As an employer, you may like to reward and thank your employees for their hard work with a social function, gifts, a Christmas bonus, or all of the above. While certainly a worthwhile action, one thing to be aware of is that there are various taxation considerations.
One of these is Fringe Benefits Tax (FBT). FBT is calculated at a flat rate of 47% of the taxable value of a fringe benefit. A fringe benefit is a payment to an employee that isn’t in the form of salary or wages, for example, providing an employee with a work car that they can use for private purposes. FBT prevents employees, particularly high-earning employees, from having their employers provide them with benefits that are not taxed or that are taxed lower than their marginal tax rate.
There are cases where FBT applies to end of year function and gifts and bonuses provided to employees. At the end of this article, you will find a handy table with a bunch of different examples of function and gifts, and whether they are income tax deductible, whether they are FBT exempt and which exemption applies (if any), and if the GST credits are claimable. Of course, you can always contact us directly if you need help with a specific transaction!
We’ll first take a look at end of year functions.
End of Year Functions:
To determine if FBT applies to your end of year function, you will first have to figure out if it is classed as entertainment. If it isn’t entertainment, FBT won’t apply, however, if it is, there is a chance that FBT does apply.
Generally, if the purpose of the function is social it would be considered entertainment. There are other aspects to consider though, firstly, what food and drink is being provided? Light refreshments that assist employees in getting their job done would typically not be entertainment, but providing a full meal would. Also, if alcohol is provided, it is rare that it would not be considered entertainment. The when and where is also important. If it was on business premises, during work time, it is less likely to be considered entertainment, however, if it is off premises and not during work time, it is more likely to be entertainment.
Considering the general nature of end of year functions, based on the above, normally an end of year function would be considered entertainment, and therefore you will have to look if FBT applies and if the function is income tax deductible. Entertainment is only deductible to the extent it is subject to FBT. If entertainment is not subject to FBT, it is not income tax deductible.
When determining if FBT applies to your end of year function, there are two exemptions to look at: the property exemption and the minor benefits exemption.
The Property Exemption
When the entertainment is on business premises, by current employees on a working day, the property exemption will apply. However, if the food and drink was also provided to your employee’s associates (e.g. a spouse), you may have to apportion the expenditure on a per head basis. The cost per employee will be exempt from FBT, but you will need to consider the minor benefits exemption for the associates.
The Minor Benefits Exemption
There are two criteria for determining if the minor benefits exemption applies. The first is if the notional tax value is less than $300, and the second, if it is unreasonable to treat it as a fringe benefit. The notional tax value is the amount that would be taxable if the benefit was a fringe benefit.
There are five points to examine when considering if it is unreasonable to treat the benefit as a fringe benefit.
How frequently the benefit is being provided (more frequent is less likely to be exempt)
The total value of the minor benefit and identical or similar benefits (if the benefit is provided more frequently, what is the total value of all those benefits combined)
The total of other associated benefits, that is, those that are provided in connection with the minor benefit (for example, if you provide a taxi for your employee to a restaurant for a meal, you would consider the cost of the taxi plus the cost of the meal)
The practical difficulty in determining the value of the minor benefit and any associated benefits
The circumstances in which the benefit and any associated benefits were provided
In general, looking at the criteria, it would be unreasonable to treat an end of year function as a fringe benefit, however, it would depend on the cost of the benefit too. And remember, where it is classed as entertainment, no deduction for income tax will be available.
Gifts:
FBT may also apply to gifts you give to your employees as a reward for their hard work. In general, FBT can be avoided if the gift’s value is under $300, where the minor benefits exemption (above) would apply. Unlike with entertainment, although the gift would be FBT exempt, it is still a tax deductible expense for the employer.
If you give your employees a gift that is over $300 it is still tax deductible but FBT will apply. The employee will have to declare the fringe benefit on their tax return, and as an employer, you will also have to complete an FBT return.
Alternatively, you could decide to not claim it as a tax deduction, and FBT will apply. For example, if you gave your employee a gift that costed $299, you can claim it as a minor fringe benefit, but if it was $302, it's either non-deductible or you have to pay FBT.
Bonuses:
You may also like to reward your employees with a bonus. Paying a bonus would be a way to get out of FBT obligations as it would be considered wages. Keep in mind however that you will have to withhold tax from the bonus and it will have to be reported to the ATO via STP.
Examples:
Situation | Deductible? | FBT? | GST Claimable? |
Employer provides their employees with a gift costing under $300 for their efforts | Yes | Exempt (minor) | Yes (although be mindful that GST cannot be claimed on gift vouchers) |
Employer provides employees with a gift costing over $300 for their efforts | Yes | Taxable Fringe Benefit | Yes |
Party held on business premises, on a working day, for employees | No | Exempt (property) | No |
Party held on business premises, on a working day, for employees and their associates at under $300 per head | No | Cost for employees: exempt (property & minor) Cost for associates: exempt (minor) | No |
Party held on business premises, on a working day, for employees and their spouses at over $300 per head | Cost for employees: yes Cost for associates: yes | Cost for employees: FBT applies Cost for associates: FBT applies | Yes |
Party held off business premises with a cost of less than $300 each | No | Exempt (minor) | No |
Employer provides employees with a $1,000 bonus for their efforts | Yes | Exempt - not a fringe benefit (classified as a wage) | No GST to claim |
