Gifts for employees and clients: Tax FAQs answered

As a business owner, you want to thank your employees – and clients – to show how much they’re appreciated after a long year. Here’s how you can give gifts without ending up in a tax tangle.

In any normal year, December is a month of festivities, with workplaces around the country holding end-of-year celebrations and parties on a massive scale.

While things may be looking quite different this year due to restrictions on venues and on the size of gatherings, there’s still every reason to celebrate hard work done well.

Can an employer give a gift to an employee?

Yes, an employer can give a gift to an employee. But there are tax implications depending on whether the gift is:

• an entertainment or non-entertainment gift, and
• costs more or less than $300.

See below for more about entertainment and non-entertainment gifts.

Holding a party can also be a great idea (where restrictions allow). But the cost of holding a staff Christmas party is regarded as “entertainment” expenditure and:

• It’s not tax deductible
• You have to pay fringe benefits tax (FBT) if the cost per person is more than $300, which doesn’t fall under the “minor benefits” exemption.

What is the minor benefits exemption?

The minor benefits exemption allows a person to avoid paying FBT where the benefit given meets certain criteria. A minor benefit is one that:

• is provided to staff or their associates, for example their spouse or partner
• is provided on an “infrequent” or “irregular” basis
• is not considered a reward for services, and
• costs less than $300 “per benefit” inclusive of GST.

Are gifts to employees tax-deductible?

Non-entertainment gifts that cost less than $300 are fully tax deductible with no FBT payable.

Non-entertainment gifts given to staff (including working directors) are usually exempt from FBT where the total cost is less than $300 inclusive of GST per staff member. A tax deduction and GST credit can also be claimed. The types of gift can include skincare and beauty products, flowers, wine, perfumes, gift vouchers and hampers.

The $300 minor benefits exemption also separately applies to any gifts provided to associates. This means that a similar gift can also be provided to a spouse or partner of the staff member with the same favourable tax outcome.

READ: GST Reimbursements And Credits: The Complete Guide

What if the non-entertainment gift is $300 or more (incl. GST)?

Providing employees “non-entertainment gifts” of $300 or more GST inclusive is less tax effective. A tax deduction and GST credit can still be claimed, but FBT is payable at the rate of 47 percent on the grossed-up value (currently 2.0802).

What if you provide staff with gifts of consumables which are not consumed at the workplace?

The cost is tax deductible. A GST credit can be claimed and is exempt from FBT up to the $300 limit.

Non-entertainment gifts given to clients and suppliers do not fall within the FBT rules as they are not considered your staff. Generally, a tax deduction and GST credit can still be claimed provided they are not excessive or overly valuable.

What gifts should I avoid giving?

Avoid giving staff and clients entertainment gifts, as it’s less favourable than giving non-entertainment gifts. Entertainment gifts include things like tickets to a musical, theatre, live play, movie, sporting events or providing a holiday.

If the cost for each staff member and their associate is less than $300 GST inclusive each, FBT is not payable, but you can’t claim tax deduction or GST credit.

However, if the cost for the staff member and their associate is $300 or more GST inclusive each, a tax deduction and GST credit can still be claimed, but FBT is payable at the rate of 47 percent on the grossed-up value.

For clients, the cost of any entertainment gifts provided is not subject to FBT, and no tax deduction or GST credit can be claimed.

What should I give my staff this holiday season?

The best tax outcome for your business this Christmas is to give staff non-entertainment type gifts that cost less than $300 GST inclusive per staff member as this is fully tax deductible with no FBT payable.

But, these favourable tax rules don’t apply to gifts to sole proprietors and partners in a partnership as they cannot be employees of themselves. Benefits given to any staff employed by the business achieve the same tax outcomes as mentioned above.

Some fringe benefits need to be reported on payment summaries. As the employer, if the total taxable value of certain fringe benefits is more than $2,000 in an FBT year, you must record these on an employee’s payment summary. If you prepare your payment summaries with MYOB AccountRight, you’ll find that staying on top of your staff gifts every year is a piece of  cake.

This article, while written by accredited tax agent, chartered accountant and business advisor, Joe Kaleb, of small business tax and financial management tools portal Australianbiz, does not constitute professional advice. For advice on your specific situation, MYOB recommends engaging a qualified professional directly. You can begin looking for an advisor, here.