Are Office Christmas Parties Tax Deductible?

With the holiday season approaching, businesses across Australia will soon start planning their annual Christmas festivities. ‘Tis a wonderful time of the year, where businesses can let their hair down, celebrate the year’s achievements, boost team morale, and spread some Christmas cheer. However, amidst the celebrations, a practical question often arises: Are office Christmas parties tax-deductible?

Let’s explore what expenses can be considered tax-deductible this festive season and how to effectively navigate the regulations set by the Australian Taxation Office (ATO).

Fringe Benefits Tax (FBT) and Christmas Parties

Firstly, it’s essential to recognise that costs associated with your office Christmas party might be liable for Fringe Benefits Tax (FBT). If you’re not familiar with FBT, it is a tax imposed by the Australian government on specific benefits that employers offer their employees, beyond regular salaries or wages (think company cars, health insurance, and yes, even Christmas parties).  Christmas parties are included in this category, as they are considered a non-cash benefit.

That said, not every Christmas party will incur FBT as the ATO outlines certain exemptions. Whether you can claim a tax deduction depends on several factors, such as the cost per head, who attends the party and where it is held. If you follow the guidelines set by the ATO, you might be able to avoid paying FBT altogether.

Let’s take a closer look at each of these factors.

When is a Christmas Party Tax Deductible?

Cost Per Head Rule

Don’t get your tinsel in a tangle just yet! By simply ensuring you stay under $300 per head, the cost of your Christmas party will generally be exempt from FBT. Here’s how the cost per head rule impacts your ability to claim Christmas parties on tax:

• Costs Under $300 Per Person:
  The magic number to remember is $300 per person. If your Christmas party expenses are below this amount per attendee, they can typically be categorised as a “minor benefit,” which means Fringe Benefits Tax (FBT) won’t apply. However, there’s a catch: when FBT is not applicable, those expenses are also not tax deductible. So, if you keep costs under $300 per head, you won’t incur FBT, but you also won’t be able to claim those expenses as a deduction.
• Costs Over $300 Per Person:
  If your Christmas party exceeds $300 per person, the situation changes depending on who you’ve invited (refer to our table below). In some cases the costs will be subject to FBT, which also means you can claim a tax deduction for the entire expense, including GST credits. Paying FBT means you’ll face additional tax obligations, so while the expenses are deductible, you may not be saving money.

Attendance Rule

Whether or not you can claim your event on tax also hinges on who attends your Christmas party. The ATO makes distinctions between employees, their associates (like spouses or family members), and clients or suppliers:

• Employees: Expenses for employees fall under the general FBT regulations. If the cost per person exceeds $300, FBT applies and the expenses become tax deductible.
• Associates: The same rules for employees also apply to associates. If spouses or partners are invited and their portion of the cost surpasses $300, it will incur FBT, but the expenses remain deductible.
• Clients and Suppliers: When clients or suppliers attend your Christmas party, any related expenses are exempt from FBT but also are not tax deductible, irrespective of the amount spent. The ATO categorises these costs as “entertainment” expenses, which are typically non-deductible.

Location Rule

Another important aspect to consider is the location of the party, i.e. whether it takes place on your business premises or off-site:

• In-House Parties: Hosting the event at your office or another business-owned property qualifies it as a minor benefit if the cost per employee is below $300. This means no Fringe Benefits Tax (FBT) applies, but the expenses are not tax deductible.
• Off-Site Parties: If you choose to hold your Christmas gathering at a restaurant, venue, or any external location, and the costs per person exceed $300, FBT will be applicable, and these expenses can be claimed as a deduction.

Overview of Christmas Party Tax Rules

To sum up the above rules, we’ve pulled together a handy table to help you better understand your tax responsibilities this Christmas.

In house/ Off site	Cost per Head	Who are the Guests	FBT Applicable?	Deductible?
In House	Under $300	Employees	No	No
In House	Under $300	Associates	No	No
In House	Under $300	Clients	No	No
In House	Over $300	Employees	No	No
In House	Over $300	Associates	Yes	Yes
In House	Over $300	Clients	No	No
Off Site	Under $300	Employees	No	No
Off Site	Under $300	Associates	No	No
Off Site	Under $300	Clients	No	No
Off Site	Over $300	Employees	Yes	Yes
Off Site	Over $300	Associates	Yes	Yes
Off Site	Over $300	Clients	No	No

 

What About Staff Christmas Gifts?

When it comes to spreading Christmas cheer to your employees in the form of an end of year gift, don’t let FBT be the Grinch who stole your Christmas budget!

It’s important to note that staff gifts and staff Christmas party expenses are treated together as one jolly package, and if it stays under $300 per person and isn’t frequent, you’ll be spared from FBT. But if you go over a combined $300 per head for the gifts and the party, you’ll have to pay FBT and will also have to do another lodgement too. Our friendly advice? Keep it simple and stick to the budget, so you can enjoy the season without any extra headaches.

If you’d like to learn about the tax rules surrounding Client Christmas gifts, you may like to read our article, “Are Client Christmas Gifts Tax Deductible?”

Maximising the Festive Fun Without the Extra Costs

In a very festive nutshell, it’s crucial for businesses to understand the rules and regulations surrounding Tax, and specifically FBT during the Christmas season to ensure you remain compliant. To keep your office Christmas party FBT-free and avoid extra tax costs, here are a few tips:

1. Consider how much to spend: If you’re looking to avoid FBT, one of the most important things to remember is to keep the cost per head within the acceptable limit. For the current financial year, this limit is under $300 per head (but it can change every year, so be sure to check the latest figures again next year). While you’ll avoid FBT, remember that you won’t be able to claim the expenses as a deduction.
2. Consider who to invite: More isn’t always merrier! Invite all your employees to the party, but you might like to avoid inviting clients and suppliers if you want to maximise deductions, as their costs won’t be deductible.
3. Where to host the party: Host your party on your business premises during work hours. This way, the party can be considered a “minor benefit” and is exempt from FBT.
4. Record Keeping: And lastly, make sure to keep accurate records of all expenses related to the party, as these will be needed when you lodge your next tax return.

By carefully planning your party and keeping these tips in mind, you can make sure your team enjoys a festive end of year celebration without any unpleasant surprises from the tax office. Happy party planning!