By Kim Reynolds and Harrison Dunn
With Christmas only two months away, many employers will be considering booking Christmas parties and the many options available. One thing to consider is the Fringe Benefits Tax (FBT) impacts of events and what the ATO considers entertainment. This has a large impact on whether or not you are liable to pay FBT and the deductibility of expenditure.
What is entertainment?
When it comes to FBT and entertainment, the rules aren’t black and white. A number of things must be taken into consideration when providing food and drink to employees and associates, including:
- Why the expenditure was incurred;
- What was provided;
- When it was provided; and
- Where it was provided.
In the case of a Christmas party, it is normally pretty clear. It is provided to celebrate the end of the calendar year and Christmas, commonly lavish food and alcohol are provided to staff and associates, it’s provided after hours and frequently off-site. These factors indicate this expenditure is entertainment.
Another common example for businesses is meetings where coffee and/or food is provided. In this instance, the food and drink are provided incidentally for the main purpose, that being the meeting. The food and drink are not extravagant and merely sustenance, it’s provided during work hours and on the business premises. Accordingly, this would not be considered entertainment.
There are many different types of events between these two, and we’ve picked some pretty clear-cut examples.
So, is it deductible?
A simple question with a not-so-simple answer. In common accountant style, it depends. A safe place to start is that if FBT is payable on the expenditure, then it’s likely that a deduction is available. The next thing to consider is where the food and drink are consumed. If it’s consumed on the business premises generally the expenditure is not subject FBT, and therefore no deduction is available. When the expenditure is incurred offsite it is subject to FBT, and thus a deduction is available.
It will also depend however on who attends the function and enjoys the entertainment. Employees and their associates will be subject to FBT and thus the expenditure is deductible. Clients are excluded, however, with no deduction available for their portion of the expenditure.
I have to pay… more tax?
The FBT calculation can be pretty frightening. If $5,000 is spent on entertainment for employees and it is subject to FBT, the tax liability for this event is $4,888! Surely this can’t be right, that’s so much tax!
Never fear, there are some simple methods available to reduce or eliminate your FBT liability:
- Minor and Infrequent Benefits – The most common exemption used in practice, the minor and infrequent exemption allows the expenditure of less than $300 (including GST) and occurs irregularly and infrequently to be exempt from FBT. In our example above, if 17 employees attended the event this would bring the per-employee cost below $300, allowing the entire cost to be exempt;
- 50/50 Method – If you provide entertainment more regularly than once or twice a year and frequently to persons other than employees, this concession can help reduce your FBT liability. This allows you to exclude 50% of the total expenditure on entertainment.
- 12-Week Register – This method has more stringent recordkeeping requirements but may provide a better result. As the name would suggest, you must keep a register for 12 weeks of all entertainment expenditure. For each transaction an answer to the Who, What, When, Where and Why questions must be obtained. From this, an employee use percentage is generated. Only this percentage of entertainment expenditure is then subject to FBT for 4 years after completing the register, assuming the total entertainment expenditure doesn’t change by more than 20%.
There are many others, but the above three are the most common concession for entertainment.
FBT is a complex and sometimes painful area of tax and there is much that we haven’t touched on that should be considered. If FBT is overlooked, it is a nasty tax that can present a significant liability for your organisation. It is imperative to consider your exposure and ensure you have the right outcome for your circumstances and needs when planning your next event.
An Important Message
While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.