The festive season is a great time for your business to celebrate your team’s efforts and show appreciation to your customers, clients and associates. But before you book the venue and start buying gifts, it’s important to understand how Fringe Benefits Tax might apply – and how you can legitimately minimise or even avoid it.

Fringe Benefits Tax is the tax employers pay on benefits they provide to employees, their family or other associates in addition to, or as part of, their salary or wages.

In addition to work cars for employees’ private purposes, or paying for an employee’s private health insurance, Christmas parties (as well as staff bonuses and gifts in some cases) can be subject to FBT as they constitute 'entertainment benefits'.

The good news: there are exemptions under FBT that could save your business some money.

The catch: it’s not exactly simple to determine what’s FBT-exempt and what’s not. The Australian Tax Office (ATO) website has a comprehensive Entertainment-related fringe benefits section to help clear any confusion.

Here’s a practical overview for small and medium-sized businesses on how to keep the Christmas celebrations tax-smart.

1. Understanding FBT and Entertainment Rules

Fringe Benefits Tax (FBT) applies when you provide benefits to employees or their associates (such as family members) in place of, or in addition to, salary or wages. During Christmas, this commonly includes:

• Staff Christmas parties.
• Meals and drinks provided to employees or associates.
• Gifts to employees.
• Tickets or vouchers given as rewards or bonuses.

FBT can be a grey area because it depends on who receives the benefit, where it’s provided, and how much it costs.

2. Venue matters

Whether your Christmas party is considered ‘entertainment’ or ‘non-entertainment’ is just as important from the ATO’s perspective as it is for your employees.

From the ATO’s standpoint, you’ll be more likely to be FBT-exempt if the event venue is classified as ‘non-entertainment’. If the Christmas party is at your office on a working day, it’s more likely to be classified as ‘non-entertainment’. Conversely, if you host a party off-site (e.g. a restaurant of function venue), the $300 per-head rule from point 3 below applies.

The ATO defines ‘entertainment’ with a few dot points on its website:

• Providing entertainment by way of food, drink or recreation;
• Providing accommodation or travel in connection with such entertainment; and
• Paying or reimbursing expenses incurred in obtaining something covered by either of the above.

3. $300 IS the magic number 

When it comes to FBT, $300 is an important number to remember. It’s basically the threshold for what classifies as a ‘minor benefit’ and what doesn’t.

That’s important because minor benefits are often exempt from FBT, but there are some conditions.

A minor benefit has to be infrequent and irregular, meaning you can’t throw a Christmas party-scale event every other week and still say its infrequent.

A business that holds an end-of-financial-year party in June/July and a Christmas party in November/December is considered acceptable on this front.

The total amount spent per head also has to be $300 or less (GST inclusive), and this is for all similar expenses you’re claiming throughout the FBT reporting year for that employee. This can also extend to benefits provided to the  employee's associate (e.g. spouse).

4. ‘non-entertainment’ gifts provide a better tax outcome

He knows when you’re sleeping, he knows when you’re awake, he knows when you’ve been bad or good, he knows the FBT classification of your workplace Christmas gift ('he' being the ATO, that is).

Tickets to concerts, shows and sporting events etc., movie passes and holidays are classified as entertainment gifts by the ATO and are usually subject to FBT. If these types of gifts are under $300, they are FBT-exempt but not tax-deductible.

However, hampers, vouchers, bottles of wine and other similar gifts are classified as ‘non-entertainment’ and are generally exempt from FBT.

In general, gifts that are considered ‘things’ are less likely to be considered ‘entertainment’.

5. Clients and Suppliers

When it comes to entertainment, costs related to clients or customers are not subject to FBT (because they’re not employees), but these costs are not tax-deductible as entertainment expenses.

Gifts to clients and suppliers are not subject to FBT and are tax-deductible, provided they are given for business reasons (e.g. goodwill or maintaining relationships).

In summary

To summarise, there are a few important questions to ask yourself before you throw your Christmas party.

• How much will it cost? Remember $300 (GST inclusive) is the magic number.
• Where is it, and when will it be held? At the office during work or away from work?
• Who’s invited? Is it employees only? Are partners, clients and suppliers also invited?
• Giving gifts? How much are they worth, what type are they and who is receiving?

If your concerned about FTB issues around your business' Christmas activities, get in contact with your adviser at The Peak Partnership. We're here to help with advice, clarity and direction when it comes to end of year Christmas celebrations.

It's better to be safe than sorry this silly season…and have a happy and safe holiday season.