Tax on Christmas Party / Should you pay tax if you get a cash gift?

Christmas is a busy time for small businesses – amongst other things, many may be thinking about giving gifts to employees to boost morale for a successful start to the New Year. Perhaps a loud and thoughtful “thank you” token to those VIP customers. What about a Christmas function?

It’s all very fun planning and drafting the wish list and throwing in all kinds of creative ideas for business owners, but it’s far less fun dealing with the tax tags after the holiday! Especially when our small business owners realize there are so many tax tricks and traps to avoid, preferably ahead of time!

Let’s take a close look and do it tax-smart this year.

What are the common forms of Christmas gifts small businesses give to employees and customers?

Small businesses would typically give out cash or non-cash gifts to employees and customers. Gifts in kind, such as vouchers and merchandise, are the most popular among small business owners seeking tax deductions for the gift given.

Other gift ideas can include anything from a hamper to a bottle of wine to a Gold Class movie ticket to corporate box functions. However, there are tax implications depending on what the gift is : Let’s categorize them into the following main types: 

1. Cash

2. Non-entertainment gifts

3. Entertainment Gifts

4. Christmas Party

What are the taxes and tax-like penalties a small business can be stung by on the above “goodwill”?

As a small business, Christmas can be a time of great generosity and goodwill. But it is also important to be aware of the possible taxes and tax-alikes that may be imposed on any gifts or rewards that you might give to employees or other stakeholders.

• PAYG Withholding Tax

• Employer Contribution to Superannuation

• Work Cover

• Payroll tax, potentially

• Fringe Benefits Tax (FBT)

• Income Tax

•   GST

Now let’s check them against each other one by one.

Cash gifts

This can be viewed as a Christmas bonus and is normally only for employees.

The employer will have to treat it as salary equivalent by including it in the payroll, withholding the appropriate PAYG withholding tax, paying the super contribution, and including it in wage declarations pertaining to payroll tax and workers’ compensation insurance.

The Fringe Benefits Tax (FBT) and GST are not applicable, and the employer can claim a tax deduction on the cash value paid.

The employee would need to declare the cash gift in their tax return and be taxed the same way as their salary.

Tips: Get a survey out on employees’ preferences over this before handing out cash that they’re going to be taxed for later on.

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Non-entertainment Gifts

Things in this category include a Christmas hamper, a bottle of wine that’s not consumed on the business premises, gift vouchers such as a Coles Myer card, a bottle of perfume, flowers, T-shirts, etc.

It can be for employees as well as customers.

If it’s for employees, the business would have to pay FBT, which is 47% of the “gross up” value of the gift, unless it costs less than $300 per employee, where FBT is exempt under the ATO’s Minor Benefits Exemption rule. On the other hand, only FBT paying businesses on this category of gifts can claim income tax deductions and GST credits.

When it’s given to customers, FBT doesn’t apply. The business can claim the cost as a tax deduction and get the GST credit back.

Employees and customers don’t need to pay taxes on the gifts they receive.

Tips: cap it at $300 GST inclusive per employee headcount to be exempt for FBT!

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Entertainment Gifts 

Any recreational gifts would fall under this category, such as tickets to the theater, a movie, a sporting event, or a holiday air ticket or accommodation.

If the recipient is an employee and it costs less than $300 to the employer, FBT doesn’t apply under Minor Benefits Exemption rule while the employer can’t claim a tax deduction and GST credit either. In comparison, when the gift value is over $300, the employer will be subject to FBT while being eligible to claim the cost of gifts as a tax deduction as well as being entitled to the GST credit in the cost.

The same category of gifts to customers doesn’t expose the business to FBT, nor does it entitle the business to a tax deduction or GST credit.

Tips: Check if your staff loves gift ideas in the non-entertainment category first; there are plenty of choices there!
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Christmas Party

Thinking of inviting your employees, their spouses, and your VIP customers to a nice venue? Throwing tasteful food and wine with a hired comedian MC or perhaps a trendy band?

The food and drink for your employees and their spouses are subject to FBT unless it’s less than $300 per head. The employer can only claim the food and drink as a tax deduction and be entitled to the GST credit if they’re not exempt from FBT, namely, if the food and drink costs over $300 per staff member or spouse. Further, depending on how the venue hire, host services, and entertainment are packaged, these may be potentially non-tax deductible.

Unfortunately, the cost of the customer/guest portion is not tax deductible, nor is the GST claimable.

Tips: Before you pay the deposit, consult with your accountant about how to package up the whole party cost to maximize your tax deductions!

 

Frequently Asked Questions About Tax On Employee Gifts

Is there GST on staff gifts?

“Non-entertainment” gifts that cost less than $300 per employee (including GST) are exempt from FBT, and a tax deduction and any GST credits can be claimed.

When “non-entertainment” gifts are worth more than $300, FBT is due. You can still get a tax deduction for the full amount and the GST credits, though.

Is a Christmas party an entertainment expense?

Yes, Christmas parties could be considered an entertainment expense. This would typically include any costs associated with hosting the party, such as food and drinks, decorations, and any entertainment or activities provided.

Remember that the specifics of what qualifies as an entertainment expense may vary depending on the party’s context and specific details.

Recommendation

Tax rules on this topic are complex. Before donning your Santa hats, inform your accountants of your business celebration plans and work with them to make tax-smart changes. 

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Cindy Su | Chan & Naylor