Just as Santa Claus meticulously prepares his list of who’s been naughty or nice, businesses should also be careful of the tax implications of their festive cheer.
Hosting a Christmas party for employees or clients, while a joyful occasion, can trigger fringe benefits tax (FBT) obligations. However, with careful planning akin to Santa’s global route optimisation, businesses may entirely avoid this tax burden.
Fringe benefits tax (FBT) is a tax paid by employers on certain benefits provided to their employees, or to their employees’ family or other associates. FBT is separate to income tax. It’s calculated on the taxable value of the fringe benefit. Employers must self-assess their FBT liability for the FBT year (1 April to 31 March) and, if they have an FBT liability, lodge an FBT return.
FBT exemption
The FBT legislation offers a “minor benefit exemption” – a bit like a stocking stuffer from the taxman. If the benefit provided to each employee is under $300 and isn’t a regular occurrence, it’s exempt from FBT.
Thankfully, Christmas parties fall under this category. They’re considered irregular events, so as long as the cost per employee stays below $300, businesses can use this exemption to avoid any FBT headaches. Just remember, the more frequently benefits are offered, the less likely they’ll qualify for this exemption. Luckily, or unluckily, Christmas only rolls around once a year!
Business premises
If Christmas parties are held on the business premises on a normal workday, expenses such as food and drinks are exempt from FBT, regardless of the amount. However, there is no income tax deduction available for such expenses nor are GST input credits allowable.
If family members of employees attend and the total cost (per person) is under $300, again FBT will not apply and no tax deduction and GST input tax credits will be allowable. However, if the total cost per person is above $300, FBT will apply, but an income tax deduction and GST input tax credits will be allowable.
Think of it like this: at your Christmas party, the food and drinks are like Santa’s bag of gifts – there is no dollar limit for employees enjoying them on business premises. But if you add a band or other entertainment, the costs can add up quickly and if the total cost per employee exceeds $300, FBT kicks in. Keep it under $300 per person, and you’re in the clear.
Off business premises
If the Christmas party is held at an external venue such as a hotel or restaurant, the party will again be exempt from FBT as long as the total cost per employee (and their families if attending) is less than $300. There will also be no income tax deduction or GST input tax credits allowable.
If the cost of hosting a Christmas party is greater than $300 per employee, FBT will apply and income tax deduction and GST input tax credits will be allowable to claim.
Notably, the employer doesn’t pay FBT for the taxi travel, because there is a specific FBT exemption for taxi travel directly to or from the workplace.
Clients
There are no FBT implications on the portion of expenses that relate to clients, regardless of the location of the Christmas party. As such, no income tax deduction and no GST input tax credits can be claimed for the client’s portion of the Christmas party expenses.
Christmas gifts
Many employers like to give gifts to their employees during the festive season. FBT isn’t payable if the value of the gift is less than $300 per person and it would be considered unreasonable to treat it as a fringe benefit.
However, FBT may apply if the gift is one of entertainment. Entertainment gifts include items such as tickets to live concert, movies, holiday tickets and the like. Non-entertainment gifts include gift hampers, gift vouchers, flowers, bottle of wine, etc.
So go ahead and enjoy your Christmas celebrations, but make sure the taxman doesn’t turn up to spoil the fun!
This article was first published in the Summer 2024-25 issue of Financial Times.