Avoiding the Christmas tax Scrooge

If you’re planning your Christmas budget for your team and your clients there are a couple of things you need to know to keep the Christmas tax Scrooge from ruining your Christmas celebrations.

Your team

The big tax issue with Christmas celebrations for your team is FBT. FBT applies to non-cash benefits provided by employers to their employees. This generally includes expenses for entertainment that you provide to your team (and their family).

If you provide the Christmas celebrations at your work on a working day, then they are likely to be exempt from FBT. If, however, family members of your team attend, then FBT may apply if the cost of the celebration is over $300 per person. If the cost of the celebration is less than this amount then no FBT applies as it is considered to be a minor benefit and minor benefits are exempt from FBT.

If you hold your celebrations at an external venue, then you need to ensure that the cost of the celebrations is less than $300 per person. As most start-ups have relatively small teams and tight budgets, this shouldn’t be a problem.

However, if, for example, you invited 40 team members and 20 of their spouses to a Christmas lunch, your expenses might look like this:

For FBT purposes, the cost per employee is $133 so no FBT applies. If however the cost of the meal was $180 per person, the beverage package $90 per person and the entertainment $3,800 then the cost per employee would be $333 and the Christmas party celebrations would be subject to FBT for both the employee and the spouse.

Christmas presents to staff need to be kept to less than $300 per person and need to be one-off gifts. They are not included in the calculation of the total cost of the Christmas party but are assessed separately (even if they are given out at the event).

The cost of your Christmas celebrations for team members is not deductible for income tax purposes if FBT does not apply. If FBT applies, then you can claim a tax deduction.

Entertaining clients at Christmas

Entertaining your clients at Christmas is not tax deductible. So, if you take them out to dinner, to the theatre, or any other form of entertainment, then it’s not deductible.

However, if your business gives a gift then it is deductible, as long as the gift is given in the expectation that the business will benefit.

To be deductible, the gift needs to be an expense of the business incurred in the course of generating revenue. You need to be able to prove the link between the two.

Donations to charity

It’s important to recognise that you can only claim a deduction for donations made to deductible gift recipients (DGRs). If you receive any form of merchandise – biscuits, teddies, balls or you buy something at an auction – then it’s not deductible.

This is simply because you purchased something rather than giving a gift. The same goes for charity balls and dinners. You cannot claim the cost of the dinner, unless the organisers have arranged for a part of the cost to be deductible and are able to provide you with a tax deductible confirmation.

The most (tax) effective way to give is to make a direct donation to a DGR. This way, you get a tax deduction for the donation and the charity does not have to spend time, money, and resources creating and supporting events.

Greg Hayes is a director of accountancy firm Hayes Knight. He is a regular commentator on business and taxation issues and is former national chairman of the Small Business Centre of Excellence, CPA Australia. www.hayesknight.com.au