From client gifts to Christmas parties, December is the season to be spending on office entertainment. But how much are you actually spending, and could you be saving a lot more money by this time next year?
The Season to be Spending
The jingles and sparkling tinsel seem spring up in malls and stores earlier as each year passes. By December, you are in the middle of the festivities. Invitations. End-of-year brunches. The exchanging of a bottle of wine here and there. From office to office, investing money on such things is simply part and parcel of maintaining strong relationships with your employees, clients, and partners.
Caught up in the good feelings of social functions and the sense of an impending break from work, it can be easy to be lax about just how much money you might be spending. After all, there are expectations to meet. You can’t be seen to be skimping on your end-of-year entertaining.
Yet by arranging your tax planning a little differently, you could make a significant difference not only in the amount of money you spend in December, but also in your entertainment expenditure over the course of the entire year.
All it takes is a little planning. It may be too late as the Christmas season takes off. However, every dollar you spend now should remind you to put aside some planning time early in the new year before your spending on food, drink, and travel kicks off again next year.
First of all, what counts as an entertainment expense?
Your office Christmas party. A celebratory dinner with clients. Fine wine and a gift basket. Entertainment appears to be fairly self-explanatory. However, the amount of tax you will need to pay and therefore the final expense of your event, gift, or trip is contingent on how the ATO properly defines entertainment for tax purposes.
In the eyes of the tax office, this covers the provision of either entertainment by way of food, drink or recreation, and any accommodation or travel related to such entertainment.
This could include:
- Your business lunches and drinks, cocktail parties and staff social functions
- Sporting or theatrical events, sightseeing tours and holidays
- A game of golf, theatre or movie tickets, a game of paintball, or a harbour cruise
- Occasions when you entertain employees, clients, and even associates such as the family of your employees
How does the tax office distinguish entertainment from light refreshment at a training course, or work-related food and drink expenses, or a work-related trip for marketing purposes?
- Why is the entertainment being provided? Is it a work-related staff function, or something intended purely for enjoyment?
- What entertainment is being provided? Is it a small morning or afternoon tea, or an elaborate dinner?
- When is the entertainment being provided? Is it during work time, during overtime, or while an employee is travelling, or outside these times?
- Where is the food or drink being provided? Is it at your business premises or usual place of work, or at a social venue such as a function room, hotel, restaurant, cafe, or coffee shop?
While 1) and 2) are the most important factors, it’s clear that these need to be evaluated on a case-by-case basis.
Yes, in general light meals or food or drink provided during a continuing professional development (CPD) seminar are unlikely to be considered entertainment. Yes, providing alcohol is usually considered entertainment. But more questions need to be asked. Are your employees required to attend the place where the light meals were provided? Did the CPD last for more than four hours? Was the alcohol consumed incidentally during overnight business travel?
Hence your planning starts with a careful consideration of the above criteria for each expense.
Are your entertainment expenses income tax deductible? Can you claim back GST?
Entertainment is generally not tax deductible and you cannot claim back GST credits. So it is vital that you determine whether or not your gift, event, or food or drink expenses is entertainment or not.
There are also some exceptions, such as when your entertainment is subject to FBT.
Do you need to pay fringe benefits tax (FBT) on your entertainment expenses?
Employers pay tax at a rate of 47% on benefits provided to employees and associates during the course of their work. Entertainment provided to employees is a fringe benefit and subject to FBT unless you argue it is minor and infrequent. This makes the need to determine exactly what counts as entertainment even more important.
There are various entertainment fringe benefits, such as
- a meal entertainment fringe benefit, where fringe benefits are provided by way of, or in connection with, food or drink
- an expense payment fringe benefit – for example, the cost of reimbursable theatre tickets purchased by an employee
- a property fringe benefit – for example, providing food and drink
- a residual fringe benefit – for example, providing accommodation or transport
How do I determine the FBT I will need to pay on entertainment?
Again, you’ll need to set aside time with your business advisor or CFO team to carefully examine each entertainment expense on a case by case basis. We will explore some more specific examples in the following section. But it is important to note that if you do have to pay FBT on an entertainment expense, it may not be relevant to the entirety of that expense. For example, if you organise a party with clients, employees, and partners, only the part of the entertainment that relates to employees and their associates is subject to FBT.
You can also measure the FBT on entertainment expenses in different ways. For example, there are two methods you can use to calculate the FBT on meal entertainment fringe benefits:
- 50-50 split method: the taxable value is 50% of your total meal entertainment expenditure.
- 12-week register method: this looks at the total meal entertainment expenditure and an appropriate percentage, based on the keeping of 12-week register.
As you can see, there are many factors to consider. While it is arduous to go through your entertainment line by line and item by item, pouring through the FBT and tax implications of each expense, when you plan your expenses in advance with a well-documented entertainment budget you can know exactly how much you will be paying, event by event.
What will my office Christmas party cost me?
The office Christmas party is now a work ritual. Apart from organising your own event for your employees, partners, and clients, you will probably be attending parties for other companies, and there may even be an intermingling of these events with mixed lunches, drinks, and other celebrations. Your family and friends may attend, as might the family and friends of your employees and clients.
There is no special FBT rule for your Christmas party. Here’s what you need to consider:
- Who is invited? Current and former employees, family, clients, associates, others?
- Is the Christmas party held at your business premises or offsite (such as at a restaurant)?
- Is the party being held purely for social and entertainment purposes?
- What travel, food and drink, property and entertainment costs will you be paying for? How much is the total cost of each for each item?
Imagine you hold a small Christmas party in your office during office hours. You invite all your clients and employees, and some bring their family and partners. The party is simple, with food, drink, and the cost of travel to and from the office provided.
In total, you spend less than $300 on the party and each attendee spends $110 to attend.
In this scenario:
- It is considered entertainment because the reason for the party is purely social
- The food and drink provided to your employees and their family is exempt from FBT because it is given to them on a working day at your office. However, food and drink provided to clients is not.
- Partly due to a specific travel exemption and the minor cost exemption derived from the total cost of the party being under $300, the ride-share travel for your employees and their family is exempt from FBT. The travel costs for clients is not.
- You cannot claim an income tax deduction or GST credits for the Christmas party.
Below are a number of other specific examples provided by the ATO. They should serve to reiterate how important case-by-case planning really is.
| Situation | Income tax | FBT |
|---|---|---|
| Employee takes two clients to lunch at a restaurant – cost $150 | Employee’s portion – $50 tax deductible Client’s portion – $100 non-deductible | Employee’s portion – $50 fringe benefit Client’s portion – No FBT |
| Employee has meal in restaurant while travelling on business trip | Tax deductible | No FBT (‘otherwise deductible’ rule) |
| Employee has meal in an ‘in-house canteen’ | Tax deductible | Exempt from FBT |
| Employer provides sandwiches and juice for working lunch in office (not entertainment) | Tax deductible | Exempt from FBT |
| Employer provides substantial lunch with wine for employees in office but not in ‘canteen’ | Non-deductible | Exempt from FBT |
| Employer provides social function for employees in office | Non-deductible | Exempt from FBT |
| Employer provides social function for employees and associates in office | Cost per employee – Non-deductible Cost per associate – Tax deductible | Cost per employee – Exempt benefit Cost per associate – Taxable fringe benefit |
| Employer reimburses employee for cost of private party | Amount reimbursed is tax deductible | Taxable fringe benefit |
| Employer provides employee and associates with theatre tickets | Tax deductible | Taxable fringe benefit |
How to plan ahead
So, in the midst of the toasts and dinners and secret-Santas, you should now be committed to a planning time next year when you will work out if you can pay less on your yearly entertainment. Good planning saves you from the onerous task of pouring through your past expenses detail by detail because you have not developed precise, documented procedures for spending, which could also raise scrutiny from the ATO.
Once you’ve got your accountant and expert advisors together who understand Australian business regulations regarding this issue in their entirety, you could work through the following steps:
- Set an overall marketing and staff benefit budget for each financial year.
- Determine your planned entertainment expenses within this budget. This could involve looking ahead to all the food, drink, travel, and related expenditure for the year, (perhaps by considering the past years payments and new plans for the new year). It also means determining what is considered entertainment for tax purposes. Using the above criteria, ask yourself why, what kind, for whom, and where the entertainment expenses will occur.
- Explain the entertainment budget to all your managers. With them, document expenditure in detail as you pay for it over the course of the year. It’s important to identify not only a total lump cost for a party, but rather identify each item and service that you paid. This means planning a reliable documentation system. There are many apps that you and your employees can use to better track and approve each expense item. This is particularly relevant since much entertainment is paid for by way of reimbursement. Determine FBT, GST, and income tax consequences. Where do related fringe benefits and the FBT apply? When can you make a tax deduction or claim back GST?
- Determine adjustments that could save you money. This where you can make shifts in the way you spend on events, travel, and food and drink that can save you on FBT and income tax costs. These changes can sometimes involve subtle shifts to the location, timing, total cost, or invitees for next year’s Christmas party.
- Develop policies and procedures to meet these new and improved entertainment plans. For example, while food and drink on work trips your staff make with clients and other come under FBT, some of these expenses may have questionable benefits to the business. So you should have policies and procedures in place that clearly define how to the limit of staff expenses and reimbursements related to providing entertainment with clients or other staff.
In all this, record keeping can make or break your planning. Good records for each item or service include:
- The date when the entertainment was provided
- A description of who benefitted from the entertainment (such as an employee, client, or associate).
- The cost of each item and service
- The type or kind of entertainment and its purpose
- The location where the entertainment was provided.
You’ll find this planning can go well beyond simply budgeting your next Christmas function or work party. Yes, planning in this way can save you money this time next year – meaning you’ll have a new reason to enjoy the next office Christmas party. But it can also free up funds for marketing, export development, and many other activities that can have a clear ROI value.
Important Disclaimer: Readers should not act solely on the basis of the material on this page. Items herein are general comments only and do not constitute or convey advice. Legislation and proposals of legislation are also subject to constant change. We therefore recommend that formal advice be sought before acting in any of the areas. This news article is issued as a guide to the readers. Calibre Business Advisory Pty Ltd and its associated entities disclaims any losses that may be incurred as a result of the reader undertaking any action based on this article.