Chan & Naylor gets a lot of questions at this time of year from clients about the tax deductibility of the Christmas parties and we just want to through some of the concepts here.
Please watch our video “Corporate Christmas Parties and Tax” below:
Hello. My name is Janelle Bartlett. I’m a chartered accountant and partner at Chan & Naylor Redlands. I’m here today to talk to you about Christmas Parties and Tax. We get a lot of questions at this time of year from clients about the tax deductibility of the Christmas parties and I just want to through some of the concepts here. I’ll say at the outset, please don’t shoot the messenger, the answers are not great but we do at the end of the video give you clear cut options so please stay tune.
Okay Christmas parties and tax.
So tips about Christmas parties. They are divided into a number of categories by the ATO. So the ATO is interested whether the party is on premises, off premises, or if the party meets the definition of Entertainment for the ATO’s purposes. If it does it will be subject to a fringe benefits tax and that’s a bad thing because fringe benefits tax is very expensive.
So the ATO looks at whether is on premises or off. They also look at whether the gifts are employees, suppliers or clients. They look at the cost per head of the function and they do look at the alcohol served.
Then I’ll give you some simplified lists. The first one will be various parties which are deductible and have no fringe benefits tax. So they are the good parties. The second one are deductible parties with FBT. They’re nasty because FBT is very expensive. And the third one are non-deductible parties. We’re going through some options with that.
So first category, the deductible with no fringe benefits tax. So none of that additional tax. These parties must be attended only by employees and their partners. So you can’t invite your business associates to these parties. You’re in to serve only light meal and no alcohol. So now if you do serve alcohol or provide a substantial meal, this party is not tax deductible. So yeah it’s not good news . This is not a sort of party most of us would want to provide.
The second category are tax deductible but fringe benefits tax does apply. This must cost over $300 per head. They can be attended by employees and partners only. You can claim a tax deduction and the GST but the fringe benefits tax applies, and the rate is very high. So to give you an idea, a party costing $350 per head, with partners attending will cost employers $700 per employee plus an additional amount of fringe benefits tax. And an example a fringe benefits tax is about $690. So that’s an expensive party indeed.
The third category is no tax deduction, no GST claim & no FBT. These parties cost under $300 per head, which is probably more typical and may be attended by anyone. So employees, their partners can attend and so can your business contacts. So your suppliers and clients.
They can be on premises or off premises. And that gives you more flexibility with the venue. You can provide a substantial meal and alcohol which is what most employers want to do. And you can have entertainment if you wish.
Now the conclusion is most work places will have a Christmas party off premises or a party on premises with alcohol and a substantial meal costing under about $300. So you cannot claim a tax deduction or the GST for this. Fringe Benefits Tax does not apply and that’s a good thing so you don’t need to pay the fringe benefits tax on this parties. And the business can pay for the party, but not claim deduction or the GST.
Just have to think that the real cost of the party to a business is about 140%. That’s a good way to look at it. If you are looking at a party that’s costing say $50 a head, just remember that if the business pays for that, that will cost the business a comparable amount of $70 because not being able to claim that tax deduction and not being able to claim the GST really makes it cost a $50 per head, function cost about $70. that will help you decide on venues and packages.
So it’s really a business decision to make the options. So if you are a business owner and you wish to pay for your Christmas party for your staff, just remember that the party costs about 40% more because you don not claim the tax deduction of the GST. This does depend on your tax rate. Keep this in mind when choosing your venue and drinks arrangements.
Many employers run a social club and this is another option, option 2. and collect a small amount every week from the pay of each employee, for example $2 per week. This gives a social club a $104 per employee towards a Christmas party.
Some employees have suggested to me that they like to increase the wage for each employee to cover that $2. But I suggest that’s not a good option. You need to actually increase the wage but at least $3. Pay the $1 pay as you go on it to keep the $2 for the Christmas party so from a tax perspective it’s really not better than 1. And it’s just a lot more administration so I would say 3 is not suggested, option 1 or 2 is suggested.
Just my disclaimer. Just remember the information presented here is general in nature, I have made various assumptions which might not reflect your particular circumstance. You should always seek professional advice to be sure that the information is correct for you.
At Chan & Naylor, we have offices around Australia. If you want additional information on these or anything at all to do with your business please contact us at chan-naylor.com.au or you can also go to our website and sign up for a free newsletter service it has a lot of great information and it’s produced once a month. It has lots of information just like this video so go ahead and sign up. And thank you for listening.