How to make Christmas parties and gifts tax effective

Christmas gifts for customers

If you’re running a business and want to buy Christmas gifts for your customers, you have a few options to optimize your tax effectiveness.

If you send or hand deliver a gift to a customer, then that gift is tax deductible as long as there is an expectation that the business will benefit.

The gift must not amount to ‘entertainment,’ as there are specific rules designed to prevent deductions and GST credits from being claimed when the expenses relate to entertainment (restaurants, a show, a corporate day out, golf are all examples that sit in the ‘entertainment’ category.) Taking your clients out or entertaining them in any way is not tax deductible and you can’t claim back the GST.

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 above $2 are often tax deductible making quite a difference to a good cause.

Christmas gifts to staff

$300 is the minor benefit threshold for FBT, so anything at or above this level will result in a gift to the Tax Office too at the rate of 47%. To qualify as a minor benefit, gifts also have to be ad hoc. This means no monthly subscriptions or providing someone with multiple gift vouchers amounting to $300 or more.

Any cash gifts from the business are treated as salary and wages. PAYG withholding is triggered, and the amount is subject to the superannuation guarantee.

Christmas parties

To avoid tax on your work Christmas party then you would need to host it in the office on a workday! By doing this, Fringe Benefits Tax (FBT) is unlikely to apply regardless of how much you spend per person.

Also, bear in mind that taxi travel that starts or finishes at an employee’s place of work is exempt from FBT. 

If your work Christmas party is out of the office, then if you keep the cost of your celebrations below $300 per person you can avoid paying FBT.  The downside is that the business cannot claim deductions or GST credits for the expenses if there is no FBT payable in relation to the party.

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 you have provided. In theory, this means that if the cost of each item per person is below $300 then the gift, party and taxi travel can potentially all be FBT-free. The minor benefits exemption requires a number of factors to be considered, including the total value of associated benefits provided across the FBT year.

If entertainment is provided to employees and a FBT exemption applies, you will not be able to claim tax deductions or GST credits for the expenses.

If your business hosts a larger party and goes above the $300 per person minor benefit limit, you will pay FBT, but you can also claim a tax deduction and GST credits for the cost of the event.  Just be mindful that deductions are only useful to offset against tax. If your business is paying no or limited amounts of tax, a tax deduction is not going to help offset the cost of the party.

If you are running a GST registered business which is not tax exempt, and you are not using the 50-50 split method for meal entertainment, our handy table below will give you a snap shot of what you need to know.

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Last updated: 8th December 2022