Don't Get Caught Out.
With the ATO now on the war path searching for anything to catch you out, your Christmas cheer could be the red flag they are waiting for.
To help you understand some of the problem areas, we have reproduced the article "Dealing with Christmas parties, end of financial year functions and similar social functions", from National Tax and Accountants' Association (NTAA).
Dealing with Christmas parties, end of financial year functions and similar social functions
Most employers will incur expenditure in connection with an annual Christmas party, end of financial year function or similar function. A Christmas party will normally be attended by different people such as employees, associates, clients, suppliers and/or contractors and the functions may be held at various locations (e.g., on business premises or at a restaurant).
At a minimum, a Christmas party/function will involve an employer paying for the cost of food and drink. However, for more elaborate Christmas functions, an employer will often also pay for:
- the cost of an entertainer (e.g., a comedian, a clown, a band or a DJ); and/or
- the cost of premises or facilities within which the function will take place (e.g., a function centre or even a boat for a river cruise).
Checklist of function-related costs incurred by employers
An employer can incur a wide range of function-related costs in relation to a Christmas party, end of financial year function or a similar function. The following checklist outlines the more common categories of expenditure that an employer can incur in connection with such a function, and whether the expenditure has the character of meal entertainment or recreation.
|
Type of expenditure |
Meal entertainment |
Recreation |
|
Food and drink |
X¹ |
|
|
Waiters and waitresses |
X¹ |
|
|
Travel (e.g., taxi travel and airfares) |
X¹ |
X² |
|
Accommodation costs |
X¹ |
X² |
|
Venue hire (e.g., a reception centre or a boat) |
|
X³ |
|
Entertainers (e.g., a clown, comedian, band or DJ) |
|
X³ |
|
Non-entertainment gifts (e.g., hamper, bottle of wine) ⁴ |
Not entertainment |
Not entertainment |
|
Entertainment gifts (e.g., tickets to sport event, movies) ⁴ |
|
X |
¹ These meal entertainment costs are dealt with according to which valuation method is used by the employer (e.g., actual method or 50/50 split method). If the actual method is used, an exemption from FBT may apply, for example, the minor benefit exemption under S.58P.
² The travel and accommodation costs may be meal entertainment or recreation depending on whether the costs relate to the provision of meal entertainment or recreation. For example, if an employer provides taxi travel to a sporting event then the taxi travel will be recreation, however, if the taxi travel is to a restaurant then it will be meal entertainment. In any case, consider whether an FBT exemption applies (e.g., the taxi travel exemption in S.58Z).
³ These recreation costs are generally dealt with under the actual method. However, any recreation that qualifies as an Entertainment Facility Leasing Expense (‘EFLE”) can be dealt with under the 50/50 split method. The venue hire will represent an EFLE where the employer has exclusive possession of the venue or premises to the exclusion of others. Any costs associated with entertainers will also represent an EFLE where the entertainer costs were included as part of hiring the venue or facility (i.e., the entertainer is not separately engaged by the employer).
⁴ Reference should also be made to TD 94/55. Consider whether an FBT exemption applies (e.g., the minor benefit exemption in S.58P).
Meal entertainment at a Christmas party (or similar function) for employers using the actual method
Food and drink provided (or paid for) by an employer at a Christmas party (or similar function) will have the character of meal entertainment. As a result, the FBT (and other tax) consequences for an employer will basically depend on the following:
- Whether the function is held ‘on-site’ (i.e., on the employer’s business premises)or ‘off-site’ (e.g., at a restaurant or similar venue); and
- Who attended the function (i.e., employers, associates, clients, contractors, etc.).
The following table summarises the general FBT (and other tax) consequences of provided food and drink (i.e., meal entertainment) at a Christmas party (or other similar function) for the 2011 FBT year under the actual method.
|
Person attending function |
Location of the function |
|
|
On-site functions (i.e., on employer’s business premises) |
Off-site functions (e.g., restaurant or similar venue) |
|
|
Employees |
FBT exempt and non-deductible (i.e., where the property benefit exemption in S.41 applies). As a result, GST input tax credits cannot be claimed. |
Subject to FBT and deductible. ¹ As a result, GST input tax credits can generally be claimed. However, if the ‘per head’ cost of food and drink at the function is less than $300, the minor benefits exemption may apply. If the exemption applies, no deduction or GST input tax credits can be claimed. |
|
Associates (e.g., family members) |
Subject to FBT and deductible. ¹ As a result, GST input tax credits can generally be claimed. However, if the ‘per head’ cost of food and drink at the function is less than $300, the minor benefits exemption may apply for the associate. If the exemption applies, no deduction or GST input tax credits can be claimed. |
|
|
Non-employees (e.g., clients, suppliers, contractors) |
Not subject to FBT and no deduction can be claimed. As a result, GST input tax credits cannot be claimed. |
Not subject to FBT and no deduction can be claimed. As a result, GST input tax credits cannot be claimed. |
¹ No deduction is allowed for any GST input tax credit entitlement. Refer to S.27-5 of the ITAA 1997.
Example – Comparing ‘on-site’ and ‘off-site’ Christmas party
Festive Pty Ltd (“Festive”) arranged a Christmas party for 30 people (comprised of 15 employees and 15 partners or associates) in December 2010. It is Festive’s general policy to provide one main social function for the year for employees and their partners.
The total bill (i.e., the GST-inclusive cost of food and drink) was $13,200, including $1,200 GST, and no other benefits were provided in connection with the function. This equates to a ‘per head’ cost (in relation to food and drink) of $440 (i.e., $13,200/30 people).
What are the FBT (and other tax) consequences for Festive if the party was held at a restaurant (i.e., ‘off-site’)?
Based on the ATO’s guidelines in TR 2007/12, the minor benefit exemption will not apply to the meal entertainment benefit (i.e., food and drink) provided to each employee (and their partner) because the ‘per head’ cost of food and drink (i.e., meal entertainment) was $300 or more.
For FBT purposes, the taxable of the meal entertainment is $13,200 under the actual method (i.e., $440 x 30 employees and partners = $13,200). For GST purposes, input tax credits can be claimed for the $1,200 GST paid (i.e., $13,200 x 1/11). For income tax purposes, a $12,000 deduction is available (i.e., $13,200 - $1,200 input tax credit).
What are the FBT (and other tax) consequences for Festive if the party is held on the Festive’s business premises (i.e., ‘on-site’)?
In these circumstances, the $13,200 meal entertainment would be treated as follows:
(a) Employees – The $6,600 portion of the meal entertainment that relates to employees is exempt from FBT under the property benefit exemption contained in S.41 (i.e., for food and drink consumed by a current employee on business premises during a working day) and is not deductible for income tax purposes. Furthermore, no GST input tax credit can be claimed for the $600 GST paid (i.e., $6600 x 1/11).
(b) Partners – The $6,600 portion of meal entertainment that relates to partners is subject to FBT and is deductible for income tax purposes. Note that the property benefit exemption under S.41 does not apply to associates of an employee. For GST purposes, input tax credits can be claimed for the $600 GST paid).
Meal entertainment at a Christmas party (or similar function) for employers using the 50/50 split method
Under the 50/50 split method, meal entertainment provided in connection with a Christmas party, end of financial year function, or similar function will be dealt with in the same way, regardless of the location of the party (i.e., on-site or off-site) and who attends (i.e., employees, associates, clients, suppliers, etc.).
That is, only 50% of the employer’s meal entertainment expenditure will be:
(a) subject to FBT;
(b) generally eligible for GST input tax credits for any GST paid (i.e., provided either a special GST election or FBT election is in force); and
(c) deductible (excluding any GST input tax credit entitlement).
Therefore, under the 50/50 split method, there is no requirement for an employer to dissect their Christmas party meal entertainment between employees and non-employees. The employer’s total meal entertainment expenditure is aggregated, and only half of the expenditure is subject to FBT and deductible (excluding any input tax credit entitlement). Refer to S.37BA, S.51AEA of ITAA 1936, S.69-5(3A)(a) and S.69-25 of GST Act.
It is important to note that, where meal entertainment provided in connection with a Christmas function is valued under the 50/50 split method, the property benefit exemption under S.41, the minor benefit exemption under S.58P and the taxi travel exemption under S.58Z cannot apply.
Example – Christmas party under the 50/50 split method
Luda Pty Ltd (“Luda”) arranged a Christmas party at a local restaurant. Of the 50 people who attended, 35 were employees and associates, and 15 were clients and contractors. The total restaurant bill was $11,000 (including $1,000 GST). On this basis, the total ‘per head’ cost of the function was $220 (i.e., $11,000/50 people).
Under the 50/50 split method, the $11,000 meal entertainment would be treated as follows:
- FBT – 50% of the expenditure is subject to FBT. Therefore, the taxable value is $5,500 (i.e., 50% x $11,000). The minor benefit exemption would not be available.
- GST input tax credit – Luda has a GST input tax credit entitlement in respect of 50% of the expenditure. Therefore, Luda’s input tax credit entitlement is $500 (i.e., 50% x $11,000 x 1/11).
- Income tax deduction – 50% of the expenditure is deductible (excluding any GST input tax credit entitlement). Therefore, Luda’s tax deduction is $5,000 (i.e., $11,000 x 50% - $500 GST input tax credit entitlement).
What if the function was held on the employer’s business premises?
In these circumstances, the same FBT (and other tax) consequences as noted above would arise under the 50/50 split method. That is, Luda would not be able to take advantage of the property benefit exemption under S.41 (nor the minor benefit exemption under S.58P).