isn't deductible either. A party that costs $300 or more per head avoids that problem only by creating an FBT bill, at the top marginal rate, which is rarely a good swap.

So for most small businesses, the simplest approach is a party that stays under $300 per head, with the understanding that it's a cost you won't claim.

Gifts: what kind of gift matters

Gifts are assessed separately from the party, so a $150 dinner and a $200 gift aren't added together for the $300 test.

• Non-entertainment gifts, such as a hamper, a bottle of wine or a gift card, are generally FBT-free under $300 per person and can usually be claimed as a tax deduction, with GST credits.
• Entertainment gifts, such as event tickets, a dinner voucher or a weekend away, are generally FBT-free under $300 but aren't deductible.
• Gifts to clients aren't subject to FBT. Non-entertainment gifts are usually deductible; entertainment gifts aren't.

Quick checklist before you book

• Work out the cost per head, including food, drinks and venue.
• Decide whether partners are invited, and keep their cost under $300 per head.
• Keep gifts and the party separate, and choose non-entertainment gifts if you want to claim them.
• Keep receipts and a note of who attended. The FBT year ends on 31 March.

Not sure how your plans stack up? We look after FBT, payroll and tax for small businesses across Melbourne. See our business tax services, or book a free first consultation and we'll talk it through.