‘Tis the season to be jolly. Staff celebrations ring out around the country. It’s a time for good will and cheer – and also extra expenses for your small business. The good news is that the Australian Taxation Office (ATO) does allow some of these expenses to be claimed as genuine work tax deductions, but there are certain rules that need to be followed for it to be a legitimate claimable expense. Do you know what Christmas expenses are tax deductible?
Gifts That Are Tax-Deductible
Gifts that are not entertainment and have been gifted with the intention of generating future income are tax deductible in the ATO’s eyes and can be claimed when you lodge your tax return.
Let’s say you’re a builder and you want to gift a hamper to your highest value clients that completed a project with you in 2023, to encourage referrals for 2024. This gift is tax-deductible as it is not ‘personal’ and it has the intention to generate future income.
Gifts That Are Not Tax-Deductible
Any gifts that are considered entertainment or are personal, with no intention of generating future income, are not tax-deductible.
For example, if you have a client that is a good friend of yours and you decided to send them a bottle of wine, that is not tax-deductible as it is considered a personal gift.
Value of the Gift
Gifts valued at $300 or less are considered “minor benefits” by the ATO. For non-entertainment gifts under $300, no FBT is payable. Entertainment gifts under $300 still require FBT to be paid.
Gifts over $300 in value are not exempt from Fringe Benefits Tax (FBT). The employer must pay FBT on the value that exceeds $300.
Ideas for client gifts
It’s a good idea to think of a suitable business gift that might resonate with your customers type of business or is useful in some way. Here are some ideas:
- Gift basket of locally sourced products like coffee, chocolate, honey, etc. This promotes other small businesses.
- Gift card/voucher to the business for a future purchase or service. Encourages repeat business.
- Coffee/lunch voucher to local cafe. Supports nearby establishments.
- Donation to a charity in the customer’s name. Builds goodwill while helping the community.
- Subscription to a local magazine or newspaper. Keeps business top of mind.
- Book from a local independent bookstore. Sparks new conversations and interests.
- Gift basket of business branded merchandise like caps, water bottles, notebooks. Advertises brand.
- Food hamper with products from regional suppliers. Highlights local/Australian made items.
Can you give a gift to your employees?
While bosses can definitely give gifts to their employees, there are some tax things to keep in mind.
First up, gifts fall into one of two categories – entertainment gifts meant for fun, or non-entertainment gifts with a practical use. Gifts like tickets are entertainment and can’t be claimed, but electronics or gift baskets are tax deductible.
Next is the value of the gift. Anything under $300 is considered a “minor benefit” by the tax man. For non-fun gifts under $300, you’re all good – no taxes! Entertainment gifts under $300 still need tax paperwork though.
Gifts over $300 don’t qualify for the minor benefit exception. Bosses need to pay that fringe benefits tax on anything over the $300 limit.
Company Christmas parties are a blast for team bonding, but the costs aren’t tax deductible for the employer. Anything over $300 per person on food, drinks or fun activities also means paying more taxes.
In the end, just be mindful of gift types and values compared to $300. The tax department wants their cut of higher value gifts or party costs per employee. But small tokens of appreciation below $300 should fly under the radar tax-wise.
What is the minor benefits exemption?
The minor benefits exemption allows employers to provide small benefits to employees without incurring fringe benefits tax (FBT). This exemption aims to reduce the tax compliance burden for minor benefits.
For a gift to qualify as a “minor benefit”, it just needs to meet a few easy criteria:
- It has to go to an employee or someone close to them like family.
- It should only be given occasionally, like on birthdays or holidays, not all the time.
- It can’t be a reward for work things like hitting sales targets.
- Each gift must be worth less than $300. You can’t give multiple small gifts that add up to more.
As long as bosses stick to those simple guidelines, they don’t have to tell the tax man about the gifts or pay any FBT. It leaves them free to throw your hard workers a little thank you without a big hassle.
The tax department knows not every little present need tax forms filled out. This exemption is their way of keeping small kindnesses between employers and staff tax-free. Just follow the rules and everyone’s happy!
What if your gift is worth more than $300?
While non-entertainment gifts under $300 do not incur fringe benefits tax (FBT), higher value gifts are still permissible but less tax effective for employers.
If a non-entertainment gift is $300 or more, including GST, the employer can still claim a tax deduction for the expense and input tax credits for GST paid.
However, FBT will now apply to the gift. FBT is payable by the employer at a rate of 47% of the grossed-up taxable value of the benefit.
The current gross-up factor applied by the ATO is 2.0802. This means the employer includes an additional amount for FBT purposes, increasing the taxable value.
For example, a $500 gift would have a grossed-up taxable value of $500 + ($500 x 2.0802) = $1,040.10.
FBT of 47% of this amount, or $488.85, would be payable by the employer.
While higher value non-entertainment gifts are permissible, employers need to consider the reduced tax effectiveness once FBT applies above the $300 threshold. The administrative burden and higher tax cost may outweigh the benefit.
Pro Tax Tip: If an employee receives fringe benefits with a total taxable value exceeding $2,000 within an FBT year, the employer is obligated to report these benefits on the employee’s income statement.
A good accountant knows all the latest tax laws inside and out. They’ll make sure you’re claiming every deduction possible to lower your tax bill. But more than that, they take the stress out of Christmas for you so you can enjoy this special time thanking your staff and customers for their loyalty throughout the year!