Christmas Parties Chaos… Will you be charged FBT?
With the festive season upon us, many employers will be planning to reward staff for their efforts this year. Food, drinks, gifts… How do you know if you will be charged fringe benefits tax (FBT)? And how can you reduce the FBT you pay?
What is Fringe Benefits Tax (FBT)?
Fringe Benefits Tax (FBT) is a tax payable by you on any benefits you have paid to employees in place of salary or wages. Fringe Benefits can be a useful way of attracting and retaining quality staff as they are perceived as a non-cash incentive or as a salary packaging option.
Fringe benefits include any rights, privileges or services provided to current, former or future employees or directors of a business. Common benefits include; utilisation of work vehicles for private purposes; low or no interest loans, school fees, health insurance, gym memberships and entertainment such as food, drink or recreation.
FBT was created when the government realised that employers were being creative when paying benefits instead of salary. The most common fringe benefit is for vehicles where the employer picks up the cost of the car and provides the car for their employees’ use.
When will FBT apply?
FBT may apply to entertainment provided to employees (and their family) and non-employees (eg. clients).
How is FBT Calculated?
Under the FBT act, there are 3 methods of calculating what is payable:
- 50/50; and
- The 12-week method.
The most popular methods currently in use are Actual and the 50/50 methods.
We take a look at each one in detail here:
RELATED POST: How is FBT Calculated?
The Minor Benefit Exemption
When taking a look at the calculation methods in action, it is important to consider the Minor Benefit exemption. A benefit is considered minor if the value of the entertainment or gift is less than $300. In this instance, the benefit is exempt from fringe benefits tax if it would be reasonable to consider the event or gift as a fringe benefit. That is if:
- the benefit is provided irregularly
- the taxable value of the minor benefit is low
- it is difficult to calculate the taxable value of the benefit and any associated benefits
- the benefit is provided as a result of a contingency (for example, unexpected overtime).
Let’s take a look at both of the most popular methods in action
Example 1: A Christmas Party
An employer holds a Christmas party for its employees and their spouses. There are 40 attendees at the event and the cost of food and drink per person is $250. There were no gifts provided.
There will be no FBT payable for all 40 employees and their spouses by applying the minor benefit exemption. (Click here to read more about the minor benefit exemption) The party is also not tax-deductible.
The 50/50 Method:
The total cost of the event is $10,000, so $5,000 (50%) will be applied for FBT. This amount will also be tax-deductible.
Example 2: Christmas Gifts
An employer gives a gift at Christmas.
Gifts for employees:
Gifts to employees and their family members are liable for FBT. Unless the gift is valued less than $300 by using the minor benefit exemption. The expense is tax-deductible.
Gifts for clients:
Gift to clients and suppliers, etc have no FBT but are tax-deductible.
Example 3: A Christmas Party and a Gift
An employer holds a Christmas party for its employees and their spouses. The food and drinks cost $260 per person. The employer also provides employees a gift valued at $150.
There will be no FBT payable as the cost of each separate item (the party and the gift respectively) is less than $300 each (the benefits are not aggregated). A tax deduction will not be applied to the cost of the food and drink. However, the cost of the gift will be tax-deductible.
The 50/50 Method:
50% of the total cost of both food and drinks will have FBT applied. Party expenses will also be tax-deductible. The total cost of the gifts is not liable for FBT as the individual cost of each gift is less than $300. Gift expenses is tax-deductible.
The calculations for establishing the FBT amounts can be quite complicated, depending on the type of benefit and whether it includes GST or not. At Modoras we make the process simple and calculate this for you.
To arrange a discussion to talk about your Fringe Benefits Tax options and obligations, contact our team today for an obligation-free consultation.
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