Can staff celebrations attract FBT?

With the holiday season coming up, employers may be planning to celebrate with their employees.

Before they hire a restaurant or book an event, employers should make sure to work out if the benefits they provide their employees are considered entertainment-related, and therefore subject to fringe benefits tax (‘FBT’).  This will depend on:

• the amount they spend on each employee;
• when and where the celebration is held;
• who attends — is it just employees, or are partners, clients or suppliers also invited?
• the value and type of gifts they provide.

Employers who do provide entertainment-related fringe benefits should keep records detailing all of this information so they can calculate their taxable value.

Reminder of December 2024 Quarter Superannuation Guarantee (‘SG’)

Employers are reminded that employee superannuation contributions for the quarter ending 31 December 2024 must be received by the relevant super funds by 28 January 2025.  If the correct amount of SG is not paid by an employer on time, they will be liable to pay the SG charge, which includes a penalty and interest component.

The SG rate is 11.5% for the 2025 income year.

ATO’s tips for small businesses to ‘get it right’

While the ATO knows most small businesses try to report correctly, it understands that mistakes can happen.  The ATO advises taxpayers that it is important to get the following ‘basics’ right:

• using digital tools and business software to help track and streamline processes to increase the efficiency of their business;
• keeping accurate and complete records, which will help taxpayers meet their tax and super obligations and make lodging easier; and
• getting the right advice from trusted resources such as their registered tax professional or the ATO’s website, which can help taxpayers navigate change and uncertainty at any stage of the business life cycle.

SMSFs cannot be used for Christmas presents!

There are very limited circumstances where taxpayers can legally access their super early, and the ATO is reminding taxpayers that “paying bills and buying Christmas presents doesn’t make the list.”

Generally, taxayers can only access their super when they:

• reach preservation age and ‘retire’; or
• turn 65 (even if they are still working).

To access their super legally before then, taxpayers must satisfy a ‘condition of release’.

SMSF members who illegally access their benefits may be liable for additional income tax and administrative penalties, and they could be disqualified as a trustee.

For taxpayers who have illegally accessed their super, returning it to the fund may be considered a new contribution.  Depending on their contribution caps, this may result in additional tax on excess contributions.

Taxpayers should beware of people promoting ‘early access schemes’ to withdraw their super early (other than by legal means).  They can protect themselves from promoters of such schemes by:

• stopping any involvement with the scheme, organisation or person who approached them;
• not signing any documents, and not providing any of their personal details such as their tax file number; and
• making a ‘tip-off’ to the ATO online or by phoning the ATO on 13 10 20.

Taxpayer’s claims for various ‘home business’ expenses rejected

In a recent decision, the AAT rejected in full a taxpayer’s claims for “several classes or categories of deductions.”

For the relevant period of 1 July 2021 to 30 June 2022, the taxpayer was (according to his employer) a ‘technical architect’. 

However, the taxpayer also claimed he worked from home 6am to 11pm seven days a week, 365 days of the year (as he was ‘always on call’), and his income tax return for the 2022 financial year claimed a wide range of deductions, totalling approximately $40,000.

The AAT separately considered each category of deductions claimed, and rejected each in turn.

In relation to his home office ‘occupancy expenses’ (e.g., for home insurance, council rates, waste disposal, water rates, and repairs), the AAT noted that the ‘home office’ rooms (comprising floorspace occupying 31% of the dwelling’s total floor area) were not physically separate from the remainder of the dwelling, which the taxpayer shared with four other members of his family.

Home office running expenses (e.g., gas, power and internet) were disallowed on the grounds that the taxpayer had “not properly established an entitlement to such deductions or otherwise appropriately apportioned them between private or work-related activities.”  The AAT found his 100% claim for the internet, on the basis that the other members of the household did not use the internet connection, “very difficult to accept”.

In relation to plant and equipment expenses, the evidence was “largely non-existent.”

In relation to consumable expenses, the AAT noted that they appeared to be for goods or services of a private or domestic nature (including medications, toilet paper, milk, tea, sugar and insect spray).

The AAT also rejected the taxpayer’s claim for “payments made to his spouse for tax management, office cleaning and document management/storage”, noting that the services provided were generally of a private or domestic nature, and that the rendering of invoices by the spouse “has a degree of artificiality to it”.

ATO reminder about family trust elections

Taxpayers may be considering whether they should make a family trust election (‘FTE’) for a trust, or an interposed entity election (‘IEE’) for a trust or other entity.

Making an FTE provides access to certain tax concessions (assuming the relevant tests and conditions are satisfied), although there are important things to consider.

In particular, once the election is in effect, family trust distribution tax (‘FTDT’) is imposed when distributions are made outside the family group of the ‘specified individual’.  FTDT is a 47% tax, payable by a trustee, director, or partner, as the case may be (depending on the entity).

Taxpayers should review FTEs and IEEs annually to ensure they remain appropriate.  Taxpayers can only revoke or vary FTEs and IEEs in limited circumstances and subject to certain conditions.

Before making a distribution or annual trust resolutions, trustees should identify the members of the specified individual’s family group.  This will help avoid FTDT liabilities.

Editor: Please contact our office if you require any assistance in this regard.

Christmas Parties
& Gifts 2024

December 2024

Year-end (and other) staff parties

Editor:  With the well earned December/January holiday season on the way, many employers will be planning to reward staff with a celebratory party or event.  However, there are important issues to consider, including  the possible FBT and income tax implications of providing ‘entertainment’ (including Christmas parties) to staff and clients. 

FBT and ‘entertainment’

Under the FBT Act, employers must choose how they calculate their FBT meal entertainment liability, and most use either the ‘actual method’ or the ’50/50 method’, rather than the ’12-week method’.

Using the actual method

Under the actual method, entertainment costs are normally split up between employees (and their family) and non-employees (e.g., clients).

Such expenditure on employees is deductible and liable to FBT.  Expenditure on non-employees is not liable to FBT and not tax deductible.

Using the 50/50 method

Rather than apportioning meal entertainment expenditure on the basis of actual attendance by employees, etc., many employers choose to use the more simple 50/50 method.

Under this method (irrespective of where the party is held or who attends) 50% of the total expenditure is subject to FBT and 50% is tax deductible.

However, the following traps must be considered:

• even if the function is held on the employer’s premises – food and drink provided to employees is not exempt from FBT;
• the minor benefit exemption* cannot apply; and
• the general taxi travel exemption (for travel to or from the employer’s premises) also cannot apply.

(*) Minor benefit exemption

The minor benefit exemption provides an exemption from FBT for most benefits of ‘less than $300’ that are provided to employees and their associates (e.g., family) on an infrequent and irregular basis.

The ATO accepts that different benefits provided at, or about, the same time (such as a Christmas party and a gift) are not added together when applying this $300 threshold.

However, entertainment expenditure that is FBT-exempt is also not deductible.

Editor:  ‘Less than’ $300 means no more than $299.99!  A $300 gift to an employee will be caught for FBT, whereas a $299 gift may be exempt.

Example: Christmas party

An employer holds a Christmas party for its employees and their spouses – 40 attendees in all.

The cost of food and drink per person is $250 and no other benefits are provided.

If the actual method is used: 

• For all 40 employees and their spouses – no FBT is payable (i.e., if the minor benefit exemption is available), however, the party expenditure is not tax deductible.

If the 50/50 method is used:

• The total expenditure is $10,000, so $5,000 (i.e., 50%) is liable to FBT and tax deductible.

Christmas gifts

Editor:  With the holiday season approaching, many employers and businesses want to reward their staff and loyal clients/customers/suppliers.

Again, it is important to understand how gifts to staff and clients, etc., are handled ‘tax-wise’.

Gifts that are not considered to be entertainment

These generally include a Christmas hamper, a bottle of whisky or wine, gift vouchers, a bottle of perfume, flowers or a pen set, etc.

Briefly, the general FBT and income tax consequences for these gifts are as follows:

• gifts to employees and their family members – are liable to FBT (except where the ‘less than $300’ minor benefit exemption applies) and tax deductible; and
• gifts to clients, suppliers, etc. – no FBT, and tax deductible.

Gifts that are considered to be entertainment

These generally include, for example, tickets to attend the theatre, a live play, sporting event, movie, etc, a holiday airline ticket, or an admission ticket to an amusement centre.

Briefly, the general FBT and income tax consequences for these gifts are as follows:

• gifts to employees and their family members – are liable to FBT (except where the ‘less than $300’ minor benefit exemption applies) and tax deductible (unless they are exempt from FBT); and
• gifts to clients, suppliers, etc. – no FBT and not tax deductible.

Non-entertainment gifts at functions

Editor:  What if a Christmas party is held at a restaurant at a cost of less than $300 for each person attending, and employees are given a gift or a gift voucher (for their spouse) to the value of $150?

Actual method used for meal entertainment

Under the actual method no FBT is payable, because the cost of each separate benefit (being the expenditure on the Christmas party and the gift respectively) is less than $300 (i.e., the benefits are not aggregated).

No deduction is allowed for the food and drink expenditure, but the cost of each gift is tax deductible.

50/50 method used for meal entertainment

Where the 50/50 method is adopted:

• 50% of the total cost of food and drink is liable to FBT and tax deductible; and
• in relation to the gifts:

       –     the total cost of all gifts is not liable to FBT because the individual cost of each gift is less than $300; and

       –     as the gifts are not entertainment, the cost is tax deductible.

Editor:  We understand that this can all be somewhat bewildering, so if you would like a little help, just contact our office.