Christmas employee functions will have varying degrees of lavishness. We look at some scenarios and assess their ‘Grinch’ risk.
With the end of the calendar year fast approaching, many of you may be preparing an end of year celebration for staff. As with most things involving an employer and staff, fringe benefits tax (FBT) must be considered because, let’s face it, the last thing an employer wants is for FBT to ‘spoil the party’, so to speak.
Below are two common scenarios we were presented with via the Q&A portal. We outline the facts and provide a summary of the FBT outcomes.
We hold an end of year function for current staff in late December each year.
The function is held on our premises during working hours. All expenses are met by us including a smorgasbord meal, beer, wine and soft drinks, bus travel for non-local staff, some equipment hire and a musician.
The Christmas party is a combination of celebration of Christmas and a means of recognising the efforts of staff over the year with the presentation of a number of gift hampers. The hampers cost less than $300 each.
No family members of staff, clients or associates are invited.
The food, drink and supply of a musician show that the purpose of the expenses is for the effects to create a fun, enjoyable and celebrating occasion. The food, drink and musician are integral to the function being a social gathering and they are enjoyed by the attendees for the party only.
The food is a smorgasbord meal. A variety of drinks, including soft drinks, beer and wine, will be available during the party. It is considered that the content of the meal to be provided to the employees is more elaborate than just a light lunch, refreshments or sustenance. Further, the function is held in normal working hours and so, as per a usual working day, the need for the employer to provide its employees with sustenance during normal working hours does not arise.
As a result, this factor leans towards the provision of the food and drink constituting entertainment.
The musician is clearly elaborate for the presentation of hampers and is more commonly suited to a social function. Therefore, this factor leans towards the provision of the musicians constituting entertainment.
Based on the above, the nature of the meal, beer, soft drinks, wine and musician to be provided is considered to be entertainment by way of food or drink or recreation. Bus travel for staff is to do with providing such entertainment, thus expenditure for bus travel has the character of entertainment.
The conditions in section 38 of the FBTAA have been met and the provisions of those benefits will be tax-exempt body entertainment benefits. The minor benefit and on-site property exemptions will not be available.
Note, the hampers are treated as a separate benefit and will not constitute a tax-exempt body entertainment benefit. The ATO accept that hampers do not constitute entertainment. As their individual cost is less than $300, the minor benefit exemption will be available.
A lunch is held for staff members prior to the Christmas holiday break. The Christmas lunch is held at an external location.
It is not compulsory for employees to attend the Christmas lunch. Employees that are interested in attending are required to register their interest and places are offered to employees as they register. Employees are unable to bring family members or associates as guests.
Senior staff members and management attend the lunch and a senior staff member will address the attendees for approximately 10-15 minutes thanking the staff for their contribution and discussing their achievements over the year.
Attendees at the lunch are provided with vouchers which entitle them to receive the food and drink on offer. The vouchers do not have a monetary value disclosed on them but entitle the employee to the food and drink on offer.
Employees can use the vouchers at the event to receive food and drink. If they do not use the voucher or only use part of the voucher (e.g. only food, no drink) the voucher or unused part of the voucher is forfeited and cannot be used towards anything else and no monetary balance is paid to the employee.
At the event in the relevant year vouchers provided to the employees entitled them to one can of soft drink and one serve of lunch consisting of a bread roll, salad and roast meat.
No alcohol was served at the lunch. The lunch was held from 12noon until 2pm.
Employees were expected to return to work after the event concluded at 2pm and if they wanted to leave work for the day following the event, they needed to negotiate leave with their team leader/manager and apply for leave using an approved leave form.
At the Christmas lunch the provision of the food and drink had both work related purposes (opportunity to thank staff for their work over the past year and for employees to meet colleagues they usually work with remotely, with an aim of improving productivity) and social objectives (celebrating the end of the year and Christmas time with food and drink with work colleagues and friends).
Although a sit down three course meal is not being provided, the food and drink provided consisting of bread, salad and roast meat along with a soft drink is more substantial than a light meal and more likely to confer entertainment on the employee.
The Christmas lunch is held during work hours from 12noon until 2pm however, as discussed above the food and drink is not being provided purely for the purposes of refreshment during the working day and it is reasonable to conclude that there is an expectation of entertainment of the recipients of the food and drink.
The lunch is held at an external venue and therefore providing the food and drink away from the employees’ usual place of work contributes to a social setting and the provision of entertainment.
Having regard to the factors set out in TR 97/17, it is considered that the provision of the food and drink at the Christmas lunch constitutes the provision of entertainment and therefore, a tax-exempt body entertainment benefit will arise from the provision of the food and drink to your employees.
There may be some readers thinking the conclusion reached in scenario 2 is harsh, given there was no alcohol provided at the function and the nature of the meal. We are also of the view a non-entertainment conclusion can be argued.
However, the above scenarios are very similar to scenarios presented to the ATO by way of private binding ruling submission where the ATO reached the conclusion that entertainment was provided.
It seems to suggest that the ATO is unlikely to accept that entertainment is not provided where an end of year function takes place.
This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. It is not intended to be, nor should it be relied upon as, a substitute for professional advice. TaxEd Pty Ltd and any person connected with its production disclaim any liability in connection with any use.