Fringe Benefits Tax (FBT) and Christmas Parties: A Guide for Small Business Owners

The holiday season is a time when you can give back to your hardworking team. This can mean organising Christmas parties and offering gifts to your employees and clients as a token of your appreciation.

In addition to boosting employee morale, giving gifts over Christmas also has tax considerations – particularly Fringe Benefits Tax (FBT) considerations.

In this guide, we’ll explore different holiday-related scenarios where FBT can apply to your small business – including the rules, exemptions, and tax implications. Understanding FBT and Christmas parties can help you plan your holiday activities and avoid surprises.

What is a Fringe Benefit?

A fringe benefit is a form of compensation you provide to an employee that is not part of their regular salary or wages. This can include parking, a gym membership, free concert tickets, or even reimbursing private expenses incurred by an employee. The following payments are not considered fringe benefits: super fund contributions, division 7A dividend payments and shares under an employee share acquisition scheme.

Fringe benefits given to any employee (past, present or future), company director or beneficiary of a trust who works in your business are subject to Fringe Benefits Tax (FBT). If you are a sole trader or in a partnership, benefits you give yourself are not subject to FBT.

What is Fringe Benefits Tax (FBT)?

Understanding Fringe Benefits Tax (FBT) is important when you’re accounting for office parties. FBT refers to a tax that is levied by the Australian Taxation Office (ATO) on fringe benefits you offer your employees. Unlike regular income tax, it is determined based on the taxable worth of the fringe benefit. Fringe benefits include:

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

You are responsible for assessing your FBT liability for the FBT year. It is important to note that the FBT year differs from the financial year and runs from 1 April to 31 March. If you have an FBT liability, you must lodge an FBT return and pay the FBT owed.

​​How Much FBT Do You Pay?

The calculation of FBT involves "grossing up" the taxable value of fringe benefits. This is the same as determining the gross income that employees would need to earn at the highest marginal tax rate (including the Medicare levy) to purchase the benefits themselves.

There are two rates that you can use to calculate the ‘gross-up’ rate. The rate used depends on whether GST is included in the fringe benefit value:

• If GST is included in the taxable value: you would use the higher (type 1) gross-up rate of 2.0802.
• If GST is not included in the taxable value: you would use the lower (type 2) gross-up rate of 1.8868.

To get the total fringe benefit taxable amount you need to add together the grossed-up values.

The FBT amount payable by the employer is typically 47% of the total fringe benefit taxable amount, as of writing in November 2024.

For instance, suppose you offer one employee a gym membership worth $2,200 (including $200 in GST) and your business pays the school fees for their child worth $3,300 (GST-free). In this case, the calculation of FBT would be:

As an employer, you must prepare and lodge an annual FBT return and pay the FBT liability. You may also need to calculate and report each employee's reportable fringe benefits amount in their end-of-year payment information.

FBT and Christmas parties

This section will look at the fringe benefits you can expect as a small business owner over the festive period. We’ll also provide information on how to make your Christmas party tax-deductible.

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:

• Christmas Party 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.

Christmas Party Held On Business Premises

If your business holds a Christmas party on a working day at your business premises and exclusively for your current employees, you won't be subject to FBT for the food and drink provided. This is known as a FBT minor benefits exemption.

Let’s consider a scenario where your company hosts a Christmas lunch on a working day at your business premises. Employees will attend the event with their partners and clients. The cost for each person is $100.

In this situation, your business doesn't owe FBT for the food and drinks provided to employees, their partners and clients. Since they are provided and consumed during a regular working day on your business's premises. In regards to an employee’s partner, it is considered a minor benefit since it has a value under $300 so would not be treated as a fringe benefit (this category of exemption is also referred to as ‘FBT minor and infrequent’).

Christmas Party Held Off Business Premises

If the Christmas party takes place outside of your workplace or involves employees' associates (such as their partners), you won't owe FBT if it is considered a minor benefit. This means that the cost per person should be below $300, and it would be deemed unreasonable to consider it a fringe benefit. This is another example of a minor benefit exemption FBT.

In both cases, on-premises or off-premises, you do not pay FBT for costs that relate to clients. It is important to note that if a Christmas party is not subject to FBT then you won’t be able to claim an income tax deduction for the cost of the Christmas party.

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.

Entertainment Benefits and Exemptions

A team celebration is classed as a “fun event”, and the FBT Christmas party exceptions 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.

Gifts

If you give your staff Christmas presents, you won't be subjected to FBT as long as the value of each gift remains under $300 per person, and it would not be considered a fringe benefit.

Holiday as a Reward

You may want to reward employees with a holiday as an incentive or bonus. However, this can also lead to FBT implications.

Let’s say that you offer a holiday reward to employees who achieve a set sales target. If the value of each holiday package is over $300, FBT applies to the accommodation and tickets provided to your employees who meet the sales target.

The minor benefits exemption doesn't apply since the value exceeds $300. This means you’re liable to pay the FBT, but you can claim income tax deduction on the FBT you pay.

For more information on other holiday implications read our guide to public holiday pay.

Afternoon Tea

Celebration afternoon teas on business premises can be a great way to mark special occasions, like weddings or even Christmas, and involve employees, associates, and clients.

Imagine you’re hosting an informal event on the business premises to celebrate the holiday season. This event includes drinks and finger food and is attended by your employees, associates, work colleagues, and clients. The cost is $35 per person.

Food and drink provided to employees on your business premises during a working day is exempt from FBT. The same applies to the food and drink given to associates since it is only $35, as it is considered a minor benefit. There is no FBT on benefits provided to clients.

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".

How QuickBooks Can Help

By being aware of your tax implications, you can make informed decisions about holiday celebrations and gift-giving, helping you comply with tax regulations while spreading holiday cheer.

QuickBooks accounting software provides you with a way to keep track of your expenses related to holiday celebrations and gifts. You can easily categorise expenses, making it straightforward to identify fringe benefits and their associated costs.

By using QuickBooks, you can streamline your financial processes and stay on top of your tax obligations during the holiday season. This allows you to focus on celebrating with your employees, associates, and clients while maintaining financial transparency and compliance.

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