Heading into Christmas – celebrations and gifts.

mini christmas tree sitting on top of a calculator

WiseClick had a lovely Melbourne Cup Day this year, it is becoming a regular event for us. In the morning we had a staff meeting. (subject = FBT, of all things!) , then lunch together while watching  the cup and then finally back to work for the rest of the  long, frocked up  and champagne tired, work day.

I feel that this sort of staff bonding is very important to every business. This event and ‘trying’ to get the related expenses through my set of books as tax deductible has made me  think about Christmas time again. I am thinking about how complex the rulings are around Christmas Parties. Almost every business will want to show their staff some appreciation at the end of the year after twelve months of hard work and dedication from their staff.

There are a few bookkeeping minefields to navigate at this time of year.

  • Getting the specifics of the Christmas party correct. Should you think about the claim ability of each location or just go with the most popular event and then deal with the tax bill aftermath?
  • Staff and client gifts. You may like to show your appreciation with a gift.
  • Paying a bonus and how to transact those correctly.

Now before I get too far into this, I am a BAS Agent and not a Tax Agent so I have included a link here to backup my comments from Westcourt Chartered Accountants who was nice enough to clarify things for me. Please only use my comments below as a way to start to understand the way Fringe Benefits work. ALWAYS check with your accountant to confirm your individual situation. (disclaimer done!)

  1. Christmas Parties

Well I have learnt some things through trying to put these details in writing for you. I hope that my writing below makes sense to you. I have tried to make it simple, like the 1000 writers before me. The problem is that FBT is NOT simple and really NOT nice either!

If you do NOT lodge an FBT return each year then Christmas parties are classed as a non-deductible expense with no GST claimable. This means that you can pay for them out of the business but they will not reduce your tax bill at the end of the year. The reason for this is that they are classed as entertainment / benefits to your staff.

For those small businesses that don’t want to prompt an FBT return in their business, you can provide the event using the Minor Benefits exemption of $300 per person. When planning your event aim for the cost per employee to be under this threshold (sorry still non deductible though, BUT you DID avoid the FBT costs J).

As an overview, a Christmas party is classed as an entertainment benefit.  If no FBT is paid on the event then it is a non deductible expense and thus no GST can be claimed. If your business lodges an annual FBT return then sometimes (see link) you can pay the FBT on the event, claim the GST and claim the income tax deduction. Please note! FBT is a nasty tax with an effective tax rate of roughly 96% so many businesses try to not get into this area of taxes. Clients or family attending as well? Please read the link here.

  1. Gifts / Minor Benefits

Staff – Gifts can also come under the Minor benefits exemption as per above. Minor benefits of less than $300 paid infrequently are free from FBT (Remember from above, no FBT paid = no income tax and no GST claimable)

Clients, Suppliers and Contractors – Gifts such as flowers, bottle of wine etc can come under the Minor benefits exemption as per above. Even without an FBT return these types of gifts of up to $300 including GST can be claimed as a tax deduction and also the GST claimed.

Gifts such of an entertainment nature such as theatre tickets or sporting events are subject to FBT even if they are under $300 and for a client, thus also non deductible for small businesses not lodging an annual FBT return.

  1. Christmas bonuses –

The main thing that employers get wrong here is the superannuation relating to bonuses that are paid. A Christmas bonus is classed as ordinary time earnings and thus attracts the normal superannuation amount on top of the bonus paid. When working out bonuses to pay, please allow the current 9.5% cost on top for superannuation.

One other really big mistake that I see is an employer telling the staff member that they will be paid $XXX ‘in the hand’. I know that I have a bookkeeping background but to me this does not make business sense as when making this comment the owner has no real way to know the actual COST to the business will be. Every staff member has different tax rates, some up to 46% and this is a nightmare to work backwards for a bookkeeper. So quote a ‘Gross’ bonus figure to staff and let your software work out the tax when it is paid to them.

What about working out the PAYG tax on a bonus payment? The ATO website link here says that you should:

  1. Divide the Christmas bonus by the amount of pay periods it applies to, the whole year (div 52 for weekly, div 26 for fortnightly pays). Drop the cents
  2. Add the amount from above to a normal pay run amount. Extra tax per period = tax on test pay run less normal pay period tax amount.
  3. The tax to deduct from the Christmas bonus will be. Answer at b) x number pay periods in a year.

Worked Example – Christmas bonus of $2000. Staff is paid weekly – Gross = $1500, Tax = $400.

  1. a) $2000 div 52 = $38
  2. b) New Gross for sample pay run. $1500 + $38 = Gross $1500. Software or tax tables come up with new tax of $412. Tax per pay period on bonus equals $412 – $400 = $12
  3. c) Tax on bonus is $12 x 52 = $624.

So there you have it, I hope this has helped you to be all ready to celebrate and thank your clients and staff plus know how to comply with the ATO and claim the maximum for your business.

Merry Christmas celebrations to you all.

Warm regards, Cheryl