If you have asked yourself this question you are not alone. Lots of employers think about this at this time of the year when they are planning Christmas Parties or buying gifts for their employees. Firstly, what is Fringe…
If you have asked yourself this question you are not alone. Lots of employers think about this at this time of the year when they are planning Christmas Parties or buying gifts for their employees.
Firstly, what is Fringe Benefit Tax or FBT?
Well, put simply FBT is a tax paid by an Employer for certain benefits provided to an employee or their associates, in connection with employment. This tax can apply to past, present, or future employees.
A simple example would be an employer providing a fully maintained car to an employee to be used for personal use. Now, if that same car was to be maintained by an employee, the employee would be paying all the running cost from its net pay (that is after tax money). Therefore, ATO introduced this tax regime, to ensure this free benefit (commonly known as Fringe benefit), is taxed the same way it would if someone in the similar position had to bear the cost from after tax money.
FBT is only payable by an employer and is claimable as income tax deduction for the business to the extent of amount. To complicate the matter further, FBT year runs from 1st of April to 31st of March and the tax rate is at the top of marginal rate of 47%.
Even though the cost of providing fringe benefit is high for a business, many do this to attract better personnel on Senior positions like CEO, CFO, Divisional Mangers etc.
Fringe benefit can take many forms, for example a business class ticket for the employee and the wife, paid private health insurance cover for employee’s family, private school fees and most common Entertainment. And one example of entertainment is Christmas parties.
Christmas Parties and FBT?
There are a few different scenarios we will cover:
- A Christmas party for only your current employees held on the business premises on a working day before Christmas will be exempt from FBT. This is known as Property Fringe benefit exemption. But if an employee’s partner attends the Christmas party then it would be subject to FBT. The only exemption would apply here is the minor benefit exemption. If the employee’s partner’s cost per head is less than $300, then you can apply for this exemption.
But the exemption does not apply to clients attending the party. For clients attending any business parties that is considered some sort of entertainment, have no FBT payable nor any income tax deductions. This means you can entertain your business clients, but ATO will not allow you to deduct it as an expense in your business.
Christmas parties in Restaurants or hired Venue.
Your employees have worked hard the whole year and as a business owner, you want to treat them to a lavish meal and free flowing beers and wine. But imagine, after the party, your accountant informs you that you will be slapped with a huge FBT tax for providing this kind of awesomeness. So let me take some of your stress and provide you good news.
You can throw a lavish Christmas party, if the cost of the meal, drink and music is less than $300 per employee. You can also invite employee’s partner’s and not pay FBT if the cost is less than $300. Again, the minor benefit exemption will apply.
But as mentioned earlier, clients are not included in this exemption. You cannot deduct anything for the business client.
If you do go over the $300 threshold, be ready to face some FBT consequences.
Let’s look at a simple example how the tax is calculated:
XYZ decided to provide a party for employees which would cost $500 per person (GST free) in a restaurant. Now to calculate the tax amount, we need to gross up the $500. The reason ATO gross up the benefit amount is to reflect the gross salary that an employee would have to earn to purchase the same benefit from after tax income. There are two gross up types:
Type 1 – 2.0802 (if you can claim GST on the benefit)
Type 2- 1.8868 (benefits without GST)
In our example, we do not have any GST, so the calculation would be:
$500 x 1.8868 =$943.40
$943.40 X 47% (FBT tax rate) = $443.39
Therefore, the total cost to the business is:
Restaurant $500
FBT tax $443.39
Total cost to business per head $943.39
Of course, the above is a full deduction to the business if you pay the FBT tax.