The most effective way of sharing the Christmas joy with customers is not necessarily the most tax effective. If, for example, you take your client out or entertain them in any way, it’s not tax deductible and you can’t claim back the GST. There are specific rules designed to prevent deductions and GST credits from being claimed when the expenses relate to entertainment, regardless of whether there is an expectation of generating goodwill and increased business sales. Restaurants, a show, golf, and corporate race days all fall into the ‘entertainment’ category.
However, if you send your customer a gift, then the gift is tax deductible as long as there is an expectation that the business will benefit (assuming the gift does not amount to entertainment). Even better, why don’t you deliver the gift yourself to your best customers and personally wish them a Merry Christmas. It will have a much bigger impact.
From a marketing perspective, if your budget is tight, it may be better to focus on the customers that you believe deliver the most value to your business, rather than spending a small amount on every customer. If you are going to invest in Christmas gifts then make sure it is something that people remember and appropriate to your business.
You could also make a donation on behalf of your customers (where your business takes the tax deduction) or for your customers (where they receive the tax deduction). Donations to deductible gift recipients (DGRs) above $2 are tax deductible and can make an active difference to a cause (see For you section below).
Christmas is expensive. Some businesses simply can’t afford to do much because cashflow is tight. Expectations are high so if you want to do something then it’s best not to exacerbate cashflow problems and take advantage of any tax benefits or concessions that you can. Let’s have a look at the impact of your options.
If you really want to avoid tax on your work Christmas party then host it in the office on a workday. This way, Fringe Benefits Tax (FBT) is unlikely to apply regardless of how much you spend per person, however the cost is not tax deductible.
Also, taxi travel that starts or finishes at an employee’s place of work is exempt from FBT. So, if you have a few team members that need to be loaded into a taxi after over indulging in Christmas cheer, the ride home is exempt from FBT.
If your work Christmas party is out of the office, keep the cost of your celebrations below $300 per person. This way, you won’t pay FBT because anything below $300 per person is a minor benefit and exempt.
For example, if the party is held somewhere other than your business premises then the taxi travel is taken to be a separate benefit from the party itself and any Christmas gifts that you have provided. In theory, this means that if the cost of each item per person is below $300 then the gift, party, entertainment and taxi travel can all be FBT-free. However, the total cost of all benefits provided to employees needs to be taken into account in determining whether the benefits are minor across the FBT year.
Just remember that if entertainment is provided to employees and an FBT exemption applies, you will not be able to claim tax deductions or GST credits for the expenses.
If your business hosts outside of the office, slightly more extravagant parties and goes above the $300 per person minor benefit limit, you will pay FBT but you can also claim a tax deduction for the cost of the event. Just bear in mind that deductions are only useful to offset against tax. So, if the business is paying no or limited amounts of tax, a tax deduction is not going to help offset the cost of the party.
$300 is the minor benefit threshold for FBT so anything at or above this level will mean that your Christmas generosity will result in a gift to the Tax Office as well at a rate of 49%. To qualify as a minor benefit, gifts also have to be ad hoc – no monthly gym memberships or giving the one person multiple gift vouchers amounting to $300 or more.
Gifts of cash from the business are treated as salary and wages – PAYG withholding is triggered and the amount is subject to the superannuation guarantee.
Aside from the tax issues, think about what will be of value to your team. The most appreciated gift is the one that means something to the individual. Giving a bottle of wine to someone who doesn’t drink, chocolates to a health fanatic, or time off to someone with excess leave, isn’t going to garner much in the way of goodwill. A sincere personal message will often have a greater impact than a uniform gift.
We all have a relative who does not need or want anything material and who is very socially aware. This Christmas, why not consider a charitable gift?
Assuming the gift is made through a deductible gift recipient (DGR), then the donation will be tax deductible.
Remember however, that if you receive something for that donation (like a toy or raffle ticket), then it will not be tax deductible.
The amount you can claim depends on the type of gift. For gifts of money, it is the amount of the gift but it must be $2 or more. For gifts of property, there are different rules, depending on the type of property and its value.
A tax deduction for most gifts is claimed in the tax return for the income year in which the gift is made. However, you can elect to spread the tax deduction over five income years in certain circumstances.