Christmas Party FBT: What You Can Actually Claim for Your Team

Every September the same question turns up: can we claim the Christmas party? It depends on four things, and most business owners only know about one. So here is the whole subject for your own team, from the office kettle to the party. Clients, referral partners and gifts are next week.

Start with the one rule everything else hangs off. Entertainment is not tax deductible and you cannot claim the GST on it. The main way out is to pay fringe benefits tax on it, which gives you the deduction and the GST credit back. FBT is 47 per cent on the grossed-up value, against a deduction worth perhaps 25 or 30 cents in the dollar, so for most small businesses the cheapest outcome is for the entertainment to be exempt: no FBT, no deduction, nothing to pay.

Prefer to listen? We covered this in Coffee, Clients and the Christmas Party: What You Can Actually Claim, episode 59 of the Aevum Accounting Podcast.

The four questions

The ATO decides whether food or drink is entertainment by asking why, what, when and where, and the first two matter most. Why was it provided? Refreshment to get people through the working day is generally not entertainment; a social occasion where the point is to enjoy yourselves is. What was provided? Tea, coffee, biscuits, sandwiches and juice are not entertainment, and the more elaborate the meal, the more it looks like it. A three course lunch is entertainment even if it is work related. When and where help at the margins: work time beats after hours, and your own premises beat a restaurant. The ruling lists hotels, restaurants, cafes and coffee shops among the places where food is more likely to be entertainment.

Alcohol is close to decisive. In the ATO's words, if alcohol is provided at the morning or afternoon tea or light lunch, you are providing entertainment to your employees and their associates. Add a bottle of wine to the sandwich tray and the whole spread becomes entertainment, not just the wine.

The office kitchen and the working lunch

Tea, coffee, milk and biscuits in the kitchen, for staff and anyone visiting, are not entertainment at all. Deduct them, claim the GST, no FBT. Sandwiches and juice brought in for a meeting or a training session on your premises get the same answer, and so does light food for someone working back late. It stays clean as long as the food stays light and there is no alcohol.

Friday drinks and the cafe downstairs

Put beers in the fridge on a Friday and the answer changes. Drinks in the office are entertainment, but there is an exemption for food and drink provided to a current employee on a working day and consumed on your own business premises. No FBT, and no deduction or GST credit either, which is still the cheaper outcome.

Take a staff member for coffee at the cafe downstairs and the answer is different. The exemption needs your business premises, and the cafe is not them. The only thing that can save it is the minor benefits exemption: a benefit worth less than $300 that it would be unreasonable to treat as a fringe benefit. A coffee is under $300; the second half is the problem. The ATO's own example is an employer who takes her staff to the pub every Friday at $45 a head. Low value, but regular, so it fails. A sales manager buying coffees three times a week is the same pattern. And feeding someone at home does not get the premises exemption at all, because the law says business premises do not include an employee's residence.

The Christmas party is four separate benefits

Most businesses treat the party as one thing. The ATO sees four. The food and drink for your employees is exempt if the party is on your premises on a working day: no FBT, no deduction. Their partners are not covered by that exemption, so their share is a fringe benefit unless it is a minor benefit, which at most parties it is, so there is no FBT and no deduction on it either. When a partner's share is taxable, because it is $300 or more or the minor benefit rules do not apply, you get the deduction and the GST credit back on that share. A band, DJ or magician is not food or drink handed over, so the premises exemption cannot reach it, for employees or partners; it can only be a minor benefit. Gifts handed out on the night are looked at separately from the party.

The $300 line is per benefit, and it is a cliff

The $300 threshold is tested on each benefit separately, not on the total per person, so a party costing $430 a head across food, band, tickets and a gift can carry no FBT at all if each of the four is under $300 on its own. That is possible, not automatic: staying under $300 on each item only passes the first test, and the second, whether it would be unreasonable to treat the benefit as a fringe benefit, adds all the associated benefits back up. Stack enough onto one night and you fail it.

If a single benefit reaches $300 you lose the exemption on that benefit, and it is the whole amount, not the excess. Go to $305 a head on the food and the full $305 is taxable. If you are getting close, stop ordering.

The choice that changes every answer above

All of this assumes you value meal entertainment on actual cost, which most small businesses do. There are two other methods. Under the 50/50 split method you pay FBT on half of everything you spend on meal entertainment for anyone, and both the premises exemption and the minor benefits exemption stop applying. Under the 12 week register method the premises exemption is lost but minor benefits can still count. The choice applies to the whole year, so ask which method your file uses before assuming the party is free. The two methods are explained here.

Records, or none of this counts

Everything above depends on being able to show what happened. The ATO wants the date, who received the entertainment and whether they were an employee, a partner or someone else, what it cost, what it was and where it was. A credit card statement with a total on it shows none of that. Photograph the receipt and write on it who was there, the same day, and keep it for five years. Our earlier guide to what goes through the business covers the rest.

If you would like a hand getting this right before the party season, book a consultation with our team. Our small business accountants in Perth can tell you which method your file uses and what this year's party will cost. If you are already a client, bring it up at your next catch-up.

The information in this article is general in nature and does not take into account your personal circumstances. It does not constitute specific tax or financial advice. Everyone's situation is different, so we recommend speaking with a qualified professional at Aevum Accounting before acting on anything you have read here.