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Businesses need to be aware of some of the important nuances that exist with deductions for Christmas parties and meals, says BDO.
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Entertainment or gift? Remember how it comes wrapped in tax
24 November 2023
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9 minute read
Businesses planning Christmas parties, entertainment or gifts to clients and staff need to bear festive tax traps around deductibility in mind, BDO says.
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Partner Mark Molesworth said the tax consequences varied depending on the decision.
“If we’re talking about entertaining our clients, then we need to remember that what the business spends on entertaining clients in terms of sitting down to lunch, for example, is not deductible,” said Mr Molesworth.
“People don’t necessarily think about that non-deductibility issue and another tie-up with that non-deductibility issue is the inability to claim input tax credits for GST on that component.”
Often the transaction would hit the accounting system and the accountant would simply code it without thinking about it, he said.
“Or in 12 months’ time when they go to lodge the tax return they have to go back and reanalyse who was at the Christmas party and how many of them were staff and how many of them were clients and those sorts of things.”
“If we can capture that data at the data entry point while we’re thinking about it, then that makes everybody’s life a whole lot easier.”
Mr Molesworth said there was also a distinct difference between taking a client out to lunch or the alternative, giving them a gift.
“If you’re going out for lunch then that’s entertainment, but if you give them a bottle of wine and you don’t sit down and open it immediately to drink it with them, then that’s just a gift,” he said.
“It’s not entertainment so it remains deductible. Clearly you want to do what your clients enjoy doing but there is certainly a difference in the tax outcomes between entertaining someone and giving them a gift.”
In terms of Christmas party planning, Mr Molesworth said it was worth remembering that if the business could keep the cost of a staff Christmas party below $300 per head and did not entertain staff regularly, then that should be exempt from fringe benefits tax.
“So maybe consider how generous you’re feeling as an employer,” he said.
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