Fringe benefits tax and Christmas parties

Christmas is rapidly approaching and not only will business owners be preparing Christmas Parties, they will be considering what gifts, if any, they will provide to clients and employees. An important issue to consider is the possible Fringe Benefits Tax (FBT) and income tax deductibility that may be applicable when providing ‘entertainment’ to staff and clients.

Tax Deductibility of a Christmas Party

The cost of providing a Christmas Party is income tax deductible only to the extent that it is subject to FBT. Therefore, any costs that are exempt from FBT (refer below) cannot be claimed as an income tax deduction. The costs of entertaining clients are not subject to FBT and are not income tax deductible.

FBT on a Christmas Party

For FBT purposes Christmas parties fall into the category of “entertainment benefits” and as such will incur FBT unless specifically exempt or they fall under the “minor benefits” exemption. A minor benefit is one that is provided to an employee/client on an infrequent or irregular basis and the cost is less than $300 inclusive of GST per employee/client.

 Additionally, the costs (such as food and drink) associated with Christmas parties are exempt from FBT if they are provided on a working day on your business premises and consumed by current employees. A taxable fringe benefit will arise in respect of an associate of an employee who attends the party if not otherwise exempt under the minor benefits exemption.

Christmas party held on the business premises

A Christmas party provided to current employees on your business premises or worksite on a working day may be an exempt benefit. The cost of associates attending the Christmas party is not exempt, unless it is a minor benefit.

* Where the benefits are indicated as qualifying for the minor benefits exemption, it is on the basis that the necessary conditions have been satisfied.

Christmas party held off business premises

The costs associated with Christmas parties held off your business premises (for example, a restaurant) will give rise to a taxable fringe benefit for employees and their associates unless the benefits are exempt minor benefits.

* Where the benefits are indicated as qualifying for the minor benefits exemption, it is on the basis that the necessary conditions have been satisfied.

Gifts provided to employees at a Christmas party

 The provision of a gift to an employee at Christmas time may be a minor benefit that is an exempt benefit where the value of the gift is less than $300.

Where a Christmas gift is provided to an employee at a Christmas party that is also provided by the employer, the benefits are associated benefits, but each benefit needs to be considered separately to determine if they are less than $300 in value. If both the Christmas party and the gift are less than $300 in value and the other conditions of a minor benefit are met, they will both be exempt benefits.

Christmas Gifts

 Gifts are separated into two categories:

 Non Entertainment Gifts – for example a hamper, a gift voucher, a bottle of wine, flowers, pens etc

 Entertainment Gifts – forexample theatre tickets, sporting events, movies, holidays etc

Non-entertainment gifts provided to employees “separately” from the Christmas party, however, are exempt from FBT where the total value is less than $300 inclusive of GST. A tax deduction and GST credit can also be claimed. The ATO has indicated that if these type of gifts are given to employees two weeks before the actual Christmas party, then the gift and the Christmas function will be treated as separate benefits. This means that the $300 FBT exemption limit can be claimed twice.

Non-entertainment gifts given to clients and suppliers do not fall within the FBT regime, as they are not provided to employees. Generally a tax deduction and GST credit can be claimed for these gifts, provided they are not excessive or overly valuable.
Entertainment gifts have different tax implications. If they are given as gifts to employees and family members and are over the value of $300 FBT is payable and a tax deduction is allowed. Where the combined cost for employees/associates is less than $300 GST inclusive, there is no FBT, no tax deduction is allowed and no GST credit can be claimed.

Of course this all sounds quite complex, however the team of accountants at GeersSullivan can ensure that the taxman is kept as far away as possible from your Christmas party and provide you with the best tax outcome.

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The Ins and Outs of trading stock

What is trading stock?
Trading stock includes anything you produce, manufacture, acquire or purchase for manufacture, sale or exchange.

What isn’t considered to be trading stock?
Stocks of spare parts held for repairs and maintenance, goods acquired to be hired out to customers and consumables used in manufacturing trading stock such as cleaning agents.

Standing or growing crops, timber or fruit are not considered to be trading stock either. They become trading stock when they are harvested, felled or picked.

How do I value my trading stock?
There are several ways that you can value your trading stock.

The most commonly used method is cost. This means that the stock is valued at the price paid . The cost of the trading stock also includes expenses incurred getting the stock to its existing condition such as freight, handling charges and cost of labour.

Using the market selling value is another method. This is the value from a sale or sales in the ordinary course of the taxpayers business. For a retailer, it would be the current retail value. For a wholesaler, it would be the current wholesale value.

The replacement value method is another way you can value your trading stock. This is the price at which trading stock can be replaced by the taxpayer buying a comparable item in the market. To use the replacement value method, the items must be available in the market and be substantially identical to the replaced items.

What happens if my stock becomes obsolete?           
If your stock becomes obsolete, you can elect to write down the stock to a lower value, providing it is still reasonable.

For stock to be considered obsolete it must be out of use, out of date, unfashionable or outmoded. You must be able to show that there is no reasonable prospect of future sales of the stock.

You can decide to either make a once-off write-down or a progressive write-down of the value of the obsolete stock, although a progressive write-down is more commonly used and preferred. Obsolete stock which remains on hand should generally by valued at its scrap value.

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