Everything you Need on the 50% Capital Gains Discount
The 2024 has proved to be yet another difficult and rewarding year for many, marked by elections, interest rates and volatile commodity prices. Yet, as Australia and Perth continue to deliver strong housing returns and mining activity, there is all the more reason for Perth family businesses to celebrate what their employees and accountants have achieved this past year.
Although the tax implications of pre-Christmas events and gifts can be a minefield, businesses and their private CFO’s still have plenty of ways to express their good wishes and appreciation this festive season. This article outlines the FBT rules relevant at this time of year and the kinds of benefits employers can provide to their employees, their employees’ associates, and clients without incurring a substantial FBT liability in the process.
A brief look at Fringe Benefits Tax (FBT)
FBT is a tax paid by employers on the taxable value of fringe benefits, other than salary or wages, provided to their employees and their associates (such as family) regarding their employment during an FBT year (1 April to 31 March). Section 136(1) of the Fringe Benefits Tax Assessment Act 1986 (Cth) (FBTAA) defines an employee by reference to the PAYG withholding system. This means that directors are employees for FBT purposes.
The ATO has simplified the method statement prescribed by the FBTAA here. It explains how to calculate the FBT employers must pay for providing fringe benefits. The FBT payable is the fringe benefits taxable amount multiplied by the FBT rate (currently 47%).
The fringe benefits taxable amount is calculated by totalling:
- the grossed-up taxable value of type 1 aggregate fringe benefits amount; and
- the grossed-up taxable value of type 2 aggregate fringe benefits amount.
Notes
1 There are two types of gross-up rates:1
- Type 1 aggregate fringe benefits amount — the total taxable value of all the fringe benefits you are entitled to claim GST input tax credits.
- Type 2 aggregate fringe benefits amount — the total taxable value of all the fringe benefits for which you cannot claim GST input tax credits.
2. The rules for calculating the taxable value of a fringe benefit vary by type.
3. The above formula grossly increases the taxable value of the benefit provided to reflect the gross salary an employee would need to earn after paying tax to pay for the benefit.
4. Further information on calculating an FBT liability is available from the ATO website.
FBT, GST and income tax
Section 32-5 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) prevents a deduction for a loss or an outgoing incurred in providing entertainment. However, a deduction is allowed by s 32-20 for the loss or outgoing if it is incurred to provide entertainment by way of delivering it as a fringe benefit.
It follows that an employer who is registered for GST is generally:
- not entitled to claim GST input tax credits on entertainment expenses that are not provided as fringe benefits because the amounts are non-deductible under s 32-5;2
- entitled to claim GST input tax credits on entertainment expenses provided as fringe benefits because the amounts are deductible under s 32-20.
Methods for calculating FBT on meal entertainment benefits
Broadly, providing entertainment through food and drink, or accommodation or travel in connection with such entertainment, is an expense payment fringe benefit, a property benefit, a residual benefit or a tax-exempt body entertainment benefit.
However, the employer may choose3 to value food, drink and associated accommodation or travel as ‘meal entertainment’ under specific valuation rules contained in Division 9A of Part III of the FBTAA (Division 9A).
Division 9A provides for two valuation methods:
- the ‘50/50 split method’; or
- if the employer makes a further election — the 12-week register method’’.
Suppose the employer does not elect for Division 9A to apply. In that case, they are subject to the actual value method under the valuation rules for expense payment fringe benefits, property benefits, and residual or tax-exempt body entertainment benefits.
Actual value method
Under this method, the employer needs to record attendees at each event and calculate the taxable value of the meal entertainment benefits provided. Employers will need to record information such as:
- Date of the event
- Names and status of each attendee (i.e. whether they were an employee, an associate of an employee or a client)
- Costs to hold the event.
50/50 split method (must elect)
Under the 50/50 split method, the taxable value is 50% of the total meal entertainment benefits provided during the FBT year, regardless of the actual taxable value of the benefits provided.
If this method is chosen, the employer cannot then avail themselves of FBT concessions such as the $300 minor benefits exemption or the exemption for property benefits provided and consumed on a working day on the employer’s premises.
12-week register method (must elect)
Under the 12-week register method, the employer must track the attendees at events over 12 weeks to calculate the percentage of the total meal entertainment expenditure during that period that is subject to FBT. This percentage is then used to calculate the taxable value of the total meal entertainment costs for the entire FBT year.
Suppose the 12-week register method is chosen for the 50/50 split method. In that case, the employer cannot avail themselves of FBT concessions such as the $300 minor benefits exemption or the exemption for property benefits provided and consumed on a working day on the employer’s premises.
Exempt benefits
The FBTAA provides for two exemptions from FBT (outlined below) that may interest employers during Christmas. Note that an income tax deduction or GST input tax credit cannot be claimed if the benefit is meal entertainment and exempt from FBT.
$300 minor benefits exemption
A benefit qualifies for the minor benefits exemption4 where its value is less than $300 (including GST), it does not reward an employee for their performance or service, and it is provided on an irregular and infrequent basis.5 Benefits provided to either employees or their associates may qualify for the minor benefits exemption.
Entertainment benefits and other gifts are considered separately when applying for the minor benefits exemption. For example, suppose an employer holds an event that costs $290 per person and gifts each attending employee a hamper valued at $200. In that case, each benefit constitutes a minor benefit and therefore, both are exempt from FBT.
Further, when determining if the notional taxable value of the benefit provided to an employee is less than $300, benefits provided to associates are not included. This means the $300 limit applies separately to employees from their associates. Accordingly, when this is combined with the above rule about entertainment benefits and other gifts being considered separately, an employer can provide a (less than) $300 gift to each of the employee and their associate and hold an event at a nearby restaurant at a cost of (less than) $300 each; a total benefit of (less than) $1,200 that is exempt from FBT.
Importantly, the $300 minor benefits exemption is not available to employers who elect to value their meal entertainment fringe benefits under Division 9A. This is because once the decision is made to value the benefits using the 50/50 split method or the 12-week register method, those valuation methods apply to all the meal entertainment fringe benefits. The employer cannot then ‘cherry-pick’ some of the benefits to which they would like to apply for the $300 minor benefits exemption.
Exempt property benefits for employees
Where an employee is provided with and consumes a property benefit (such as food and drink) on their employer’s business premises on a working day, the benefit is an exempt property benefit and, therefore, exempt from FBT.6
This exemption does not extend to property benefits provided to associates of employees. However, these benefits may still be exempt from FBT under the minor benefits exemption.
As with the minor benefits exemption, the exempt property benefits rule is not available to employers who elect to value their meal entertainment fringe benefits under Division 9A. This is because once the decision is made to value the benefits using the 50/50 split method or the 12-week register method, those valuation methods apply to all the meal entertainment fringe benefits. The employer cannot then ‘cherry-pick’ some of the benefits for which they would like to use the exempt property benefits rule.
FBT and Christmas
During the festive season, employers often provide the following types of benefits to their employees:
- Christmas parties
- Christmas gifts.
The following sections describe the tax implications of these types of benefits, assuming that the actual value method for FBT is being used. Where the employer chooses to use the 50/50 split method or the 12-week register method in Division 9A, they will be unable to avail themselves of the exemptions discussed below.
Christmas parties
Christmas parties are a great way for teams and colleagues to reconnect after long periods of working from home. The location of the Christmas party (e.g., on-site or off-site) significantly affects the tax implications. These costs are regarded as meal entertainment benefits for FBT purposes.
As mentioned above, where an event is held on the business premises during a working day, employee meal entertainment benefits are exempt from FBT, regardless of cost. Businesses looking to spend $300 or more (including GST) per person at their Christmas party may wish to consider restricting the event to employees only and holding it on-site during a working day.
If any associates of employees are attending, their costs are subject to FBT unless the minor benefits exemption applies. This means businesses seeking to avoid FBT will need to keep the event cost below $300 per person (including GST).
Client meal entertainment costs are not subject to FBT, nor are income tax deductions or GST input tax credits available.
Where a business chooses to hold its Christmas party off-site, the exempt property benefit for employees is no longer available. As a result, the employer may spend less than $300 per person (including GST) without paying FBT under the minor benefits exemption. This applies to both employees and their associates attending the event, but the $300 limit applies to the employee and their associates separately.
As noted above, client meal entertainment costs are not subject to FBT and are not income tax deductible, but you cannot claim GST input tax credits for these expenses.
Costs of transport to and from the event
Generally, travel to and from events is subject to FBT unless it is to and from the employee’s place of work. If your Christmas event is held on-site, paying for your employees’ travel to and from the event is exempt from FBT.
However, the tax implications are different where the event is held off-site. If employees travel from work to the event and then home, only the trip between their workplace and the event is exempt from FBT.7 Where the employee is travelling between their home and the location of the Christmas party, the entire trip is subject to FBT.
Travel costs may be exempt from FBT under the minor benefits exemption where the total entertainment costs per person (i.e. for the Christmas party and the transport costs combined) remain less than $300 (including GST).
The travel costs of associates to and from the event is subject to FBT, regardless of where the event is being held and the taxable value of the benefit.
Summary
Table 1 below outlines the tax treatment of benefits provided to employees, their associates, and clients when hosting a Christmas party, assuming that the actual value method for FBT is being used. Where the employer chooses to use the 50/50 split method or the 12-week register method in Division 9A, they will not be able to avail themselves of the exemptions set out below.
TABLE 1: Tax treatment of entertainment costs
Christmas gifts
The tax treatment of gifts for FBT purposes depends on whether the gift is provided to:
- employees (and/or their associates) in respect of their employment; or
- non-employees such as clients or customers.
Where a Christmas hamper or gift (such as a retail gift card) is provided to an employee and their associate at a Christmas function that the employer also provides, whether the gift is an exempt benefit needs to be considered separately from the function.
Hampers or gifts given to an employee at a Christmas function are not considered to be entertainment. Where the gifts are not treated as tax-exempt body entertainment benefits, they are subject to FBT unless the minor benefits exemption applies.
For example, a hamper or gift costing less than $300 given to each employee at a Christmas function — that meets the conditions of the minor benefits exemption — is not subject to FBT and is tax deductible and GST-creditable.
Items such as movie tickets or sports tickets constitute an expense payment fringe benefit, property fringe benefit, or residual fringe benefit for FBT purposes. As with the above mentioned expenses, these amounts are subject to FBT when provided to employees or their associates unless the minor benefits exemption applies.
Where an employer gives their employees a gift at an event such as a Christmas party, the gift and the meal entertainment may be considered separately when working out whether the $300 threshold is exceeded. However, they must be considered together in determining whether it would be concluded that it would be unreasonable to treat the minor benefit as a fringe benefit.8
An income tax deduction is available for gifts provided to a client or customer if the gift can be characterised as being made to produce future assessable income. The taxpayer’s outgoing is ‘dictated by the business ends to which it is directed’ and is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.9 Such gifts are not subject to FBT.
However, gifts that constitute entertainment, such as movie or sports tickets, will not be subject to FBT, nor will income tax deductions or GST input tax credits be available. Accordingly, if a business intends to give its clients or customers a gift, a tax deduction is available only if the gift is not entertainment (because it cannot be provided as a fringe benefit).
Summary
The following table summarises the FBT, GST and income tax implications of providing gifts to employees, employees’ associates and clients.
TABLE 2: Tax implications of providing gifts to employees, employees’ associates and clients
Hiring or leasing of entertainment facilities
Where an employer provides a Christmas party and an entertainment facility is hired or leased as part of the party, the taxable value is the cost of the activity (unless they elect to use the 50/50 split method).
Entertainment facility leasing costs are expenses incurred in hiring or leasing:
- a corporate box;
- boats or planes for providing entertainment; or
- other premises or facilities for providing entertainment.
Expenses or parts of expenses for providing food or beverages are not entertainment facility leasing expenses. These constitute meal entertainment fringe benefits.
Under s 152B of the FBTAA, employers may apply the 50/50 split method to entertainment facility leasing costs. This results in the aggregate fringe benefits amount arising from the use of entertainment facilities the employer hires or leases including 50% of all entertainment facility leasing costs incurred during the FBT year, rather than including the total taxable value of all fringe benefits that is attributable to entertainment facility leasing expenses.
Conclusion and tips
As the year draws to a close and Christmas festivities begin to ramp up, tax concerns should not dull employers’ willingness to give back to their employees and clients as a gesture of gratitude and goodwill.
To summarise the tips in this article, employers could consider providing the following types of fringe benefits without incurring a tax bill in the process (if the employer has not made an election to apply either of the meal entertainment valuation methods in Division 9A):
- They could hold a Christmas party on a working day on the business premises, regardless of the cost.
- They could consider paying for employees’ travel to and from a Christmas party on the business premises.
- They could consider holding a Christmas party off-site for employees and their associates at less than $300 each (including GST).
- They could give employees a Christmas hamper, gift card or bottle of wine worth less than $300 (including GST).
- They could consider giving employees an entertainment gift where the cost of holding the Christmas party is significantly less than $300 per person (including GST).
- They could consider giving their clients a non-entertainment gift.
Getting clear advice regarding your Christmas tax benefits is essential. An ATO review of a Perth family business, including a Next 5,000 review, will almost always consider the application of fringe benefits tax. At Westcourt, we are a clear choice for fringe benefits tax advice – our sole focus on family-owned businesses, together with our award-winning deep technical expertise and global network, make us a clear choice for structuring your business well – so why not give us a call?
1 These rates are available on the ATO website.
2 Section 69-5(3)(f) of the A New Tax System (Goods And Services Tax) Act 1999 (Cth) (GST Act).
3 An employer chooses to apply Division 9A by making an election under section 37AA of the FBTAA.
4 See ATO ruling TR 2007/12.
5 See s 58P of the FBTAA.
6 See s 41 of the FBTAA.
7 This is because FBT does not apply to taxi travel where the trip either starts or ends at the workplace: see s 58Z(1) of the FBTAA.
8 See Example 3 of TR 2007/12.
9 See paragraphs 1 and 13 of ATO determination TD 2016/14.
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