Christmas gifts and parties for employees
It’s normally in the run up to Christmas that we begin to consider gifts or a party to reward our employees for their services over the last year. Done right, the goodwill generated can be significant with staff feeling valued and part of something great. Which all leads to a better business with hard working and loyal staff.
But, before we settle on how to reward our people let’s consider the tax effects and the actual costs of different rewards.
Cash rewards, such as bonuses, are simple. They are just extra pays which will be taxed within the payroll and be subject to PAYE. This will mean that the amount received by the staff member will be reduced, sometimes significantly, by the tax portion.
Non-cash gifts to employees such as vouchers, tickets, flowers, food and drink may be subject to Fringe Benefit Tax (FBT) – this is a tax on benefits provided to your employees over and above their salary or wage. FBT will apply if the employee can choose to enjoy the gift outside of work and at a time and place of their choosing. If your business is registered for FBT then these gifts will need to be included in your filings.
However, you may be able to utilise a FBT-free allowance for these types of benefits. These allowances are simply exemption thresholds for these unclassified benefits and so long as you don’t breach the value threshold then you don’t need to comply with FBT filing or paying any further taxes. The expenses will simply be fully tax deductible with no further consequences for the business or employee. The threshold is $300 per employee per quarter, or $1,200 per annum. There is also a maximum business threshold of $22,500 for any 4 consecutive quarters. It pays to keep track of what you are spending, as should any of these thresholds be breached then all fringe benefits are taxable.
For example, Betty has her own nail salon with 5 employees who work hard and bring in lots of business. She is keen to keep all the staff and so rewards them regularly. One staff member, Gloria, is exceptional and routinely wins the monthly $100 restaurant voucher for bringing in the most business. Other staff members receive gifts of flowers and wine throughout the year in recognition of their sterling efforts. Given that the most available to any employee is $300 per quarter Betty does not register for FBT or disclose the benefits.
However, in the 3 months ending 31 December Gloria wins the monthly $100 voucher in October, November and December and everyone gets a Christmas ham and bottle of wine valued at $75.
As Gloria has received $375 worth of gifts in the quarter the $300 general exemption threshold has been breached. Betty will, therefore, need to register for FBT and declare the gifts made to Gloria for that quarter. As the other staff have received gifts below the threshold there is nothing to declare for them.
Christmas parties are not without tax consequences either. Any sort of party will likely be subject to the entertainment regime and only 50% of the costs incurred will be allowed for income tax and GST purposes.
Also, it is not just the cost of the food and drink which is subject to the limitation. Any costs associated with the functions will only be 50% deductible. These include items such as the hire of crockery, utensils and glassware, waiting staff, music or other entertainment.
We fully advocate the rewarding of staff at Christmas and see great benefits accruing to businesses as a result. Just bear in mind that some types of gifts and entertainment can potentially bring unintended tax consequences and make sure that you don’t over-claim the GST or forget to disclose any fringe benefits.
Questions about FBT, employees or entertainment? – feel free to contact us here!