Christmas Parties – Entertaining and Tax
With December on our doorstep, thoughts of Christmas celebrations come to mind, so we thought that we could remind businesses on what the tax angle is for the cost of sharing the festive spirit with their employees and their clients/customers.
Most genuine Christmas parties for staff and customers will not be income tax deductible, nor will you be able to claim back the GST credits. The aim is to try to avoid Fringe Benefits Tax (FBT) on the value provided to employees by fitting into one of the exemption categories.
It is well recognised that the entertainment of our customers is a genuine business expense and contributes to ongoing healthy relationships with the people and businesses that buy our products. So, spending a part of your promotion budget on client entertainment is generally money well spent and legitimately incurred in the earning of your income.
Under normal tax rules, expenses incurred in earning your income are considered tax deductible. However, since 1995, even though recognised as a genuine expense, if you have spent money entertaining customers, then you can generally kiss the tax deduction goodbye! The Government, at the time, introduced legislation to specifically exclude entertainment as a tax-deductible expense with only a few minor exceptions.
The rules for entertaining employees and their partners have changed a few times since the introduction of the legislation in 1995. Currently, the rules state that generally, providing entertainment to employees and/or their associates, is a fringe benefit and as such, is tax deductible for Income Tax and GST purposes. On the surface, being tax deductible sounds great, but the catch out is fringe benefits tax. As mentioned in an earlier article, the FBT rate currently stands at 47%. So getting an income tax deduction at a marginal rate of somewhere between 27.5% and 39% and then paying FBT at 47% is not so palatable.
One of the exceptions that allows entertainment to be deductible is if the food or drink provided is only light refreshments provided as part of a larger business promotional function or seminar/conference. To fit this exception, the cost of the refreshments needs to be minor in the context of the cost of the overall event.
So, this does open the door a little for businesses to hold a training/product information function for their clients and potentially claim some of the costs of entertaining the attendees. But, strict conditions apply and there are no black and white rules.
One of the main exceptions for employees’ entertainment is to try to get the expenses to fall under an FBT exemption. If successful, this means that no FBT is payable. Unfortunately, it also means, that usually the income tax deductibility and GST claims disappear too. The main exemptions are for meals and drinks provided to employees on the business premises, and also entertainment that is minor, infrequent and irregular (costing less than $300 per employee).
We highly recommend that you talk to your tax adviser before planning your Christmas event. If you would like to talk to one of our specialist tax advisers about your entertainment deductibility, please call us, Potts & Schnelle, on Ph 02 60332233.