Christmas function invitations are going out, and the ATO has a simple message for employers: how you run the event decides whether fringe benefits tax (FBT) applies. A few minutes of planning now can avoid a surprise later.

The party itself

The ATO says that if your party is held on a working day, on your business premises, and only for your current employees, you do not pay FBT on the food and drink.

Move it off site, or invite partners, and the answer changes. The ATO says benefits to employees and their associates at an off-site party are taxable unless the minor benefit exemption applies. That exemption needs the cost for each person to be less than $300, and it must be unreasonable to treat the benefit as a fringe benefit.

Gifts are assessed separately

A gift to an employee can also be an exempt minor benefit if it is under $300 per person. The ATO says gifts such as a hamper or bottle of wine given at the function should be considered separately from the party when you test the $300 limit. A $200 per head dinner plus a $150 hamper is not automatically safe.

Clients are different

Entertaining clients does not attract FBT, but the ATO says those costs are not income tax deductible either.

The deduction catch

The ATO's position is that the cost of a Christmas party is deductible only to the extent it is subject to FBT. So costs that are exempt from FBT generally cannot be claimed as an income tax deduction. In the ATO's example of an exempt party, the employer also cannot claim GST credits for the food, drink or taxi travel.

That surprises many owners: exempt from FBT usually means no deduction and no GST credit as well. It is a fair trade, but you should know it before you book.

What to do

  • Decide the format first. On site on a working day for staff only is the simplest.
  • Work out the cost per head for everyone who attends, including partners, before you commit to a venue.
  • Test gifts on their own against the $300 limit.
  • Keep records: invoices, guest lists and a note of how you reached your view.
  • Talk to your accountant if a per head cost is near $300, or if you are unsure whether the benefit is exempt.

The FBT year runs to 31 March, so anything you provide this December will be dealt with in that return, if it is needed at all.

This article is general information only and does not take your circumstances into account. Check the ATO website or speak to a registered tax professional about your situation.