As the so-called ‘silly season’ gets underway and with many employers reverting to pre-pandemic norms around meal entertainment, it is the perfect time to consider what benefits are going to be provided to staff and how, with a little planning, you might be able to avoid a Fringe Benefits Tax (FBT) hangover.
FBT and entertainment
During this time of the year, in addition to the typical Christmas party, we generally see a marked increase across meal and recreational entertainment, as well as gifts. This includes:
- Friday night drinks;
- Team lunches and dinners;
- Client lunches and dinners;
- Attendance at cultural and sporting events (e.g., horse racing or tennis); and
- Christmas gifts (vouchers/bottles of wine)
Under the Fringe Benefits Tax Assessment Act 1986 (“FBT Act”), employers must choose how they calculate their FBT meal entertainment liability. Most use either the ’50/50’ method or the ‘actual’ method, rather than the ‘12-week’ method.
For completeness it is important to note that neither of the following should usually be considered meal entertainment, irrespective of the method of calculation used:
- ‘Sustenance’; and
- Meals while travelling
Using the ‘50/50’ method
Rather than apportion meal entertainment expenditure based on the proportion received by employees (and their associates) and non-employees (who aren’t associates of employees) and by reference to where food and drink is actually consumed under the actual method, many employers choose to use the simpler 50/50 method. Under this method, irrespective of where the meal entertainment occurs or who attends, 50% of the total expenditure is subject to FBT and 50% is deductible for income tax purposes. However, the following traps must be considered:
- The ‘property exemption’ available under the actual method won’t apply. This means even if the function is held on the employer’s premises the food and drink provided to employees is not automatically exempt from FBT;
- The minor benefit exemption cannot apply; and
- The general taxi travel exemption (for travel to or from the employer’s premises) also cannot apply.
Using the ‘actual’ method*
Under the ‘actual’ method, only the entertainment provided to employees and their associates is subject to FBT. In addition, where food and drink are consumed by employees on the employer’s premises, there will be no FBT due to the property exemption - this takes care of Friday night drinks in the office! But usually, the greatest reduction in FBT when using the actual method will come from the ‘minor benefit’ exemption.
Outside of a handful of exceptions, where a benefit with a notional taxable value of less than $300 (including GST) is provided to an employee or an associate, the minor benefit exemption will generally apply to exempt the benefit from FBT. This being said, it’s important to be cognisant of the following:
- The frequency and regularity of the minor benefit
The more frequently and regularly a particular benefit is provided, the less likely the benefit will qualify as an exempt benefit.
- The total of the notional taxable values of the minor benefit and other identical or similar benefits
The greater the total value of minor benefits, the less likely it is that any minor benefit will qualify as an exempt benefit.
- The likely total of the notional taxable values of other ‘associated benefits’ – that is, those provided in connection with the minor benefit
For example, where a meal, which is a minor benefit, is provided in connection with a night’s accommodation and taxi travel, which themselves may or may not be a minor benefit, the total of their taxable values must be considered. The greater the total value of other associated benefits, in this case being the accommodation and the taxi travel, the less likely it is that the minor benefit will qualify as an exempt benefit.
- The practical difficulty in determining what would be the notional taxable value of the minor benefit and any associated benefits.
This would include consideration of the difficulty in keeping the necessary records in relation to the benefits.
- The circumstances in which the minor benefit and any associated benefits were provided.
This would include consideration as to whether the benefit was provided as a result of an unexpected event, and whether or not it could be seen as principally being in the nature of remuneration.
We find that usually employers would save a considerable amount of FBT using the ‘actual’ method (including removing the Christmas party!) however they usually don’t have the time to determine who received the benefit in order to apply the exemption.
RSM has developed an end-to-end solution combining complex data analytics and a bespoke rules-based approach to automate and streamline an employer’s meal entertainment and can assist in this regard.
*The minor benefit exemption is not as broad for taxpayers who provide tax-exempt body entertainment.
A common trap is where we have an employee who is considered a ‘frequent entertainer’ for meal entertainment purposes and then is automatically considered a frequent entertainer for recreational entertainment such that the minor benefit exemption is not applied.
As is the case when comparing a Christmas party to regular meal entertainment during the year, attendance at a football match is different from lunch with a client. Accordingly, we recommend reassessing which employees should be eligible for the minor benefits exemption with respect to recreational entertainment.
Also in valuing the recreational entertainment, particularly where you have a corporate box or a marquee, it may be appropriate to value the benefit using the capacity of the facility, as opposed to the final attendees. This could result in significant FBT savings.
The giving of gifts
Gifts provided to employees, or their associates will typically constitute a property fringe benefit and therefore are subject to FBT unless the minor benefit exemption applies. Gifts, and indeed all benefits associated with the Christmas function, should be considered separately to the Christmas party in light of the minor benefits exemption. For example, the cost of gifts such as vouchers, bottles of wine, or hampers given at the function should be looked at separately to determine if the minor benefits exemption applies to these benefits.
Gifts provided to clients are outside of the FBT rules but may be deductible if they are being made for the purposes of producing future assessable income.
For more information
Please contact Rick Kimberley if you have any questions or would like to have a discussion how RSM tax analytics can help deliver value in your FBT return.