Christmas and Tax

With the festive season approaching (or already underway), many business owners are preparing for year-end celebrations with their employees and clients. Understanding the rules around Fringe Benefits Tax (FBT), GST credits, and tax deductibility can help avoid unexpected surprises at tax time.

Holiday celebrations typically involve Christmas parties and/or gift giving.

Christmas Parties

• On-premises parties
  If the party is held at the business premises during work hours, attended only by current employees, and costs less than $300 per person (GST-inclusive), FBT does not apply. However, the cost is not tax-deductible, and GST credits cannot be claimed.
• Off-premises parties or events with partners
  If the party is held off-site (e.g., at a restaurant) or includes employee partners, FBT applies if the cost is $300 or more per person (GST-inclusive). However, if the cost is below $300 per person, it qualifies as a minor or infrequent benefit, so FBT does not apply. If FBT does apply, it covers the entire cost, not just the excess over $300. In this case, the expense is tax-deductible, and GST credits can be claimed.
• Parties with clients
  FBT does not apply to costs incurred for clients (as they are not employees). However, these expenses are not tax-deductible, and GST credits cannot be claimed.

Gifts

It’s essential to determine whether the gift is classified as "entertainment" (e.g., movie or theatre tickets, sporting event admissions, holiday travel, or accommodation vouchers).

• Entertainment gifts for employees
  If the cost (GST-inclusive) is less than $300, the minor or infrequent exemption may apply, and FBT is not payable. However, the cost is not tax-deductible, and GST credits cannot be claimed. For entertainment gifts costing $300 or more, FBT applies, but the cost is tax-deductible, and GST credits can be claimed.
• Non-entertainment gifts for employees
  Non-entertainment gifts under $300 (e.g., Christmas hampers, alcohol, pens, or gift cards) may qualify for the minor or infrequent exemption. Since entertainment rules do not apply, the cost is tax-deductible, and GST credits can be claimed.
• Gifts for clients
  Gifts for clients are not subject to FBT. Non-entertainment gifts provided with the intent to build goodwill or encourage future business are tax-deductible and have no monetary limit (within reason). GST credits can also be claimed.

Best Approach for Employees

Treating employees to a Christmas lunch or dinner can avoid FBT if the cost per person stays under $300 and the event is infrequent. While the cost isn’t tax-deductible, this approach avoids the higher cash-flow impact of grossed-up FBT.

Pairing an off-site Christmas party with non-entertainment gifts (e.g., up to $299) is a cost-effective way to show appreciation. Gift cards are particularly well-received and, even if they can be used for entertainment purchases, are not considered entertainment gifts. This means they are tax-deductible, and GST credits can be claimed.

Best Approach for Clients

FBT does not apply to gifts for clients, but non-entertainment gifts (e.g., hampers, wine, or branded merchandise) are more tax-effective than hosting a lunch or dinner, as these gifts are tax-deductible, and GST credits can be claimed. Thoughtful gifts often leave a stronger impression than dining out during a client’s already busy festive schedule.

For advice on tax treatment for holiday celebrations and gift giving, feel free to contact us.