The festive season is synonymous with corporate spending, so here are a few tips to help you avoid the ‘gift’ of a heaving EOFY tax bill.
‘Tis the season to whip out the corporate credit card, shout a round for your favourite clients and treat your employees to an epic end-of-year celebration – and we sure as hell aren’t going to be the people to tell you not to do that.
But if you’re going to go all out on corporate gifting and spending this silly season, you should know what you’re getting yourself into from a tax perspective.
Get to know the general rules when it comes to corporate gifting and spending before you get out the credit card this Christmas.
Client gifts and functions
Shouting clients an evening out, dinner and/or drinks is a fairly normalised affair when it comes to most service industries.
However, the year is no longer 1960, and casually popping all of your entertainment expenses onto your corporate credit card à la Mad Men no longer flies with the Australian Tax Office, unfortunately.
But does that mean you can’t shout your clients a drink at the bar? Does it mean you can’t send a thoughtful gift hamper or voucher? It does not. Let’s break it down.
The two main things to consider when choosing what gifts or spending you’ll allow on clients or customers is whether it’s going to be deductible (or not) from an income tax perspective, and whether (or not) you can claim the GST credits on the expense.
In most standard accounting software packages, the expense account that’s dedicated to non-deductible expenses is the Entertainment account. The Entertainment account is seen by the ATO as just that – a good time which could very easily be an enjoyable tax aversion. For this reason, expenses that fall under that category are in many cases, non-deductible.
Thankfully, there are a number of ways to treat your customers or clients in a way that does benefit your business from a tax perspective. Here’s a rough guide.
Of course, you’re still allowed to go down the route of the non-deductible expenses – and many businesses in the service industry do just that. It’s just not going to benefit your business from a tax perspective, as there’s no tax deduction available.
A quick note on client functions: Generally with client functions or end-of-year parties that involve both staff and clients, there are a range of expenses that will fall under both deductible and non-deductible expense accounts. It’s best to talk to your accountant about this and keep your receipts.
Employee gifts and functions
Seasonal spending on your employees is similar to your clients, but there’s also Fringe Benefits Tax (FBT) to consider.
The threshold for FBT when it comes to staff gifts or entertainment spending is $300 per person (including GST).. Another condition the ATO requires to avoid triggering FBT is that the spending is “minor and infrequent” – i.e. it’s not something that a particular employee is treated to every week.
So your staff Christmas party – assuming it’s less than $300 per head and they’re not getting this type of perk all the time – is unlikely to be subject to FBT. However, assuming it’s at a restaurant or bar, it’s still considered Entertainment and therefore won’t be tax deductible.
Employee gifts, however, may be a deductible expense. The key here is to avoid the Entertainment expense account again. .
Another thing to consider when it comes to the end of the year is cash bonuses for staff. Cash bonuses are generally considered part of an employee’s remuneration so they’re likely to be subject to the same requirements as payroll – think PAYG withholding and superannuation.
Finally, Christmas time usually implies a period of leave or a company shut down period.
Private use of the corporate card use during annual leave or when your team isn’t working is potentially going to trigger FBT. So if the business is closed for the holidays and there are still a heap of expenses going through the company credit card, you’ll need to be able to justify that to the ATO.
Where the company provides cars to employees – and if they still have access to them when they’re not working – the business may also be inadvertently increasing their end of year FBT bill. As always, keep all your receipts and if you’re unsure, talk to your accountants about your planned use of the vehicles.
And that’s what you need to know to avoid getting a lump of coal in your stocking from the ATO this season – happy holidays!