Ho Ho Ho….Merry Taxmas! How to avoid the Tax Office Grinch this festive season!
December 15th – by Angela Lehmann
It is always around this time of year when the Christmas parties, gifts and other festivities kick into gear that additional tax obligations are triggered for a lot of employers, usually inadvertently.
Although the main tax implications stem from Fringe Benefits Tax (FBT), there are interactions with income tax, GST and Payroll Tax that most employers do not consider.
Some common festive season benefits an employer might provide their employees include:
- Cash bonuses;
- Vouchers and other Christmas gifts; and
- Christmas Parties.
Let’s discuss the potential tax impact of some of these festive activities and any possible exemptions and concessions to ensure that you can still reward your employees for their year of hard work.
In FBT legislation, the definition of an ‘associate’ includes friends, relatives, partners, trustees and beneficiaries and related companies. Bear this in mind as benefits provided to an employee’s associate (commonly spouses) also trigger FBT.
1. Cash bonuses
A bit of extra cash at this time of year is always appreciated. If you’re sharing some of your hard earned profits with your employees, these are the things to consider:
- Paying staff a year-end cash bonus, is not a fringe benefit.
- Bonuses are considered salary and wages PAYG withholding and Superannuation Guarantee.
- Payments for cash bonuses are deductible to the employer the same as salaries and wages.
- Bonuses are assessable income to the employee and are reported in their PAYG Payment Summaries.
- Don’t forget the payroll tax. Bonuses are included in the definition of wages for payroll tax purposes and must be included in the payroll tax calculation for the relevant State or Territory.
2. Vouchers and other Christmas gifts
Rewarding your team with a trip to Bunnings, Coles or Woolies? Typically, vouchers and other gifts given to employees or their associates as are subject to Fringe Benefits Tax (FBT).
Vouchers are treated as gifts and not cash (albeit they have a cash value) and therefore are considered “property fringe benefits.”
It’s not all bad news though, where the gift meets the definition of a minor benefit, then the minor benefits exemption is likely to apply. The main criteria for the minor benefits exemption being:
- Value of the gift is less than $300 (including GST) per gift; and
- Gifts of similar kind are not given regularly/frequently, such as every month as an incentive.
If you’re not exactly full of festive spirit, consider this; being a great boss and rewarding your staff can be a tax deduction! The cost of the gift would be tax deductible to the employer where it is a non-entertainment gift.
There are also a few GST considerations (hold on, this bit is a little technical):
- The employer’s GST status and eligibility to claim GST will determine the FBT gross-up rate to be applied when calculating the FBT amount. The Type 1 gross-up rate is used where the benefit provider is entitled to claim GST and the Type 2 gross-up rate is used when they are not entitled to claim GST. For the FBT year ending 31 March 2016, the gross-up rates will be 2.1463 and 1.9608 respectively;
- Reminder! When calculating FBT, you must use the GST-inclusive amount of the benefit. Therefore, if you are using a general ledger to determine the amounts, make-sure you gross-up for GST; and
- You can still claim the GST you paid on the gift (regardless of whether it is exempt from FBT or not).
“What about payroll tax?” I hear you ask. As a general rule, payroll tax only applies to taxable fringe benefits (i.e. not exempt benefits).
The employer needs to gross-up the taxable value of the fringe benefit by the Type 2 gross-up factor and include that amount as part of total wages for payroll tax purposes.
3. Christmas Party
The work Christmas part isn’t only an occasion that makes your HR team nervous, it can also be a tax minefield. Christmas parties are tricky; it requires the employer to dissect the various components of the party and to consider each one individually. Considerations include:
- Was transport (i.e. taxi) provided as a means of getting to/from the party?
- Was there entertainment provided at the party?
- Was the party held on business premises or was a venue hired?
- Were partners and clients also invited?
- What was the total per-head cost of the party?
There is quite a lot to the Christmas party tax implications. I’ll cover this more in my next blog post.
For now, I hope these tips are useful and inspire your festive holiday spirit!