As the festive season approaches, Christmas party planning is in full swing around the offices, factories and venues. While a Christmas party is a great way to reward your hard-working staff and reflect on the year gone by, it is important to understand the tax rules and implications to avoid a nasty FBT surprise in the new year.
What the ATO Means by “Entertainment”
The ATO considers food, drink, and recreation provided to employees and their associates (such as partners) as “entertainment.” This includes Christmas parties, dinners, and similar social functions, as well as lunches during work hours, and gift cards for employees.
How Fringe Benefits Tax (FBT) Applies
FBT is a tax employers pay on certain benefits provided to employees. FBT is paid at 47% of the grossed-up value of the benefit, and so is something you want to avoid if possible. Entertainment is considered a Fringe Benefit, meaning that FBT may apply to your Christmas party unless any exemptions apply. Some of the main FBT exemptions are:
- On‑premises, during work hours, employees only
- If associates (i.e. family members) also attend, they are only exempt if the cost is under $300 per person (known as the Minor Benefits exemption)
- Off‑premises (restaurants, function centres): Generally subject to FBT unless the Minor Benefits exemption applies (under $300 per person)
- Note that each ‘type’ of Entertainment is considered separately for the $300 limit – for example, if the venue hire is $200 per person, and the food and drinks are $150 per person, you may still be exempt as each individual ‘type’ is under the limit even though the total exceeds $300 per person
- Clients attending: Costs for clients, suppliers or contractors are not subject to FBT, but they also aren’t deductible.
- Gifts – depending on the type of gift, they may be exempt from FBT and tax deductible.
- Non-entertainment gifts (such as hampers, wine) are usually tax deductible if they are also exempt from FBT (under $300)
- Entertainment gifts (such as tickets to events) are usually not tax deductible and may be subject to FBT.
- Gifts to clients – these may be tax deductible if they are not entertainment and provided as part of the general operations of the business.
Note that Entertainment that is not subject to FBT is also not tax deductible – however, avoiding the 47% FBT is always more beneficial than receiving the tax deduction for the cost.
The minor benefits exemption also only applies if the Entertainment is ‘infrequent and irregular’ – if you are providing entertainment on an ongoing basis throughout the year you will be unable to apply this exemption.
How to keep your Christmas Party tax effective
- If possible, have your Christmas party at your workplace to avoid FBT for employees
- Keep the costs under $300 per person to utilise the Minor Benefits exemption
- Separate the expenses between employees, associates, and clients for more accurate tax treatment
Common Scenarios
Example 1: Onsite party with only employees
- Scenario: You host a Christmas lunch in the office during work hours, with food and drinks provided.
- FBT outcome: Exempt property benefit → No FBT payable.
- Deduction: Not deductible, because exempt property benefits are not tax‑deductible.
- Key point: This is the simplest way to celebrate without triggering FBT.
Example 2: Offsite party under $300 per person
- Scenario: You book a restaurant for staff, costing $150 per head.
- FBT outcome: The minor benefits exemption applies (under $300, infrequent, not excessive) → No FBT payable.
- Deduction: Not deductible, because exempt minor benefits are not tax‑deductible.
- Key point: Keep costs under $300 per person to avoid FBT, but note you lose the deduction.
Example 3: Offsite party over $300 per person
- Scenario: You host a gala dinner at a hotel, costing $350 per head.
- FBT outcome: Exceeds the minor benefits threshold → FBT is payable.
- Deduction: Deductible, because FBT is being paid.
- Key point: Higher‑end parties trigger FBT, but you can claim the expense as a deduction.
Example 4: Onsite party with employees and associates
- Scenario: The company provides Christmas gifts to both employees and clients:
- Each employee receives a $200 gift card.
- Each client receives a bottle of wine valued at $100.
- FBT outcome:
- Employees: Gifts under $300 may qualify for the minor benefits exemption, so no FBT is payable. If gifts exceed $300, FBT would apply.
- Clients: Gifts to clients are not subject to FBT.
- Deduction:
- Employees: If FBT is paid (for gifts over $300), the expense is deductible. If exempt under minor benefits, no deduction is allowed
- Clients: Gifts are deductible as marketing/business expenses.
- Key point: The tax treatment depends on who receives the gift and its value:
- Employee gifts are subject to FBT rules and thresholds.
- Client gifts are generally deductible and outside the FBT system.
Conclusion
In summary, by planning your Christmas party ahead of time, you can avoid some of the FBT pitfalls and ensure your celebrations are tax efficient (which you can celebrate too!)
If you are unsure which rules will apply to your Christmas Party, or you are planning your party and want to ensure you avoid FBT, we recommend consulting your tax professional for tailored advice for your situation.
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