Gifts provided to employees or their associates — that gold, frankincense and myrrh you picked up at the Black Friday sales — will typically constitute a property fringe benefit and therefore are subject to FBT unless the minor benefit exemption applies. Gifts, and indeed all benefits associated with a Christmas function, should be considered separately to the Christmas party in light of the minor benefits exemption.
For example, the cost of gifts such as bottles of wine and 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, see below — also note that deductibility may still apply even if the gift is a “minor benefit”).
The income tax deductibility and entitlement to input tax credits (ITCs) for the cost of the gifts depends on whether they are considered to be “entertainment”. For example, an unopened bottle of spirits is deemed to be a property benefit (the entertainment starts after the cap is unscrewed). Again, in most cases the entitlement to an ITC for expenses incurred for the employer mirrors the income tax implications — so an ITC is only available to the extent that the expense incurred is deductible.
Taxation Determination TD 94/55 provides guidance on whether the provision of property constitutes entertainment – see examples below.
Examples of “entertainment”:
- glasses of champagne
- hot meals
- theatre tickets
- holiday accommodation
- hired entertainers
- hired sporting equipment.
Examples – not “entertainment”:
- Bottled spirits
- TV sets, DVD players
- swimming pools
- gardening equipment
Further to the examples, the TD outlines some characteristics that are used as a reference for determination:
- entertainment occurs soon after provision of the item of property
- the usefulness of the item of property expires after consumption, or
- the item of property is returned at the completion of use.
- Direct connection
- there should be a direct connection between the item of property and the entertainment
- the entertainment should arise from the use of the item of property, or
- the entertainment is the expected outcome of the provision of the property.
Gifts to clients
Tax determination TD 2016/14 provides guidance on whether an outgoing incurred by a business taxpayer for a gift provided to a former or current client is deductible under the general deduction provisions contained in s8-1 ITAA97.
The ATO confirms that such outgoings are generally deductible under s8-1 ITAA97 as they are being made for the purposes of producing future assessable income. However, the outgoing is not deductible where it is of a capital nature, relates to the gaining of exempt or non-assessable non-exempt income, or some other provision of the income tax law prevents it from being deductible.
The determination contains the following examples:
Julia is carrying on a renovation business. She gifts a bottle of champagne to a client who had a renovation completed within the preceding 12 months.
Julia expects the gift will either generate future business from the client or make them more inclined to refer others to her business. Although Julia got on well with her client, the gift was not made for personal reasons and is not of a private or domestic character.
The outgoing she incurred for the champagne is not of a capital nature. Julia is entitled to a deduction under section 8-1 of the ITAA 1997.
David is carrying on a business of selling garden statues. David sells a statue to his brother for $200. Subsequently, David gifts a bottle of champagne to his brother worth $170. Apart from this transaction, he provides gifts only to clients who have spent over $2,500 over the last year.
The gift has been made for personal reasons, and is of a private or domestic character. David is not entitled to a deduction under sections 8-1 or 40-880 of the ITAA 1997.
Note that a deduction would not be denied to the business where the gift provided constitutes “entertainment” under Division 32 ITAA97. As mentioned, “entertainment” under the law is defined as: (i) entertainment by way of food, drink or recreation (such as golf days), or (ii) accommodation or travel to do with providing entertainment by way of food, drink or recreation (such as taxi travel to party venue). TD 94/55 lists property that constitutes the provision of entertainment within the meaning of subsection 32-10(1) of the ITAA97.
Some generous/successful employers, budget permitting, may choose to provide cash bonuses to staff in their end-of-calendar-year payroll.
Bonuses in the form of cash are considered to be a business cost, and therefore deductible under the general deduction provisions (s8-1 ITAA97). Therefore, being a benefit in the form of “coin” there is another side to this coin, which is that cash bonuses are assessable in the hands of employees as ordinary income (s6-5 ITAA97), no differently to salary and wages.
As a cash bonus is salary and wages, it is therefore not a taxable supply for GST purposes — so for these type of benefits, GST issues do not arise. Also there are no FBT issues to consider. However employers should consider the following:
- PAYG withholding: The ATO has released instructions on how to calculate the additional PAYG withholding for these one-off payments. This is contained in the ATO publication NAT 7905 Tax table for bonuses and similar payments. Also see Tax table for back payments, commissions, bonuses and similar payments (NAT 3348).
- Superannuation guarantee (SG): SGR 2009/2 confirms that cash bonuses constitute “ordinary times earnings” on which SG is required to be calculated and remitted at the rate of 9.5% for the 2017-18 year.
- State payroll taxes: Payroll taxes will ordinarily apply to the payment of such bonuses as these constitute taxable wages. Contact the state revenue office for your state if you need further information.