With the end of year approaching, most employers will incur expenditure in relation to an annual Christmas party, end of financial year function or other similar celebrations.

But the subject of Christmas parties and FBT can put a damper on proceedings – if you are paying too much tax.

Food and drink provided by an employer at a Christmas party or a similar function is considered ‘meal entertainment’ and therefore FBT will be payable. You may already know that there are two basic methods of calculating ‘meal entertainment’ fringe benefit tax.

In this two-part article, we assess the FBT, income tax and GST consequences with respect to each of the methods – so that you can calculate if you have been paying too much for your Christmas parties.

This first article looks at the actual method and the next will consider the 50/50 split method. If you find that you are paying too much, change methods this year and enjoy a happier end of year function!

Christmas parties and FBT: The actual method

A significant advantage of using the actual method to calculate FBT payable at your Christmas party is the potential access to certain exemptions that can reduce the FBT that you ultimately pay.

In the context of a Christmas party or similar function, the minor benefit exemption and the property benefit exemption are the most common and the most useful exemptions.

The FBT (and in turn the income tax and GST consequences) you pay as an employer will vary, depending on:

  • Whether the function is held onsite (i.e. your business premises) or offsite (e.g. at a restaurant or function venue);
  • Who attends the function (i.e. employees or non-employees); and
  • The per-head cost of the function (i.e. the total per head cost of the food and drink provided to the employees (and their associates).

It is important to remember that the per-head cost of the function requires analysis of each particular benefit that you have provided to an employee (or their associates) at the function, when considering whether you can claim the minor benefit exemption.

You also need to consider the administrative burden of applying the actual method rather than the simpler 50/50 split method, which is discussed in the second part of this article.

Christmas party FBT & other tax consequences: Summary

The following table summarises the FBT and other tax consequences of providing food and drink at onsite and offsite functions under the actual method.

Persons AttendingLocation of Function
Onsite FunctionsOffsite Functions
EmployeesThe property benefit exemption may apply. If so, the meal entertainment is:
• FBT exempt;
• Not tax deductible; and
• No ITC (for GST paid) is available.
Generally, the meal entertainment is subject to FBT, tax deductible and ITCs (for any GST paid) can be claimed.

However, an exemption to this is where the minor benefit exemption applies. In this case, the meal entertainment is:
• FBT exempt;
• Not tax deductible; and
• No ITC (for GST paid) is available.
Associates
(e.g. employees’ partners)
Generally, the meal entertainment is subject to FBT, tax deductible and ITCs (for any GST paid) can be claimed.

However, an exemption to this is where the minor benefit exemption applies.

In this case, the meal entertainment is:
• FBT exempt;
• Not tax deductible; and
• No ITC (for GST paid) is available.
Non-Employees (e.g. clients)Not subject to FBT, not tax deductible, and no ITC (for any GST paid) is available.Not subject to FBT, not tax deductible, and no ITC (for any GST paid) is available.

The above table illustrates that where the minor benefit exemption applies, as an employer you would be indifferent to providing the function onsite or offsite: the FBT, income tax and GST (ITC) implications are the same under the actual method regardless of whether the meal entertainment is provided to employees (and/or their associates) or non-employees.

In particular, where the minor benefit exemption applies, you will avoid FBT (at 47%) on functions but will forgo income tax deductions and ITC claims in relation to the meal entertainment expenditure. This is illustrated in the case study below.

CASE STUDY – A Christmas party and FBT with the minor benefit exemption
In December, an employer held a Christmas party that was attended by 30 people (15 employees and their partners – i.e. their associates). It was company policy to provide one social function a year for employees and their partners.

The employer used the actual method to value the meal entertainment.

The total GST-inclusive cost of food and drink was $6,600 (including $600 GST). This equated to a ‘per head’ cost of $220 ($6,600 divided by 30 people). No other benefits were provided in connection with the function.

The minor benefit exemption applied to the food and drink provided to each employee and their partner, as the ‘per head’ cost was less than $300.

The table below illustrates that, where the minor benefit exemption applied, the FBT, income tax and ITC implications for the employer were the same regardless of whether the function was held on business premises or at a restaurant.
Persons AttendingCost of Meal EntertainmentFBT, Tax and ITC Implications
Onsite FunctionsOffsite Functions
Employees$3,300
(i.e. $220 per head x 15 employees)
• FBT exempt;
• no tax deduction; and
• no ITC available.
• FBT exempt;
• no tax deduction; and
• no ITC available.
Associates
(e.g. partners)
$3,300
(i.e. $220 per head x 15 employees)
• FBT exempt;
• no tax deduction; and
• no ITC available.
• FBT exempt;
• no tax deduction; and
• no ITC available.
1. This portion of the meal entertainment is FBT exempt under the property benefit exemption.
2. This portion of the meal entertainment is FBT exempt under the minor benefit exemption.


Conclusion

Where the minor benefit exemption was available, this employer was not subject to FBT in relation to the meal entertainment of $6,600.

However, the employer was unable to claim the $600 ITC and a deduction for the expenditure. This was regardless of whether the function was held onsite or offsite. Importantly, although the employer would forgo an income tax deduction at the corporate rate of 30% (and cannot claim the ITCs), an FBT liability at 47% was avoided.

In contrast, if the minor benefit exemption did not apply, different consequences would arise depending on whether the function was held onsite or offsite.

In this case, it was better to hold the function onsite (on a working day) but only if the property benefit exemption applied. This is because the employer would still avoid a liability for FBT (but still could not claim a deduction and ITC) in respect of meal entertainment provided to the employees.

In the second, shorter part of this article we look at the much simpler 50/50 split method to value meal entertainment.