The holiday season is here, and for many owners of small businesses, it is the best moment of the year to say thank you to the employees and clients at the end of the year. However, there are some taxation laws that apply to Christmas parties and gifts, and not knowing these can be inconvenient. This article explains what is allowed and not allowed, gives out tips for better-claiming businesses’ tax deductions, and includes examples and other illustrations to help how to make tax-smart decisions during the Christmas season.
Why do Christmas tax deductions matter for FBT?
There are many reasons why Christmas parties or the exchange of presents are essential, including celebrating the spirit of the holiday and building strong relationships with employees and even clients. Every dollar is very important for small-scale businesses, and knowing what kind of expenses can add to non-taxable expenses helps keep costs down and acceptable to ATO standards. There is no harm in making good plans for your celebrations if the aim is to limit any damages caused by taxation.
Fringe Benefits Tax (FBT) comes into play when an employer offers an employee a benefit beyond their standard salary or wage. In some situations, Christmas parties and gifts may qualify as such benefits. Factors like party venue, guest lists, and even gifts can make you liable for lodging and paying FBT.
Understanding ATO guidelines can help you enjoy the festivities while minimising tax liabilities.
What FBT you can claim for Christmas parties
1. Employee entertainment expenses
The cost of food, drinks, and entertainment for employees at a Christmas party is deductible if it’s subject to FBT.
- Example: A business hosts a party at a restaurant, spending $250 per employee. This falls under the minor benefits exemption, making it FBT-exempt but non-deductible. However, FBT applies if costs exceed $300 per employee, and the expense becomes deductible.
2. Venue hire
Hiring a venue for your party, such as a restaurant or function room, can be deductible if it incurs FBT.
3. Transportation for employees
Providing transport, such as a hired bus, to ensure employees get to and from the party safely is deductible if it incurs FBT.
What FBT you can’t claim for Christmas parties
1. Expenses for clients
Costs for entertaining clients, including food, drinks, and entertainment, are not tax-deductible.
2. Private celebrations
Parties held for personal reasons or with non-employees, such as family members, are not deductible.
3. Non-FBT entertainment
If your party is FBT-exempt (e.g., on-site with costs under $300 per employee), associated expenses cannot be claimed as deductions.
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Christmas gifts: What’s deductible?
Gifts you CAN claim
- Work-related Items: Gifts like diaries, stationery, or work equipment under $300 are FBT-exempt and deductible.
- Example: A $100 planner gifted to employees is deductible and FBT-exempt.
- Gift cards under $300: Prepaid gift cards qualify under the minor benefits exemption and are deductible.
- Food hampers or wine: Hampers or wine under $300 per employee are deductible.
Gifts you CAN’T claim
- High-value items: Gifts exceeding $300 per employee attract FBT, which diminishes the benefit despite being deductible.
- Non-work-related items: Luxury or personal gifts unrelated to work are not deductible.
- Client gifts: Any gifts for clients, regardless of cost, are not deductible.
How to maximise your deductions for a tax-smart Christmas party
- Set a budget: Aim to keep employee expenses under $300 to fall within the minor benefits exemption.
- Choose the right venue: On-site celebrations can minimise costs and FBT exposure.
- Keep detailed records: Document all expenses, including receipts and attendee lists, to ensure compliance.
- Separate costs: Clearly distinguish between employee and client-related expenses.
Real-life example: Sarah’s café
Sarah, a small business owner, hosted a Christmas party for her 10 employees, spending $200 per person on a three-course meal and gifting $50 gift cards. Since each expense was under $300, they were FBT-exempt but non-deductible. Sarah’s meticulous record-keeping ensured her books were clear and tax-compliant.
Christmas bonuses & payroll: What you need to know
When it comes to employee Christmas bonuses, there’s more to think about than just spreading holiday cheer. The ATO treats cash bonuses as part of wages or salary, which means they’re subject to payroll tax.
Here’s the key stuff to keep in mind:
- Bonuses are subject to payroll tax.
- Each state has different payroll tax thresholds.
- Total wage payments (including bonuses) might push you over your state’s limit.
For example, states like NSW and Victoria have different payroll tax rates and thresholds. A bonus that’s fine in one state might push your business over the threshold in another.
Pro tip: Do a year-end review of total wages, including bonuses, so you’re not caught off guard by payroll tax liabilities.
Superannuation & Christmas bonuses
While chatting with your team about bonuses, why not ask how they’d like to receive them? They might prefer to salary sacrifice their bonus for superannuation. It’s a win-win for you and your staff!
Benefits of salary-sacrificing bonuses into super:
Lower tax rates for your employees.
A boost to their super savings under a concessional contribution.
A quick note: Salary sacrifice arrangements must be set up before the bonus is given, and you’ll need to ensure employees don’t exceed their concessional contribution caps (currently $30,000 as of 1 July 2024).
Make sure you have a written salary sacrifice agreement in place before the work is done. For example, an agreement should be signed before 1 January for bonuses paid in December.
PAYG implications of Christmas bonuses
The ATO treats Christmas cash bonuses as Ordinary Time Earnings (OTE), so it is considered part of an employee’s taxable income. This could bump employees into a higher tax bracket for that pay period, leading to a higher PAYG withholding rate. Unfortunately, they can’t claim back the extra tax until the end of the financial year.
Some key things to remember:
- Cash bonuses need to be reported differently in STP payroll.
- Bonuses must be manually calculated as software might treat them as regular wages.
- Let the ATO know it’s a one-off payment separate from usual bonuses.
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Beyond the numbers
At the end of the day, Christmas bonuses are about more than money—they’re about recognition. They show your team that their hard work hasn’t gone unnoticed, which can work wonders for morale and workplace culture.
While navigating payroll tax might feel like tackling an overwhelming task, a little planning can turn potential headaches into a tax-efficient advantage. So, whether your bonus is big or small, what matters most is the message behind it: “We appreciate you.”
Why use Payroller during the festive season?
Managing holiday expenses can be overwhelming, but your payroll doesn’t have to be. Here’s how Payroller can help:
- Add bonuses or commissions in pay runs: Manage benefits and more on a versatile platform.
- Simple employee tracking: Easily record separate holiday pay, bonuses, and benefits.
- ATO compliance: Stay on top of tax regulations.
- Time-saving features: Focus on celebrating while Payroller handles the heavy lifting.
- Employee scheduling: Timesheet and roster management will always keep your employees on the right shift at the right time.
Celebrate without stress with better record-keeping
Accurate records are essential for claiming Christmas tax deductions. Ensure you have:
- Receipts for all party-related expenses.
- Clear distinctions between employee and client costs.
- FBT calculations, if applicable.
Understanding the rules around Christmas party tax deductions allows you to celebrate while staying financially savvy. With proper planning and record-keeping, you can spread holiday cheer without overburdening your finances.
Frequently asked questions about Christmas party deductions and FBT
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