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accountants and bookkeepers

How to Account for an Office Party

The holiday season is a time for celebration, and for many businesses, this means organising an office party to bring employees and sometimes clients together. While these gatherings are a great way to foster a sense of community and show appreciation, they can also lead to some tricky questions for accountants. 

Are you an accountant wondering how to handle office party expenses and their tax implications? In this article, we’re explaining the rules and exemptions that apply to company parties. 

Fringe Benefits Tax (FBT)

Understanding Fringe Benefits Tax (FBT) is important when you’re accounting for office parties. FBT is a tax levied by the ATO on non-cash benefits by employers to their employees on top of their regular wages. 

Unlike what you might expect, there isn't a distinct FBT category exclusively for parties or other workplace events. Instead, FBT comes into play when offering fringe benefits to employees, their associates, and sometimes even clients. Fringe benefits include

  • Company Cars
  • Low-Interest Loans
  • Housing or Accommodation
  • Entertainment
  • Meals
  • Health Insurance
  • Other Non-Cash Benefits

The Deductibility of Office Party Costs

For accountants, understanding what part of the office party expenses can be written off for income tax purposes is crucial. Let’s go through the basics:

  • FBT Impact - The cost of an office party can be deducted from income for tax purposes, but there's a catch. You can only deduct the portion of the expenses that is subject to Fringe Benefits Tax (FBT).
  • Exemptions Matter - If a particular cost of the party is exempt from FBT (like certain minor benefits or property benefits), you can't claim it as an income tax deduction.

In simpler terms, if it's subject to FBT, it can potentially be deducted from your taxable income. But if it's exempt from FBT, you can't use it to reduce your income for tax purposes. So, it's important to understand which expenses fall into which category when dealing with office party costs.

Property Benefit and Minor Benefit Exemptions

When it comes to office party expenses, remember two important exceptions:

  • Property Benefit Exemption - Applying to the cost of food and drink during a Christmas party held at your workplace during a workday. This only applies to current employees, not friends or family.
  • Minor Benefit Exemption - This is for things with a value less than $300 (including GST) that aren't given regularly or as a work reward. It can be helpful when dealing with client entertainment or extra party perks. The $300 limit applies to each benefit separately.
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Entertainment Benefits and Exemptions

An office party is classed as a “fun event”, and the exceptions for it depend on who's involved. Here's how the rules work depending on the group: 

For Employees:

  • Food and drinks are tax-free if the party is on a workday at the office.
  • If the company arranges a taxi to and from the party, that's also tax-free.

For Employees' Friends and Family:

  • Food, drinks, and taxis are tax-free for them too, thanks to special rules for small perks.

For Clients:

  • Anything provided to clients at the party doesn't have extra tax.

Examples of Accounting for Office Parties

Let's see how accounting works in two different office party scenarios:

Scenario 1: Christmas Party at the Office

  • The company throws a Christmas lunch at the office on a workday and employees, their partners, and clients join.
  • The company covers the cost of food, drinks, and taxi rides home, totalling $125 per person.

Here, the party is seen as an entertainment event. Employees don't pay extra tax for the food, drinks, or transport. Partners of employees also don't pay extra tax because of special rules for small perks. No extra tax is on the menu for clients either. However, the company can't use these expenses to lower their income tax or get back the GST they paid.

Scenario 2: Providing Christmas Gifts

  • The company gives Christmas presents to its employees.
  • Each gift is worth $250.

If these gifts are worth less than $300 per person and it doesn't seem unreasonable to not tax them, they might not get an extra tax bill. But whether the company can reduce their income tax or get tax benefits for these gifts depends on whether they're seen as "entertainment."

Summing Up

By familiarising yourself with the rules and regulations surrounding office party expenses, you can assist your clients in navigating these potential tax implications while ensuring they can continue to celebrate and appreciate their employees and clients during the festive season. 

Using QuickBooks Online can also help you efficiently track and manage these expenses, ensuring accurate financial records, simplifying tax compliance, and ultimately allowing your clients to focus on spreading holiday cheer and building strong relationships with their staff and clients without worrying about their tax obligations. 

Sign up for QuickBooks Online to help your clients account for their Christmas office parties today. 

Disclaimer: This page is provided for general information purposes only and does not constitute accounting, tax, business, or legal advice. You should always consult your own advisors for advice relating to your business or situation. Always consult the ATO directly as information changes from time to time:

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