As we head towards the Xmas party season and end of year business activities, business owners need to consider the tax implications that relate to customer gifts, staff parties and staff end of year gifts. This article looks at some of the tax effective ways you can spend money at Xmas and claim tax deductions.
Keep team gifts spontaneous
Encourage spontaneity in team gifts to avoid crossing the $300 threshold for Fringe Benefits Tax (FBT). Gifts need to be ad hoc to qualify as minor benefits, excluding regular commitments like monthly gym memberships or cumulative gift vouchers exceeding $300. Cash gifts from the business are considered salary and wages, triggering PAYG withholding and possibly falling under the superannuation guarantee.
Consider the team’s preferences when selecting gifts, as the most meaningful ones resonate with individuals. A personalized, sincere message often has a more significant impact than a generic gift that might not align with someone’s preferences.
FBT and Christmas parties
Consider the tax implications for Christmas parties. Holding the event in the office on a workday can exempt it from FBT, regardless of per-person spending. Likewise, taxi travel to or from an employee’s workplace is FBT exempt. On the contrary, off-site celebrations should keep expenses below $300 per person to avoid FBT, though this means the business cannot claim deductions or GST credits.
If the total costs, including associated benefits, exceed the $300 limit, FBT applies. However, the business can still claim a tax deduction and GST credits for these event expenses. It’s crucial to understand that deductions only offset against tax, and if the business has minimal or no tax liability, the deduction won’t offset the party’s cost.
If your business hosts slightly more extravagant parties and goes above the $300 per person minor benefit limit, you will pay FBT but you can also claim a tax deduction and GST credits for the cost of the event. Just bear in mind that deductions are only useful to offset against tax. If your business is paying no or limited amounts of tax, a tax deduction is not going to help offset the cost of the party.
Avoid client lunches and give a gift
The most effective means of spreading Christmas joy to customers may not align with the most tax-efficient strategy. For instance, expenses incurred in taking clients out or entertaining them are not tax-deductible, and GST cannot be reclaimed. Specific regulations are in place to restrict the claiming of deductions and GST credits for entertainment-related expenditures, irrespective of the intention to foster goodwill and boost business sales. Activities such as dining at restaurants, attending shows, playing golf, and participating in corporate race days all fall under the umbrella of ‘entertainment.’
On the other hand, if you opt to send your customer a gift, it becomes tax-deductible, provided there is an expectation that the business will derive benefit (assuming the gift does not constitute entertainment). A more impactful approach is personally delivering the gift to your top customers and extending personal holiday wishes. This gesture can leave a lasting impression, even if the recipient is unavailable and learns about the delivery from the receptionist.
From a marketing perspective, if your budget is tight, it’s better to focus on the customers you believe deliver the most value to your business rather than spending a small amount on every customer regardless of value. If you are going to invest in Christmas gifts, then make it something people remember and appropriate to your business. You could also donate on behalf of your customers (where your business takes the tax deduction) or for your customers (where they receive the tax deduction).
Donate to charities
Charities love cash. They don’t have to spend any of their precious resources to receive it – unlike a lot of charity dinners, auctions, and promotional campaigns. And, from a tax perspective, it’s thesafest way to ensure that you or your business can claim a deduction for the full amount of the donation.
There are a few rules to giving to charities that make the difference between whether you will or won’t receive a tax deduction.
The charity must be a deductible gift recipient (DGR). You can find the list of DGRs on the Australian Business Register (use the advanced search).
If you buy any form of merchandise for the ‘donation’ – biscuits, teddies, balls or you buy something at an auction – then it’s generally not deductible. Your donation needs to be a gift, not an exchange for something material. Buying a goat or funding a child’s education in the third world is generally ok because you are generally donating an amount equivalent to the cause rather than directly funding that thing.
The tax deduction for charitable giving over $2 goes to the person or entity who made the gift and whose name is on the receipt.
Christmas bonuses
If you are planning to provide your team with a cash bonus rather than a gift voucher or other item of property, then remember that this will be taxed in much the same way as salary and wages. A PAYG withholding obligation will be triggered and the ATO’s view is that the bonus will also be treated as ordinary time earnings (unless it relates specifically to overtime work) which means that it will be subject to the superannuation guarantee provisions.
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