The ATO tax traps Australian businesses could fall into when organising staff Christmas parties and gifts

Australian businesses have been warned about the tax traps that could gift them a major problem this Christmas.

With the pandemic largely in the rear-view mirror, financial experts have flagged that the Australian Taxation Office will clamp down on festive season expenses and is even reviewing returns lodged in previous years.

“With many businesses now fully back from the lockdowns of COVID, there are going to be many parties, get-togethers, celebrations and gift-giving activities happening across the country,” Platinum Accounting Australia chief executive Coco Hou said.

“Some businesses are even taking staff away to resorts and overseas to destinations such as Bali to celebrate.

“At the same time, the ATO is also ramping up its review and analysis of business returns and focusing on business expenses such as Christmas-related claims.

“Many businesses are going to find themselves in hot water with the ATO unless they are diligent and compliant with ATO requirements.”

Hou said businesses will be quickly caught out if they fail to understand tax laws around gifts and Christmas events and activities.

When it comes to what businesses can claim for festive-period events, even she conceded “the answer is not so simple” and “really depends on the type of expense”.

Factors in play for celebratory activities include the type of gifts given and to whom, where the party is held, who attends, and how much is spent.

Christmas party expenses

The ATO considers Christmas parties as entertainment, which can attract fringe benefit tax (FBT).

Hou said hosts may be exempt if the costs are less than $300 per person including GST, and if the ATO considers the costs to be minor benefits provided infrequently and not as a reward for service.

Hosting the party on company property on a working day could also make it exempt from the FBT.

If family attend and costs increase, FBT “will apply to the portion that is over $300 (per person) and the business will be able to claim a tax deduction and GST credit for this amount as well”.

“If clients attend the party in person, then they are not subject to FBT, but the business can not claim income tax deductions or GST credits on their share of the cost,” Hou said.

The rules change “slightly” for parties held away from a company’s premises.

“While staff and their families are subject to the same tax treatment, if clients attend, regardless of their cost, they are not subject to FBT and the business can not claim any tax deductions or GST credits,” Hou said.

“For parties held off-site, it is important to note that the $300 per person threshold still applies for determining whether it qualifies as a minor benefit exempt from FBT.”

Christmas gifts

Company bosses wanting to thank or reward staff for a job well done also need to consider the tax implications, and the $300 marker is again important.

“If the gift is considered a minor benefit by the ATO then no FBT is applicable. To be minor, the gift must be less than $300 including GST and not an entertainment gift,” Hou said.

Entertainment gifts including holidays and tickets to sporting events “have different tax implications”.

“As long as they are less than $300 inclusive of GST, these gifts are not subject to FBT. If the gift is more than $300 including GST per employee, then FBT is applicable and the business can claim a tax deduction and GST credits,” Hou said.

“When it comes to entertainment gifts, while they may be exempt from FBT if under $300, the business cannot claim an income tax deduction or GST credits for these items regardless of their cost.”

Gifts presented to clients “are generally tax deductible” — but that comes with a warning.

“I do recommend keeping spending to a reasonable level. This includes placing or sending online purchases,” Hou said.

Non-entertainment gifts including a bottle of wine or a hamper are “generally tax-deductible” but event tickets “are not”.

“Clarifying this for businesses helps them to make the right bookkeeping entries and avoid any nasty surprises at tax time,” Hou said.

Hou’s final tip is for businesses to keep their receipts orderly, and even consider a cloud-based system.

ATO tips

The ATO uses third-party information and data matching to turn the spotlight on businesses that may be at risk of breaching their obligations and make sure they are compliant.

“Parties, events and gifting may be applicable for entertainment-related fringe benefits at any time of the year, and not just at Christmas,” a spokesperson told 7NEWS.com.au.

“Regardless of the time of year, we encourage employers to understand their FBT obligations before providing any perks or extras to their employees to avoid an unexpected FBT liability.

“Employers need to remember to keep records so they can show how they calculated the value of any benefits provided.”

More information can be found on the ATO website.