27 November 2012

"Are you Inviting the Tax Man to your Company Christmas Party?" Article by Tina Zawila

The team at Sothertons had some fun on the weekend and enjoyed our annual Christmas Party.  Every year for as long as I can remember we have had a fancy dress theme and this year it was “Grease” the movie.  Yes, we had Sandy and Danny, Rizzo and Kenickie, Frenchy, the geek Eugene and even Elvis made an appearance!


However, there was one character that we didn’t want at the party ... The Tax Man!


The annual company Christmas Party falls under the definition of Entertainment for taxation purposes...yes, there are income tax implications associated with having a good time, and you can be left with more than a hang over the next day.

Generally, entertainment and recreation expenses are not income tax deductible except in very limited circumstances, no matter who the recipients are and irrespective of whether there is a genuine connection with business activities.

Therefore, the cost to an employer of providing team social functions (including the annual Christmas Party) is a non-deductible entertainment expense.   Similarly, providing Christmas gifts to employees where the gift provides entertainment by way of food drink or recreation (eg a holiday, tickets to sporting events, the theatre or cinema or the cost of a night out at a restaurant) would not be tax deductible.  However, the cost of relatively inexpensive Christmas gifts (such as a bottle of wine/spirits or a food hamper) that will be consumed by an employee at home will not be treated as entertainment. 

But wait there’s more...you may need to consider Fringe Benefits Tax (FBT)...

Where entertainment expenses are incurred in providing a fringe benefit to an employee or associate, the entertainment expense will generally be income tax deductible as an ordinary business expense, but may be subject to fringe benefits tax (FBT).

There is an exemption available within the Fringe Benefits Tax Assessment Act in respect to “Minor Benefits” – these are defined as benefits with a value of less than $300 and are “infrequent and irregular”.  Generally speaking, a gift for an employee upon the birth of a child, or a milestone birthday, with a value of less than $300 would be considered to be a “minor benefit”.

Whilst minor benefits are exempt from Fringe Benefits Tax, they are not tax deductible, and the input tax credit (GST) cannot be claimed.

FBT legislation was introduced in 1986, but still proves to be confusing to many business owners.  If you need assistance, please call us at Sothertons on 4972 1300 and we will help you minimise the “mess” the tax man leaves behind after your Christmas Party!

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