Home > Updates > Festive Finances: Navigating gifts, bonuses, and FBT
As the festive season approaches, many businesses are actively planning Christmas events and showing appreciation to key clients and staff through gifts and bonuses. While tax considerations may not be a top priority during this busy time, it’s important to take a moment to consider potential tax implications, especially those related to Fringe Benefit Tax (FBT), to avoid any unexpected surprises in the new year.
FBT is often associated with company cars and other large benefits provided to employees, but it applies to a wider range of non-cash benefits, including gifts and vouchers given to employees and their families. These items can create a potential tax liability for the employer.
There are, however, exceptions. The most notable is the ‘de minimis’ threshold, which exempts employers from FBT on Christmas benefits if:
It’s also important to understand the interaction between FBT, PAYE, and entertainment tax rules, particularly during the holiday season. The entertainment rules take precedence over FBT for staff and client events, meaning these costs are subject to a 50% tax deduction limitation (rather than FBT). Additionally, FBT is separate from payroll taxes like PAYE, which only apply to cash payments such as salaries, wages, and cash bonuses.
We’ve set out below answers to some common questions we receive around these three regimes around Christmas:
How do I treat the costs of the annual staff Christmas party?
If you’re hosting a Christmas party for your staff, their families, or clients, whether at your premises or an external venue like a bar or restaurant, there is a personal benefit aspect to the expenditure. As a result, the entertainment tax rules override the FBT rules in most situations. It typically doesn’t matter whether the party occurs during or outside of work hours.
In most cases, only 50% of the expenses related to such an event are tax deductible.
If an employee contributes to the cost of the event (such as purchasing a subsidized ticket), this contribution is deducted before applying the 50% limitation on the remaining cost. For example, if an employer spends $200 on entertainment and an employee contributes $50, the employer’s net cost is $150. The employer can then claim a deduction for 50% of $150, which equals $75.
What about the transportation to and from a Christmas event?
If you’re covering the cost of transportation for your staff to and from your Christmas event, and attendance is voluntary (i.e., not part of their employment duties), there may be a potential FBT liability if employees have the freedom to choose when and how they travel.
Additionally, if an employee arranges their own transportation (such as booking a taxi or Uber) and is reimbursed by the employer, this reimbursement is treated as a cash payment and subject to PAYE, rather than FBT. In this case, the reimbursement would need to be grossed up as taxable income and processed through payroll.
To mitigate these risks, particularly if transportation is necessary or advisable (for example, if the event is in a remote location or involves alcohol), it’s preferable for the employer to organize transport directly. For instance, booking a bus with fixed departure and return times removes the element of employee choice. In this scenario, the transportation costs are more likely to be treated under the entertainment tax regime, similar to the other event expenses, as outlined earlier.
What is the tax treatment for gifts and vouchers I’ve given to my employees for Christmas?
Expenses incurred on gifts, prizes, and vouchers for employees are usually eligible for a full tax deduction for the employer, categorized as staff expenses.
The FBT rules apply, and you need to consider if you have breached either of the de minimis thresholds mentioned at the beginning of this article. If you have, FBT needs to be calculated and paid on the value of the gifts or vouchers provided (with the FBT paid also deductible for the employer).
I am giving my remote workforce a voucher to a restaurant, as they cannot attend the Christmas party at the head office. Is that entertainment expenditure too?
Even though the voucher may be in lieu of the Christmas party (which is likely subject to the entertainment rules), the provision of a voucher, that the remote worker can choose when to redeem, is subject to FBT, rather than the entertainment rules. Refer to item 3 above for more information.
What about gifts provided to clients?
Deductions for gifts provided to clients are subject to the 50% entertainment limitation rule if they are in the form of ‘entertainment’ i.e. food or drink items, a meal at a show, or tickets to a game or a show).
If the gift does not meet the definition of an ‘entertainment’ item (i.e. a non-perishable item such as an umbrella or torch), the cost may be fully deductible if it qualifies as a business expense.
I always pay a small cash bonus to staff at Christmas time. Does any tax need to be paid on this?
Yes. When cash bonuses are given to employees, the correct treatment of these payments (regardless of the value whether nominal or significant) is to calculate the grossed up amount (i.e. add the tax due on top of the cash given at the employee’s marginal rate) and report this gross income through your payroll.
If you would like more information on Christmas expenses and Fringe Benefit Tax (FBT), please contact your Nexia advisor.
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