Christmas Parties and FBT

With work Christmas parties just around the corner, we look at the tax treatment of such occasions.

Key concepts

To begin with, there are two critical issues to understand.

1. Entertainment

Typically, fringe benefits tax (FBT) will only apply to a party if it involves the provision of ‘entertainment’. This means the provision of (a) entertainment by way of food, drink, or recreation, or (b) accommodation or travel in respect of such entertainment, such as taxis, hotel accommodations, etc.

In this case, recreation includes amusement, sport and similar leisure-time pursuits and provides recreation and entertainment in vehicles, vessels or aircraft (for example, joy flights, sightseeing tours, harbour cruises).

1. Minor Benefits

In simple terms, a minor benefit is provided to an employee/associate (spouse) if done so on an infrequent or irregular basis (typically, no more than twice per year), and the cost is less than $300 inclusive of GST per employee/associate. This is $300 per expense (i.e., $300 per meal and drinks and a separate $300 per accommodation, etc.).

Note that for this piece, we will assume the employer (like most employers) uses the Actual method to calculate FBT, whereby FBT is paid only to employees and their associates (not clients or other outside individuals).

Venue

1. Business premises

Holding your Christmas party on the business premises on a working day (logically, Friday after work) usually gives an employer the most tax-effective outcome. Expenses such as food and drink are exempt from FBT for employees with no dollar limit, but no tax deduction or GST credit can be claimed. The reason why FBT does not apply is because there is typically no “recreational” component in play. Thus, the following rules apply to parties on the business premises:

EmployeesTax TreatmentFood and drink per person (no dollar limit) –No FBT applies, no tax deduction, and no GST credit is claimable.Recreation (e.g., band) per person < $300 –No FBT, no deduction, no GST credit.Recreation $300 or more –FBT applies, is tax deductible, and GST credit is available.AssociatesFood and drink <$300 per person –No FBT, no deduction, no GST creditd and drink $300 or moreFBT applies, is tax deductible and GST credit availableRecreation <$300-No FBT, no tax deduction, no GSTRecreation >$300-FBT applies, is tax deductible and GST credit available.

EXAMPLE – Christmas party on business premises

A company holds a Christmas lunch on its business premises on a working day.

• Employees, their partners and clients attend.
• The company provides food and drink and taxi travel home.
• The cost per head is $125.

Entertainment is being provided. A party for employees, associates and clients is entertainment because the purpose of the function is for the people attending to enjoy themselves.

Employees – no FBT; exemption applies.

The employer doesn’t pay FBT for the following:

• food and drink for employees, because it is provided and consumed on a working day on the business premises.
• taxi travel because there is a specific FBT exemption for taxi travel directly to or from the workplace.

Associates – no FBT; exemption applies.

The employer doesn’t pay FBT for the food, drink and taxi travel provided to the employees’ partners (associates) because it is a minor benefit – that is, it has a value of less than $300, and it would be unreasonable to treat it as a fringe benefit.

Clients – no FBT

There is no FBT on benefits provided to clients.

Income tax and GST credits

The employer can’t claim an income tax deduction or GST credits for the food, drink or taxi travel provided for employees, associates, or clients.

1. Offsite (e.g., restaurant)

The party is held offsite, and the tax treatment is slightly different as follows:

EmployeesTax TreatmentFood and drink <$300 per person –No FBT, no deduction, no GST credit.Food and drink $300 or more –FBT applies, tax-deductible, GST credit available.Recreation (e.g., band) <$300 – No FBT, no deduction, no GST credit.Recreation $300 or more –FBT applies, tax-deductible, GST credit available.AssociatesFood and drink <$300 per person-No FBT, no deduction, no GST credit.Food and drink $300 or more –FBT applies, tax-deductible, GST credit available.Recreation <$300 –No FBT, no deduction, no GST.Recreation >$300 or more –FBT applies, tax-deductible, GST credit available.

Clients

Irrespective of the cost or the party’s location (business premises or offsite) under the Actual method, there is no FBT, nor is there a tax deduction or GST credit available for food and drink or any recreation component provided to clients or suppliers. The reason for this is that FBT applies to employment. As a result, clients and suppliers fall outside the FBT system (except where the employer elects to use the 50/50 method to calculate their FBT liability).

Christmas Gifts and FBT

To correctly determine the tax treatment of a gift given to an employee or their associate, e.g., spouse (not just at Christmas time but at any time during the year), a distinction needs to be drawn as to whether the gift is categorised as a “non-entertainment gift” or on the other hand as “entertainment”.

“Entertainment” type gifts include movie theatre tickets, sporting tickets, holiday vouchers or admission to an amusement centre. Whereas “Non-Entertainment” type gifts include Christmas hampers, a bottle of whiskey or wine, gift vouchers, perfume, flowers or a pen set.

For gifts given to entertainment-based clients, no FBT is applicable nor a tax deduction is available. However, these would be tax deductible if you give a client a bottle of wine, a carton of beer or a Christmas ham rather than movie tickets.

Mindful of this, the treatment is as follows:

Entertainment gifts

EmployeesTax TreatmentCost <$300 per person –No FBT, no deduction, no GST credit$300 or more –FBT, tax-deductible, GST credit availableAssociates<$300 –No FBT, no deduction, no GST credit> $300 or more –FBT applies, tax-deductible, GST credit available

Non-entertainment gifts

EmployeesTax TreatmentCost <$300 per person –No FBT, no deduction, No GST credit$300 or more –FBT, deduction deductible, GST credit availableAssociates<$300 –No FBT, tax-deductible, GST credit available$300 or more-FBT applies, tax-deductible, GST credit available

No FBT would apply for gifts costing less than $300 to employees and associates, but these are tax-deductible, so feel free to hand out Christmas hams, perfume or shopping vouchers. This is the most tax-effective and economic option.

The rules regarding the minor benefit exemption have changed, so you should feel free to give the gifts at the Christmas Party rather than a few weeks before, as was previously the case. This is because the gift and the cost of the function are considered separate benefits and have their own $300 threshold. 

The FBT implications for Christmas parties and gifts can be quite complicated. There are many different variables and combinations that can change the tax-deductible nature and the fringe benefits implications for having an event or giving a gift. Speak with us if you have any questions.

Refinancing is the process of replacing an existing loan with a new one, usually with better terms and interest rates.

Pros

• Some lenders are offering up to $5,000 in refinance cashbacks. These, however, are subject to qualifying criteria regarding the loan amount and LVR, etc.
• Borrowers may be able to secure lower interest rates elsewhere. If you’re refinancing to a lower interest rate, lower repayments can help you manage your finances.
• Access to more loan features. Your current home loan may not have the parts you require, like redraw and offset, or one that gives you flexible repayment options so you can pay off your mortgage faster.

Cons

• When you’re refinancing to another lender, there are fees involved. It could amount to thousands of dollars, from discharge fees to setting up a new loan.
• If you have less than 20% equity, you might have to pay Lenders Mortgage Insurance (LMI) fees, even if you’re refinancing with the current lender.
• When you refinance, you are applying for another home loan, which will make a credit enquiry. If you keep making refinancing applications, it will leave too many questions quickly, lowering your credit score.
• When you refinance, it resets the loan term. If you’ve already paid off five years of your 30-year loan term, if you refinance to another lender, then you’re potentially back to paying 30 years’ worth of interest again.

Tax

From a tax standpoint, refinancing with another loan does not change interest deductibility. For example, Jack has a loan with ANZ bank, which was used to acquire an investment property. He refinances this with AMP. Because the interest was deductible before, it is deductible after the refinance (see Taxation Ruling TR 95/25 in paragraph 47).

Furthermore, interest on a new loan will be deductible if the new loan is used to repay an existing loan which, at the time of the second borrowing, was being used in an assessable income-producing activity or used in a business activity which is directed to the production of assessable income (Taxation Ruling TR 2000/2).

Consolidating Your Superannuation

You may be able to transfer your existing super account(s) to another complying fund (known as a rollover), depending on the rules of your super funds.

For example, you can transfer your super to consolidate multiple accounts. Putting all your super in one account means paying only one set of account fees. Differences in fees can significantly affect the amount you have when you retire. Having fewer accounts also makes it easier to keep track of your super.

Think about the possible consequences before deciding to roll over your super. Ask your existing super fund about any fees or charges that will apply or any loss of entitlements such as life insurance.

You should also consult the receiving super fund to ensure they will accept a rollover of your super.

The preservation rules apply to benefits rolled over to another complying super fund. This means benefits can only be accessed once you meet a condition of release, such as reaching 65.

Sometimes, your super may be rolled over to another super fund without you requesting it, such as when two super funds merge.

Tax

No tax is payable on the amount rolled over to another complying super fund until you withdraw your super, when tax may apply.

If a super benefit is paid directly to you before being born into another fund, the payment is considered outside the excellent system. It will be treated as a super benefit rather than a rollover, in which case it may be taxed.

If you roll over an amount wholly or partly of an untaxed element that exceeds the untaxed plan cap amount, the transferring fund will withhold the tax payable on the excess amount.

Considerations

Check with both super funds, particularly the transferring fund, so you know of any applicable fees or charges, any effect on your benefits, and any loss of entitlements such as insurance.

The fund you want to transfer to may not accept transfers from other funds or ATO-held super–checks before starting your transfer. There are no fees or charges for transferring ATO-held super money into a super fund account.

Check that both the account you’re planning to transfer super from and the account you’re planning to move it to are still open, as there can be delays in funds reporting closed accounts to us. Check that neither of the funds has restrictions on actioning the transfer.

There are some essential factors to consider before transferring your super:

• Differences in fees can significantly affect the amount you have when you retire.
• The fund you want to leave could charge administrative, exit, or withdrawal fees.
• The fund you want to transfer may charge entry or deposit fees.
• The fund you want to leave may insure you against death, illness or an accident that prevents you from returning to work. If you leave this fund, you may lose these entitlements – check if the other fund offers comparable cover. ATO online services flag any super account with insurance with a ‘Yes’ indicator.

Transferring your funds will not change the super fund your employer pays your contributions to. Speak with your employer about whether you can choose a different fund and advise them of the new fund account details for future contributions.

If unsure what to do, seek independent financial advice or contact your super fund.

How?

You can request a transfer of the whole of a super account balance online by:

• sign in to myGov.
• select the Australian Taxation Office.
• select Super, then Manage, then Transfer Super.

Completing the rollover or transfer request using ATO online services lets you view all your super accounts in one place.

You can only transfer a whole account balance from one super fund to another using ATO online services or the paper form, as this process involves closing the account. If you want to transfer part of your super account balance, contact the super fund from which you wish to transfer money.