With another year-end fast approaching, many businesses will already be planning festive season celebrations for staff and clients, and might be even organising online gifts for employees. Therefore, employers should be aware of the tax consequences of hosting festive seasonal celebrations for their staff, whether virtual or in-person.
Festive Season Celebrations in 2021
Many festive season celebrations were a little different last year, with COVID-19 and the prudence of socially distancing, some businesses replaced the usual annual physical event with a virtual one. In addition, gifts are now more likely to be bought through online services. Although much of 2021 still felt a lot like 2020, the difference this year is that the vaccines will enable many Christmas parties to be in-person.
And that brings us to FBT. Employers must pay fringe benefits tax (FBT) – at a rate of 47% – on the grossed-up taxable value when certain non-cash benefits are provided to their employees or their associates (including past, future and current employees, and their spouses and children).
We are seeing organisations review how they would typically account for meal entertainment benefits, especially given the COVID-19 environment in which we are operating. There are two common methods when calculating meal entertainment benefits: the 50/50 method and the actual method. Some organisations who were using the 50/50 method have changed to valuing meal entertainment on an actual basis. Although more detailed records are required (i.e attendance of individuals at each event), it allows you to avail yourself of certain exemptions.
Certain non-cash benefits may not be subject to FBT. While the FBT law does not specifically deal with festive season celebrations, the following types of benefits are exempt from FBT, and are particularly relevant when determining an employer’s FBT liability when hosting a Christmas party for taxpaying organisations:
- Minor and infrequent benefits valued at less than $300 (GST inclusive). This is a catch-all exemption available for current employees and their associates for low-value benefits provided on an “infrequent” or “irregular” basis.
- Exempt property benefit (e.g. all party food and drink provided by the employer that is consumed by a current employee at a party, provided the party is held at the employer’s premises on a business day); and
- Exempt transport benefits (e.g. a current employee’s employer pays for a taxi ride home if the celebration is held at the employer’s premises).
Please note that the rules are different for tax exempt bodies and the above exemptions are likely to apply in only very limited circumstances.
Minor benefits add up
The $300 (GST inclusive) minor and infrequent benefit exemption applies separately on a per-benefit basis (eg, the minor benefit exemption can apply if a present worth $250 is provided to an employee and another present worth $290 is provided to the employee’s spouse). For many businesses, the annual seasonal celebration held outside of the employer’s premises, such as at a restaurant, would amount to less than $300 per person.
As you can see from the above, the amount of FBT payable can be influenced by:
- When the party will be held (i.e. for the minor and infrequent benefit exemption, the cost of the benefit provided must be less than $300 per head and not provided regularly or frequently);
- Where the party will be held (i.e. for the property fringe benefit exemption to apply, the food and drink must be provided and consumed by current employees on the employer’s premises on a business day);
- For whom the party will be held (i.e. the tax consequences are different depending on whether the benefits are provided to employees, their associates or clients).
With COVID-19 pushing a lot of activities online, it can become a bit more complex. However, the above rules still apply to both virtual and in-person events. Just ensure all receipts and records are retained, for whatever type of event is being held or for those online gifts, to reduce the FBT liability.
This brief overview gives a broad outline of the application of the FBT law to festive season celebrations time activities. A variety of benefits may be supplied to employees at Christmas time with each containing their own valuation, deduction and exemption rules.
Talk to your trusted Nexia advisor if you would like to discuss any of the tax-effective benefits that may be provided to employees at seasonal celebrations or in certain situations, at any time.