Decoding the ATO’s View on Entertainment.
The ATO generally classifies food, drink, and recreation provided in connection with work as ‘entertainment’. This classification is the starting point for determining how FBT, income tax deductibility, and GST input tax credits apply. Misunderstanding this can lead to costly errors.
The $300 Rule: Your Best Friend (The Minor Benefits Exemption)
For many businesses, the most valuable tool in managing the tax impact of a Christmas party is the ‘minor benefits exemption’. This rule dictates that if the total cost of a benefit provided to an employee (or their associate, like a spouse) is less than $300 per person and it is provided infrequently and irregularly, it can be exempt from FBT.
Key takeaway: If your Christmas party (including food, drinks, and any entertainment provided) costs less than $300 per employee/associate, it will likely be FBT-exempt. This applies to each individual benefit. So, if you have a party costing $150 per head and also give a gift valued at $50, both can qualify as separate minor benefits, provided each is under $300.
Location, Location, Location: On-Premises vs. Off-Premises
Where you hold your party significantly influences its tax treatment: On Your Business Premises: If the party is held at your workplace, solely for your employees, and it’s just food and drink, it’s generally FBT-exempt under a ‘property benefit exemption’. If you invite employees’ associates or clients, this exemption typically doesn’t apply, and you’d revert to assessing the minor benefits exemption for employees and their associates.
Off-Premises (e.g., restaurant, function venue): Parties held off-site are generally subject to FBT unless the minor benefits exemption applies. This is where keeping costs under $300 per person becomes critical to avoid FBT.
Who’s Invited? Guests Matter
Employees and their Associates: For employees and their spouses/partners, the minor benefits exemption (under $300 per person, infrequent/irregular) is your primary consideration.
Clients: Entertainment provided to clients is generally not subject to FBT. However, this often comes with a trade-off: it’s typically not income tax deductible for your business, and you cannot claim GST input tax credits on these expenses.
Gifts vs. Entertainment
The ATO distinguishes between gifts and entertainment. While food, drink, and recreation usually fall under entertainment, a physical gift (e.g., a hamper, a bottle of wine, a voucher) to an employee may be considered a ‘non-entertainment gift’. Non-entertainment gifts under $300 are generally FBT-exempt under the minor benefits rule, and often are income tax deductible with GST credits claimable. This can be a more tax-effective way to show appreciation compared to lavish entertainment.
The FBT/Deduction/GST Interplay: A Critical Balance
This is where it gets complex. There’s often an inverse relationship between FBT and income tax deductibility/GST claims:
FBT-Exempt Entertainment: If your Christmas party (or part of it) is FBT-exempt (e.g., under the minor benefits rule), it is generally not income tax deductible for your business, and you cannot claim GST input tax credits.
FBT-Applicable Entertainment: If the entertainment is subject to FBT (e.g., a party costing over $300 per person), then it is generally income tax deductible, and you can claim GST credits.
This means you need to weigh up whether avoiding FBT is more beneficial than claiming an income tax deduction and GST credits, or vice versa. For most SMEs, avoiding FBT via the minor benefits exemption is the preferred outcome, even if it means foregoing other claims.
Record Keeping is Paramount
Regardless of your strategy, meticulous record-keeping is non-negotiable. Keep all invoices, receipts, guest lists (noting who is an employee, associate, or client), and details of what was provided. This documentation is your evidence if the ATO ever queries your claims.
Don’t Let Tax Spoil the Party
Navigating the nuances of Christmas party expenses and ATO rules can feel overwhelming, especially for time-poor business owners. The goal isn’t to give away all the secrets, but to highlight the complexities and the potential for costly mistakes if you’re not fully informed.
At Nova Business Services, we understand these challenges. Our expertise extends beyond traditional bookkeeping to providing comprehensive support in areas like BAS & GST services, payroll management, and advising on complex ATO updates. We can help you strategically plan your festive celebrations to ensure compliance, minimise your tax liabilities, and maximise your benefits. Our team of skilled professionals simplifies complex financial processes, allowing you to focus on what you do best: running and growing your business.
Ready to ensure your business thrives, not just survives, during the festive season and beyond?
Don’t let the stress of tax compliance overshadow your hard-earned celebrations. Contact Nova Business Services today for an obligation-free conversation about your business. You might be surprised by all the ways we can free you up to focus on what you do best, offering more than just bookkeeping, we’re your dedicated partner in financial success. Explore all the ways Nova can help, from cash flow management to debt collection, and transform your business journey.
Our team is here to support you and your business in many different ways, give us a call on 1800 668 225 or reply to this blog by clicking here to ask us any questions.
