As the end of year approaches, the subject of Christmas parties and FBT is never far from employers’ minds.

Paying too much fringe benefits tax can really make the turkey and stuffing stick in the throat. So how do you know if you’re getting the best deal with the tax you pay?

In the first part of this article we looked at the actual method of evaluating ‘meal entertainment’ FBT and other taxes incurred by an end of year event held either onsite or offsite.

In this second part, we consider the second method you can use: the 50/50 split method. This is a simpler way to evaluate FBT with fewer variables – so this is a much shorter article.

Christmas parties and FBT: The 50/50 split method

Under the 50/50 split method, meal entertainment provided in connection with a Christmas party or similar function is the same regardless of the location of the function (i.e. onsite or offsite) or who attends (employees, associates, clients, suppliers, etc.).

In other words, the employer’s total meal entertainment expenditure is aggregated and 50% is:

  • Subject to FBT;
  • Generally eligible for ITCs for any GST paid (i.e. if the employer is GST registered); and
  • Deductible for income tax purposes (excluding any ITC entitlement).

The remaining 50% of ‘meal entertainment’ is not subject to FBT, not tax deductible and no ITC is available.

When ‘meal entertainment’ provided in connection with a function is evaluated using the 50/50 split method, the property benefit exemption, minor benefit exemption, and taxi travel exemption cannot apply.

CASE STUDY – A Christmas party and FBT using the 50/50 Split Method

An employer arranged an end of year Christmas party at a local restaurant.

Of the 50 attendees, 30 were employees and their partners and 20 were clients and their contractors (i.e. non-employees).

The total restaurant bill was $13,750 (including $1,250 GST). Therefore, the total per-head cost of the function was $275 (i.e. $13,750 divided by 50 attendees).

Under the 50/50 split method, the $13,750 ‘meal entertainment’ total would have the following tax implications:
• FBT – 50% of the expenditure is subject to FBT. Therefore, the taxable value is $6,875 (i.e. 50% x $13,750). The minor benefit exemption would not be available.
• GST – An ITC entitlement arises in respect of 50% of the expenditure. Therefore, an ITC of $625 is available (i.e. 50% x $13,750 x 1/11).
• Tax deduction – 50% of the expenditure is deductible (excluding any ITC entitlement). Therefore, a tax deduction of $6,250 can be claimed (i.e. $13,750 x 50% - $625).

The same FBT, income tax, and GST consequences would arise under the 50/50 split method if the party was held on the business premises (during a work day). This is because under this method the property benefit exemption is not available.

I’m sure you’ll agree that the 50/50 split method is much easier to calculate and less of an administrative burden – but will it save you money?

Weigh up the FBT costs of your Christmas party or other end of year function carefully, using both methods. Then see which one works out best for you as the employer. You may enjoy a happier end of year function as a result!