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Fringe Benefits Tax and Christmas: A Guide for Small Business Owners

January 16, 2024

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

While giving gifts over Christmas can help you boost employee morale, it also has tax considerations, particularly Fringe Benefits Tax (FBT) considerations.

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

What is Fringe Benefits Tax?

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.

A fringe benefit is a benefit you offer an employee that is not a salary or wage. 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 FBT. If you are a sole trader or in a partnership, benefits you give yourself are not subject to FBT.

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 October 2023.

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:

Taxable amount of the fringe benefit that includes GST:

The taxable amount of the gym membership ($2,200) multiplied by the gross-up rate (2.0802 for a GST-inclusive fringe benefit)
Grossed-up taxable amount of the fringe benefit that includes GST = $2,200 x 2.0802 = $4,576.44

Taxable amount of the fringe benefit that does not include GST:

The taxable amount of the school fees ($3,300) multiplied by the gross-up rate (1.8868 for a GST free fringe benefit)
Grossed-up taxable amount of the fringe benefit that does not include GST = $3,300 x 1.8868 = $6,226.44

FBT amount your business has to pay

Total fringe benefits taxable amount = $4,576 + $6,226 = $10,802

FBT to pay = $10,802 x 47% = $5,076.94

In this example, your business would have to $5,076.94 in FBT

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.

Fringe Benefits and Christmas

Let’s look at the fringe benefits you can expect as a small business owner over the festive period.

Christmas Party 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 because it is considered an exempt benefit.

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.

Christmas Party 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.

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.

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.

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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