Is it possible to claim a tax deduction for Santa?

As Christmas nears, small business owners begin to plan celebrations, and bring the year to an end. This is also the time to begin organising, planning and budgeting for the Christmas party.

Instead of thinking that these functions are just another expense burden on the company's budget, let’s link Staff Christmas parties and staff morale. This can be managed in a way that is most beneficial for your business.

So if we consider the real world, the Christmas Party is going to be a benefit to staff, it is going to be entertainment and all this leads us to the tax area known as Fringe Benefits Tax.

How does a business manage a Christmas party without racking up a hefty Fringe Benefits Tax bill?

The following explanations may help you determine whether there are FBT implications arising from a Christmas party.

Exempt property benefits

The costs (such as food and drink) associated with Christmas parties are exempt from FBT if they are provided on a working day on your business premises and consumed by current employees. A taxable fringe benefit will arise in respect of an associate of an employee who attends the party if not otherwise exempt under the minor benefits exemption.

Exempt benefits - minor benefits

You should note the ATO's change in view to the application of the minor benefits exemption to Christmas parties and gifts. The minor benefits threshold of less than $300 applies to each benefit provided, not to the total value of all associated benefits.

The provision of a Christmas party to an employee may be a minor benefit and exempt if the cost of the party is less than $300 per employee and certain conditions are met. The benefit provided to an associate of the employee may also be a minor benefit and exempt if the cost of the party for each associate of an employee is less than $300. For the FBT year beginning 1 April 2006 and previous years, the minor benefits threshold was less than $100 rather than less than $300.

Gifts provided to employees at a Christmas party

A gift to an employee at Christmas time could potentially be a minor benefit that is an exempt benefit where the value of the gift is less than $300.

Where a Christmas gift is provided to an employee at a Christmas party that is also provided by the employer, the benefits are associated benefits, but each benefit needs to be considered separately to determine if they are less than $300 in value. If both the Christmas party and the gift are less than $300 in value and the other conditions of a minor benefit are met, they will both be exempt benefits.

Tax deductibility of a Christmas party

The cost of providing a Christmas party is income tax deductible only to the extent that it is subject to FBT. Therefore, any costs that are exempt from FBT (that is, exempt minor benefits and exempt property benefits) cannot be claimed as an income tax deduction.

As the ATO states, the costs of entertaining clients are not subject to FBT and are not income tax deductible.

Christmas party held on the business premises

A Christmas party provided to current employees on your business premises or worksite on a working day may be an exempt benefit. However, the cost of associates attending the Christmas party is not exempt, unless it is a minor benefit.

For more advice on tax laws and managing your small business for success, please call us on 02 9299 7044 or send through your enquiry to admin@lockwood.com.au.

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