As we farewell the Christmas festivities, and welcome in the New Year, it is a timely reminder to consider the Fringe Benefits Tax (FBT) consequences on meal entertainment so there are no surprises when the Annual FBT return is prepared. We have seen a greater level of social activity following the pandemic, which requires careful consideration on what that means for FBT on your organisation.
FBT is a tax imposed on employers when they provide non-cash benefits to an employee (or their associate, such as a family member). The current tax rate is 47%.
There are two main methods to calculate meal entertainment benefits – the 50/50 method and the actual method. The stark difference between the two methods is the level of record keeping required, should you elect to calculate meal entertainment using the actual method. Choosing the actual method may help reduce your FBT liability, however you are required to keep a register of the attendees at not only the party, but for each event held during the FBT year.
What are the exemptions available if you calculate meal entertainment using the actual method?
Certain non-cash benefits may not be subject to FBT. The following are exempt from FBT for taxpaying organisations:
- Minor and infrequent benefits valued at less than $300 (GST inclusive). Should the benefit be provided on an infrequent or irregular basis throughout the year;
- Exempt property benefit where the food and drink are provided by the employer and consumed on the employer’s business premises on a business day; and
- Exempt transport benefits where the employer provides a taxi ride home if the celebration is held at the employer’s premises.
For tax-exempt body entertainment fringe benefits, the minor benefit exemption is only available in the following circumstances:
- Where the provision of entertainment is incidental to the provision of entertainment to outsiders, and does not consist of a meal other than light refreshments; or
- A function is held on your business premises solely as a means for recognising the special achievements of your employee in a matter relating to the employment of your employee.
How does the 50/50 method apply when calculating meal entertainment?
Under this method, the costs of the festive season celebrations (and every other meal entertainment instance during the FBT year) are totalled and 50% of these costs will be subject to FBT. Generally, there are no exemptions available. This includes the 3 exemptions noted above, no access to the minor benefit exemption for the meal entertainment, no access to the on-premises exemption and no access to the taxi travel exemption.
How is a band or DJ at an event treated?
If an entertainer such as a band or DJ is hired for the event then these costs are considered recreational expenditure, rather than meal entertainment. For these types of costs, the minor benefit exemption may be considered.
Can I provide a gift to employees at an event?
Yes, the provision of a gift to employees at an event, like the Christmas party, may be considered a minor benefit where the value of the gift is less than $300 (GST inclusive). This can also apply to the employee’s associate, as a separate limit.
A gift provided to an employee of a tax-exempt body, will also be exempt from FBT where the minor benefit exemption is met.
Can I get a tax deduction for the entertainment?
The cost of the events held during the year will be income tax deductible, only to the extent that the costs are subject to FBT.
Under the actual method, if the minor benefit has been applied and therefore the benefits have been exempted from FBT, you can not claim the costs as an income tax deduction. Similarly, FBT is not payable on the costs of entertaining clients and suppliers, and therefore these expenses are generally not deductible for income tax and the GST credits are generally not allowed, the tax deduction and GST input tax credits can only be claimed on the portion of the expenditure that has been subject to FBT.
Under the 50/50 method, generally 50% of the costs will be entitled to an income tax deduction and 50% of the GST credits will be entitled to be claimed.
For more information or to have a conversation about the appropriate treatment of your business’ FBT please contact Nexia Sydney Partner and Employment Tax Expert, Katie Lin.
