Its Christmas time and although we are busy buying gifts for family and friends and organising our Christmas Day activities, we are also organising gifts and parties for our staff and clients. You need to be aware of the implications to you, the business owner these parties and gifts have.
Apart from staff not being able to work the day after your staff party due to being too ill from alcohol another impact the staff party and the staff’s gifts has on you, the Small Business Owner, is Fringe Benefits Tax. Most of you will have heard of Fringe Benefits Tax, but are not really sure what it is or how it affects you. In this blog we are going to explore this.
Fringe Benefits Tax (FBT)
What is Fringe Benefits Tax?
First of all lets look at what is Fringe Benefits Tax (FBT). It is a tax paid on certain benefits, you the employer provide to your employees and their associates (typically family members). It is a separate tax from income tax and is based on the taxable value of the various fringe benefits provided.
What is a fringe benefit?
A fringe benefit is something that is provided to an employee (or their associate) because that person is an employee of your business. Benefits maybe provided by you, the business owner, an associate of yourself, or a third party under the arrangement with you. The employee doesn’t have to be a current employee; they can be a future or former employee as well.
Benefits include rights, privileges or services. Examples of a fringe benefit being provided by yourself are when:
- You allow an employee to use a work car for private purposes
- You give an employee a cheap loan, or
- You provide social functions or leisure activities for your employees.
Why are we taxed on fringe benefits?
FBT was introduced to create a fairer tax system. It was designed to overcome deficiencies in the income tax law which allowed fringe benefits to be, in effect, a form of tax-free income. FBT ensures that tax is paid on those fringe benefits provided in place of, or in addition to, salary or wages of employees.
I can remember when you could get a job in a big company and you would get paid a minimum wage, but you would get given a company car, memberships to gyms etc all as a way of increasing your wage. This made it possible for the ‘richer’ businesses to get the better staff and the staff to avoid paying large amounts of income tax.
Where the companies that couldn’t afford to give a car and memberships, they would have to pay higher wages to get good staff but then those staff would be penalised by having to pay more income tax, so they wouldn’t accept the jobs.
Who pays fringe benefits tax?
You, the employer is responsible for the payment of FBT, even if the benefit is provided by an associate or a third party under an arrangement with you. It doesn’t matter if you are a sole trader, partnership, trust, corporation, unincorporated association or government body, or even if you pay other taxes such as income tax, you will still be required to pay FBT if you are providing a benefit to your staff.
Fringe Benefits & Christmas Parties
There is no separate FBT category for Christmas parties; they fall under the category of providing entertainment. So lets look at what entertainment is.
What is entertainment?
The ATO’s definition of entertainment is:
- Providing entertainment by way of food, drink or recreation
- Providing accommodation or travel in connection with such entertainment, or
- Paying or reimbursing expenses incurred in obtaining something covered by the above points.
You may, from time to time provide your staff with food and drinks, gifts and possibly leisure activities. Some examples of where this may happen are:
- Christmas Parties
- Business lunches with clients
- Birthday parties
- Golf days
- Product release functions
- Gym memberships
- Celebrations for achieving sales targets
- Farewell functions
- Reward and recognition functions
- Memberships to sporting clubs
- Anniversary dinners
If you sometimes provide these events for your staff, you will need to work out if the events will be classified as entertainment and require you to pay FBT.
Some events that aren’t considered entertainment are:
- Morning or afternoon teas to employees on a working day, either on your premises or at a worksite.
- The provision of light meals (finger food etc), when providing a working lunch.
Is food or drink entertainment?
To work out whether the food or drink you are providing to a person is entertainment, you need to ask the following questions. None of the factors on their own will determine if the food and rink provided is entertainment, but the first two are more important factors.
- Why is the food or drink being provided?
Are you providing the food or drink to your staff so that they can complete the working day in comfort or to enjoy themselves?
If you are providing it so that they can complete their working day in comfort it is not considered entertainment
If you are providing it in a social situation where they are to enjoy themselves then it will more than likely be considered entertainment
- What type of food or drink is being provided?
The more elaborate the meal, the more likely it becomes that entertainment arises from eating the meal.
For example if you are providing finger food for your staff to snack on then it is less like to be classed as entertainment
If you are providing a three-course meal to your staff then it is more likely to be classed as entertainment
- When is the food or drink being provided?
If you provide food or drink during work time, overtime or while your staff member is travelling for work, it is less likely to be considered entertainment.
- Where is the food or drink being provided?
If the food or drink is being provided at your business premises or at the normal place that your staff member works, it is less likely to be considered as entertainment.
If you provided the food or drink at a function centre, hotel, restaurant or the likes, then it is more likely to be considered entertainment.
You will not need to pay FBT if you provide exempt benefits. There are three common benefits that are exempt, they are minor benefits, food or drink consumed on the premises and taxi travel. So lets look at each one.
Minor Benefits Exemption
A benefit maybe considered a minor benefit if its taxable value is less than $300 and it is not considered unreasonable to treat it as a minor benefit.
To determine if it is not unreasonable to treat it as a minor benefit you need to consider the following factors. None of the factors outlined below will determine if the benefit is an exempt minor benefit on its own. You need to look at all the factors.
- How frequently and regularly benefits that are identical or similar to the minor benefit are provided.
The more frequently and regularly identical or similar benefits are provided, the less likely it will be an exempt minor benefit.
- The total of the values of the minor benefit and identical or similar benefits to the minor benefit.
The greater the total of the value of the benefit and other identical or similar benefits, the less likely it is the benefit will be an exempt minor benefit
- The likely total of the value of other associated benefits, that is those provided in connection with the minor benefit
The greater the total of other associated benefits, the less likely it is that the minor benefit will be an exempt benefit
- The practical difficulty for you in determining the value of the minor benefit and any associated benefits
The more difficult it is for you to determine the value, the more likely it is that the benefit will be an exempt minor benefit and, the more difficult it is for you to keep the necessary records in relation to the benefit, the more likely it is that the benefit will be an exempt minor benefit.
- The circumstances in which the benefit and any associated benefits were provided.
If the benefit was provided as a result of an unexpected event, such as overtime, it is more likely to be an exempt minor benefit. If the benefit is mainly given to the staff as a reward for services (that is, it is remuneration), it is less likely to be an exempt minor benefit.
Examples of exempt minor benefits
- One of your staff has a baby, or gets married, so you send them flowers, chocolates or buy them a gift valued at $125. The value of what you spend is under $300 and looking at the 5 factors to determine unreasonableness, this would be an exempt minor benefit
- Every time your staff have a birthday you spend $250 dollars on them for gifts. The value of what you spend is under $300 and looking at the 5 factors to determine unreasonableness, this would be considered an exempt minor benefit for each staff member
Examples of minor benefits not exempt
- You decided that your staff need to get fit and healthy, so you purchase them all a membership to the local gym. The cost of each membership is $900, because of the value being over $300 this is not considered an exempt minor benefit.
- If you take your staff out for lunch each Friday, even though the meal may only cost $40 per person, because it is regular then it is not a minor benefit.
Food or drink consumed on the premises
If the food or drink you are providing is consumed on your business premises or the premises of where your staff work, on a working day and to currently employees ONLY, then they are exempt from FBT.
The food doesn’t need to be prepared on your premises and it doesn’t matter if it is considered entertainment, if it is consumed on your premises it is exempt from FBT.
BUT if you are providing food or drink on your premises to associates of your staff (family), or previous staff or future staff, this is not exempt from FBT.
If you pay for your staff members taxi travel it is only an exempt benefit if it begins or ends at your staff members place of work. So you can send them home from your premises or have them brought to your premises via a taxi and it will be exempt from FBT. But if you have them taken home from a work function at a function venue then this will attract FBT.
So in summary, so as not to pay FBT on your Christmas Party this year, you need to make sure that you do not pay more that $300 per person.
I would love to hear from you about where you are having your Christmas Party this year.