Christmas parties for small businesses can have tax implications, and knowing what is deductible can help manage costs while staying compliant with tax laws. Here’s a guide to understanding Christmas party-related tax deductions and Fringe Benefits Tax (FBT) considerations.

  1. Understanding Fringe Benefits Tax (FBT)

FBT is a tax that employers pay on certain benefits they provide to their employees (or their associates) in addition to their salary or wages. Christmas parties may be considered a fringe benefit, depending on the cost, location, and attendee list.

Christmas parties typically fall under the entertainment category:

  • Entertainment benefits: Includes items such as food, drinks, and venue costs, which may be subject to FBT, depending on their nature and expense level.
  1. FBT Exemptions and Reductions

Minor Benefits Exemption

  • If the cost per person (including GST) is under $300, the expense may be exempt from FBT.
  • The exemption applies on a per-benefit basis, so multiple minor benefits (like a party and a gift) under $300 each may be exempt.

Venue Considerations

  • On-site parties (at the workplace) are often less costly in terms of FBT than off-site venues.
  • If held on business premises during work hours, food and drink provided may be exempt from FBT for employees.
  1. FBT for Clients and Contractors

Costs related to entertaining clients and contractors are not subject to FBT. However, these costs are not tax-deductible either. Therefore, inviting clients to a Christmas party is usually a non-deductible, FBT-free expense.

  1. Tax Deductibility of Christmas Party Expenses

Non-Deductible Items

  • Generally, expenses related to entertainment, including Christmas parties, are not tax-deductible where the expense is not subject to FBT.
  • For off-site Christmas parties, food, drink, and entertainment expenses for employees are not deductible where the expenses are not subject to FBT.
  • For associates (such as spouses) of employees, these costs are also not deductible where not subject to FBT and are subject to FBT if they exceed $300 per person.

Deductible Items

  • Gifts (non-entertainment items) provided to employees at the party can be deductible, provided they are under the $300 threshold per person and exempt from FBT.
  1. Gifts at Christmas Parties
  • Each gift is under $300 per person to qualify for the minor benefits exemption from FBT.

Entertainment-type gifts (like concert tickets) will likely attract FBT and may not be tax-deductible.

  1. Record Keeping

Keep clear records of all expenses, including the cost per person, venue details, and receipts for any gifts. Proper documentation can support your tax and FBT claims in the event of an audit.

Tip for Small Businesses

Planning your Christmas party doesn’t have to be a taxing experience! Let us help you navigate the rules and maximize your deductions while ensuring compliance with tax laws. Contact us today for tailored advice on Fringe Benefits Tax, deductions, and record-keeping strategies, so you can focus on enjoying the holiday season with your team. Reach out now to make your festive season stress-free and tax-smart!