Christmas party tax deductions – a guide for small business

As the holiday season fast approaches, many small business owners are organising their Christmas parties to celebrate with their teams. While the festive spirit is in the air, have you considered the tax implications of your celebrations?

Be aware, hosting a Christmas party can trigger Fringe Benefits Tax (FBT) depending on the location, cost, and whether gifts are purchased & given. Understanding how FBT works, especially during the holiday season, can help you make smart financial decisions, while also rewarding your team and keeping your business tax compliant.

What is Fringe Benefits Tax (FBT)?

FBT is tax that employers must pay on certain benefits they provide to their employees in addition to salary and wages. These benefits may include Christmas parties, gifts, and other forms of entertainment. While providing a fun celebration for your team can enhance morale, be careful, it may be subject to FBT. Knowing when and how FBT applies can allow you to reduce the overall tax impact.

At its core, entertainment-related fringe benefits refer to benefits like providing food, drink, and entertainment, which are commonly associated with Christmas parties. These expenses might seem straightforward, but they could trigger FBT if the proper exemptions aren’t applied.

Tax Implications for Christmas Parties

Planning a Christmas party for your business is exciting. Let’s see if we can understand the tax implications a little further to assist in avoiding any unwanted tax liabilities.

Minor Benefits Exemption

The $300 minor benefits exemption – this is one of the key ways to manage your tax obligations.

This exemption applies per employee and can cover a variety of expenses, including food, drinks, transportation, and even the attendance of spouses or partners at year-end parties. Whether you host the event onsite or at an outside venue, such as a restaurant or function space, the exemption can be applied as long as the total cost per person remains under $300. If the cost exceeds this threshold, FBT may apply, particularly for offsite events where additional expenses are more likely to accumulate.

Gifts Given During Christmas Parties

Gifts valued under $300 might be exempt from FBT under the minor benefits exemption, much like the party itself. This exemption covers non-entertainment gifts like gift cards, hampers, or a bottle of wine. However, entertainment gifts, such as concert or sports tickets, may not be exempt and could still incur FBT based on their value and how often they are provided.

Claiming Tax Deductions for Christmas Party Expenses

When it comes to claiming deductions for your Christmas party expenses, there are some rules to keep in mind.

• FBT-Deductible Expenses: If your Christmas party incurs FBT (for example, for offsite parties or if the minor benefits exemption doesn’t apply), the cost is usually deductible as a business expense. This includes not only the party but also related expenses like transportation or entertainment for guests.
• Non-Deductible Expenses: If your party is FBT-exempt (for instance, an onsite party for employees), you generally cannot claim a deduction for the party costs. This can be tricky planning a balance between tax exemptions and deductions, as you may want to consider the overall financial impact for your business.

Record Keeping and Reporting

Detailed record keeping is essential for calculating FBT accurately. Keep records of all party expenses, including invoices, receipts, and employee lists, so that when tax time comes, you can accurately determine whether FBT applies, and if you can claim tax deductions.

Maintaining proper documentation helps you avoid penalties and ensures you make the most of available exemptions. Accurate records are also essential for reporting purposes and will help with simplifying any decisions that need to be made.

Summary

Throwing a Christmas party is a great way to celebrate the year’s successes with your team, but as a small business owner, it’s vital to understand how it impacts your taxes.

By keeping FBT rules in mind, particularly the differences between onsite and offsite parties, the minor benefits exemption, and FBT exemptions for gifts, you can plan a holiday event that’s fun, affordable, and tax efficient.

Remember to keep accurate records and plan your party expenses with these tips in mind to avoid surprises. We are here to help with planning your festivities in a tax effective way. 

Happy holidays!