With many businesses now fully back from the lockdowns of COVID, there are going to be many parties, get-togethers, celebrations and gift-giving activities happening across the country. Some businesses are even taking staff away to resorts and overseas to destinations such as Bali to celebrate.

At the same time, the ATO is also ramping up its review and analysis of business returns and focusing on business expenses such as Christmas related claims. As a result, businesses need to be very careful to avoid the ATO tax trap with expenses. Many businesses are going to find themselves in hot water with the ATO unless they are diligent and compliant with ATO requirements.

I am regularly asked by her clients at this time of year what type of receipts they need to keep and what type of expenses they can claim at tax time.

What type of expenses can businesses claim

When it comes to what type of expenses a business can claim for Christmas related activities, the answer is not so simple. It also really depends on the type of expense. When it comes to celebratory activities, it really depends on where you have the Christmas party, who comes along, how much you spend, what type of gifts you give and to whom.

Given this area of tax law can be a bit confusing, I thought it would be helpful if I outlined what businesses need to think about. To start with, always remember the number ‘300’.

Christmas party employee expenses

According to the ATO, Christmas parties are considered to be entertainment benefits and may attract fringe benefit tax (FBT).

An organisation putting on a Christmas party will be exempt from FBT if:

  • the costs associated are considered to be minor benefits. The ATO will consider the costs to be minor benefits where they are provided to employees or their partners on an infrequent basis and are not considered to be a reward for services,
  • the costs are less than $300 per person including GST; and 
  • the Christmas party is undertaken on the business premises or online, on a working day.

The ATO states that if employee family members come along and the cost per person is greater than $300 including GST, then FBT will apply to the portion that is over $300 and the business will be able to claim a tax deduction and GST credit for this amount as well.

Christmas party client expenses

If clients attend the party in person, then they are not subject to FBT, but the business can not claim income tax deductions or GST credits on their share of the cost.

Parties held in a venue or other destination

If the Christmas party is held off the business premises, then the rules change slightly. While staff and their families are subject to the same tax treatment, if clients attend, regardless of their cost, they are not subject to FBT and the business can not claim any tax deductions or GST credits.
For parties held off-site, it is important to note that the $300 per person threshold still applies for determining whether it qualifies as a minor benefit exempt from FBT.

Christmas gifts for staff

The other area of interest for businesses at the end of the year is gifting. Many businesses like to thank staff with a gift at the end of the year.

If the gift is considered a minor benefit by the ATO then no FBT is applicable. To be minor the gift must be less than $300 including GST and not an entertainment gift.

Entertainment gifts have different tax implications. These include tickets to performances, the theatre, sports events or even a holiday. As long as they are less than $300 inclusive of GST, these gifts are not subject to FBT. If the gift is more than $300 including GST per employee, then FBT is applicable and the business can claim a tax deduction and GST credits.

When it comes to entertainment gifts, while they may be exempt from FBT if under $300, the business cannot claim an income tax deduction or GST credits for these items regardless of their cost.

Christmas gifts for clients

Gifts for clients are generally tax deductible however I do recommend keeping spending to a reasonable level, this includes placing or sending online purchases.

When it comes to giving gifts to clients that are non-entertainment related, such as a bottle of wine or a hamper, these are generally tax-deductible for the business, whereas entertainment gifts like concert tickets are not.

Clarifying this for businesses helps them to make the right bookkeeping entries and avoid any nasty surprises at tax time.

Christmas spending receipts

In addition to understanding tax requirements around what you can and can’t claim, here’s advice for businesses on capturing their receipts.

With the growth in use of cloud-based accounting systems like Xero and their ability to integrate with other software programs such as Hubdoc, there is no excuse not to capture receipts. If you haven’t downloaded and started using a good document capture and management system, now is the time to do it.

There are some good ones around. They are so easy to use, you simply take a photo of the receipt and upload it and it is saved in the cloud capable of being viewed by colleagues and accessed by your accounting professionals – which is important for tax reasons.

Coco Hou is an accounting expert and CEO of Platinum Accounting Australia.