It is only October, but Christmas party venues book out early and budgets get set now. Before you commit, it is worth knowing how the ATO treats staff parties and gifts, because the answer changes depending on the details.

The staff party

The ATO says that if you hold a Christmas party on a working day, on your business premises, and only for your current employees, you do not pay fringe benefits tax (FBT) for the food and drink.

If the party is off site, or partners are invited, the minor benefits exemption may still help. That exemption generally applies where the benefit costs less than $300 per person and it would be unreasonable to treat it as a fringe benefit. The ATO looks at the party and any gifts separately when applying that $300 threshold.

Gifts

A Christmas gift to an employee can also fall under the minor benefits exemption, again where it is under $300 per person and it would be unreasonable to treat it as a fringe benefit. Benefits you provide to clients are not subject to FBT.

The catch: deductions

This is the part that surprises people. The ATO says the cost of a Christmas party is only income tax deductible to the extent that it is subject to FBT. So costs that are exempt from FBT, such as exempt minor benefits, cannot be claimed as an income tax deduction. As a general rule, you also cannot claim an income tax deduction for entertainment you provide to clients.

In other words, a party that is FBT free is usually also a party you cannot claim. That is not necessarily a bad trade, but you should know which side of it you are on before you book.

What to do

  • Decide the format early. On premises on a working day, for staff only, is the simplest case under the ATO's rules.
  • Work out the per person cost. If you are going off site or inviting partners, check the total against the $300 threshold.
  • Keep the gifts separate. Record party costs and gift costs separately, because the ATO applies the threshold to each.
  • Keep records. Hold invoices and a list of who attended, with a note of whether they were employees, partners or clients.
  • Do not claim client entertainment. Treat it as non deductible unless your accountant tells you otherwise.
  • Check your own situation. Tax exempt bodies and other entities follow different rules, so ask your accountant if you are unsure.

A short chat with your accountant now costs far less than untangling an FBT question after the party.

This article is general information only and does not take your circumstances into account. Speak to your accountant before making decisions.