Christmas can be a tricky time when it comes to tax and there are lots of ways your business might land an unexpected tax bill.

The staff Christmas party isn’t the only potential tax trap, gifts for clients and employees should also be carefully considered.

If you decide to give your employees a Christmas present, the easiest way to avoid tax is to ensure the gift is less than $300 (inclusive of GST) and is classed as a minor benefit by the Australian Taxation Office (ATO).

If your gift meets all the criteria, the ATO will consider it exempt from Fringe Benefits Tax (FBT). Otherwise, the gift will be subject to FBT at the rate of 47 per cent.

To qualify for this exemption, the gift must be given on an infrequent or irregular basis – so no weekly lunches or multiple gift vouchers – and it must not be a reward for service.

Examples of minor benefit exemption non-entertainment gifts could include Christmas hampers, gift baskets, a department store gift card or voucher, skincare and beauty products, sealed bottles of alcohol and flowers.

If you decide it’s all too hard and give your employees a cash bonus instead, you will not have to pay FBT on the amount, but be aware that your employee will pay income tax on it.

Employee gifts that may attract tax

One of the best ways to avoiding tax problems when it comes to employee gifts is to skip any that are classed as entertainment by the ATO. That includes gifts like restaurant meals and tickets to movies or the theatre, sporting events or concerts.

Other gifts classed as entertainment include accommodation, travel and flights that are not for work and annual gym memberships. (These are classified as recreational entertainment.)

If entertainment-type gifts cost less than $300 (inclusive of GST) FBT is not payable, but you are unable to claim a tax deduction for the cost or claim the GST input credits.

Gifts to others

It’s worth remembering the FBT minor benefits exemption for gifts costing less than $300 also applies to any gifts provided to customers and associates (such as employees’ partners).

Entertainment gifts provided to clients over the holiday season are not subject to FBT, but there is no tax deduction allowed and the GST input credit cannot be claimed.

Although you may consider treating yourself (or a family member not involved in the business) to a Christmas gift, you can’t use the tax rules to do it. Private gifts are not tax deductible.

If you operate as a sole proprietor or a partner in a partnership, you can’t be your own employee, so you are not eligible for these employee benefits.

FBT and your Christmas party

If you plan to hold a work Christmas party for employees or clients, keep an eye on the tax rules so that you don’t find yourself facing a hefty tax bill.

You don’t pay FBT on the cost of the food and drink if your party is only for current employees and is held on a working day.

It’s a slightly different rule if the party is held off-site at say, a local club or restaurant. There’s no FBT if the party includes employees and their friends or partners, and the cost per person is under $300 and is considered a minor benefit. But FBT will apply if it costs more than $300 per person.

You don’t pay FBT for any costs relating to clients.

A tax deduction and GST credits can be claimed for the costs relating to employees and any family, but they cannot be claimed for the costs involved with any clients in attendance, as their benefit is not subject to FBT.

Case study: Christmas party in the office

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

• Employees, their partners/associates and clients attend

• Company provides food and drink, plus taxi travel home

• Cost per head is $125

Entertainment is being provided

A party for employees, associates and clients is considered entertainment by the ATO because the purpose of the function is for the people attending to enjoy themselves.

Employees – no FBT, minor benefit exemption applies

Employer doesn't pay FBT for:

• food and drink for employees as it is provided and consumed on a working day on the business premises

• taxi travel as there is a specific FBT exemption for taxi travel directly to or from the workplace

Employee friends and family – no FBT, minor benefit exemption applies

The employer doesn't pay FBT for the food, drink and taxi travel provided to the employees' friends and family 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

No FBT on benefits provided to clients.

Income tax and GST credits

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

Source: ATO