A little planning can help avoid an FBT hangover this festive season

Yes, it’s that time of year again! 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 your business is going to provide to staff and how, with a little planning, employers might be able to avoid an FBT hangover.

During this time of the year, in addition to the typical end-of-year party, we generally see a marked increase in expenditure across meal and recreational entertainment, as well as gifts. This may include:

• Friday night drinks;
• team lunches and dinners;
• client lunches and dinners;
• attendance at cultural and sporting events (eg horse racing or tennis); and
• Christmas and other end-of-year gifts (eg vouchers/bottles of wine).

FBT implications: meal entertainment

Under the Fringe Benefits Tax Assessment Act 1986 (the 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’s 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 apportioning 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 benefits 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 benefits” exemption (note that the minor benefits exemption is not as broad for taxpayers who provide tax-exempt body entertainment).

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 benefits 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”, ie 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; and
• 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.

Usually, employers would save a considerable amount of FBT using the “actual” method (including removing the end-of-year party!); however, they usually don’t have the time to determine who received the benefit in order to apply the exemption.

FBT implications: recreational entertainment

A common trap is where an employer has 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 benefits exemption is not applied.

As is the case when comparing an end-of-year staff 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.

Giving of gifts

Gifts provided to employees, or their associates, will typically constitute a property fringe benefit and therefore be subject to FBT unless the minor benefits exemption applies. Gifts, and indeed all benefits associated with the end-of-year function, should be considered separately to the party itself 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.