National mid-tier firm HLB Mann Judd has warned accountants and taxpayers to “beware of the tax man”, particularly in relation to Christmas parties.
Depending on where a Christmas party is held, how much is spent on each guest, and whether gifts count as entertainment, FBT may be applicable, said Mariana von-Lucken, tax partner at HLB Mann Judd Sydney.
“Businesses should keep in mind that there are two main methods for reporting FBT, the ‘actual’ and the ’50-50’ split method, and understanding how each of these work can help minimise the FBT liability,” she said.
“With the 50-50 method, FBT exemptions generally do not apply, regardless of the cost of any entertainment, so as a general rule, businesses are better off using the ‘actual’ method if entertainment expenses are likely to be under $300 a head,” she said.
Ms von-Lucken stressed the importance of keeping accurate records, adding that while the 50-50 split method usually requires less record-keeping, it can mean more FBT needs to be paid.
“It will depend on who is being entertained – clients or staff. If more staff attend, then the 50-50 method may help reduce the FBT liability,” she said.
“The 50-50 method basically means that FBT is payable on 50 per cent of the expense of providing meal entertainment to all guests, whether staff, clients or family.
“The actual method, on the other hand, means FBT is paid on all expenses for staff, but if any clients attend the event then there is no FBT payable on their expenses. Keep in mind that the client portion is not tax deductible and employers are not able to claim the GST in their business activity statements.
“Generally, using the actual method to report liabilities tends to ensure a lesser FBT liability; however it is important accurate records are kept to verify claims.
“Also, the method chosen applies for the entire FBT year, not per event, although for many businesses a Christmas party is the sole event they host for the year.”
Using business premises for a Christmas party is a fairly safe bet, however.
If the party is held on the business’ premises, on a normal working day, with just employees attending, there will be no FBT liability as long as the actual method of reporting is used, said Ms von-Lucken.
“There is also no limit on the amount that can be spent, and this includes expenses such as taxi fares for employees to get home after the party,” Ms von-Lucken said.
“If other people attend the party, such as spouses, the total cost per person must be less than $300 (including GST) to remain FBT-exempt.
“If the 50-50 method is used, then 50 per cent of all expenses will be subject to FBT regardless of how much or little is spent per guest. However, a GST credit is claimable for 50 per cent of the GST-inclusive cost of the food and drink, and a deduction is available for 50 per cent of the GST-inclusive cost, less any GST credit claimable.”
Further, if the party is held off the business premises, it will still be exempt from FBT if the cost per head is less than $300 as long as the actual method is used. No tax deduction is available or GST credits claimable in this instance.