T’is the season for gifts – but are you also making a gift of GST or FBT to the Revenue?
Based on the decorations in the streets and the shopping centres, the Christmas season has well and truly arrived and many are caught-up in the gift-giving spirit. The making of a gift by a business/entity may have unintended taxation consequences. This includes tax consequences for tax-exempt entities such as governments, local councils and not-for-profit entities.
The purpose of this article to highlight some of the FBT, GST and related income tax considerations faced by tax-exempt entities wishing to give gifts to employees or non-employees (e.g. suppliers).
Who is the gift being given to?
When a tax-exempt entity gives a gift, to determine the tax consequences the first question is: Who is the gift recipient?
If the recipient is an employee (or associate of the employee, such as a spouse) of the tax-exempt entity giving the gift, there may be both FBT and GST implications. However, the GST implications are intricately linked not only to the FBT treatment but also to the general income tax deductibility of the gift (notwithstanding that tax-exempt entities normally do not care about the income tax deductibility of an expense).
If the recipient is not an employee of the tax-exempt entity giving the gift, then there will generally only be GST implications, subject again to the income tax deductibility of the expense.
[Note, the above assumes there is no arrangement involving a third party providing gifts under arrangements between the tax-exempt employer and their employee. Gifts by a third party under arrangements between the tax-exempt employer and their employee may have FBT implications for the employer.]
The relevance of deductibility for tax-exempt entities
Generally, a tax-exempt entity would not be affected by the deductibility of an expense from an income tax perspective. However, there is a specific rule in the GST Act which looks to the question of deductibility if the entity wants to claim an input tax credit on an acquisition.
Section 69-5 of the GST Act states that a ‘non-deductible expense’ does not give rise to a creditable acquisition or importation. For tax-exempt entities, there is a special condition (s. 69-5(4)) which recognises that where the entity would have been unable to claim a deduction for the expense if it were a taxable entity, then the acquisition will not be a creditable acquisition.
Accordingly, when a tax-exempt entity wants to claim a GST credit on the acquisition of a gift for their employee/non-employee, they will need to consider whether they would have been able to claim an income tax deduction assuming they were a taxable entity.
For purposes of s. 69-5, there are several categories of expense which are ‘non-deductible’. Entertainment expenses (within s. 32-5 ITAA 1997) are the most relevant in the context of this article.
This leads to the next important question: Is the gift entertainment?
Is the gift entertainment?
Before discussing the concept of entertainment, we make two preliminary comments. Firstly, while an entertainment expense under s. 32- 5 is generally non-deductible, where FBT applies to the provision of the entertainment, the entertainment expense becomes deductible.
Accordingly, the general interaction between FBT, GST and income tax deductibility (insofar as the last item relates to income-taxable entities) broadly results in the following:
|Entertainment provided by an employer to:||FBT implications||GST implications||Income Tax implications|
|an employee||subject to FBT*||GST credits available*||deductible*|
|not an employee||NOT subject to FBT||no GST credit||non-deductible|
*unless the minor benefits exemption is available
Secondly, entertainment expenses incurred by a tax-exempt body are generally not able to access the minor benefits exemption for FBT based on the definition of that term. (Broadly, a minor benefit is exempt from FBT when the value of a benefit provided by an employer to their employee is less than $300 and it meets certain infrequent/irregular rules).
The same definition of ‘entertainment’ is used for income tax, FBT and GST purposes and regardless of whether the entity is tax-exempt or taxable. The definition has two limbs:
- the provision of entertainment by way of food, drink or recreation (where ‘recreation’ includes amusement, sport and similar leisure time pursuits); or
- the provision of accommodation or travel in connection with or to facilitate the provision of the entertainment.
For completeness, it does not matter if business discussions or transactions take place during the provision of the entertainment.
Based on the above, some examples of gifts that would/would not constitute entertainment include:
|Holidays||Alcohol (e.g. a bottle of wine, whisky, gin, etc)|
|Experiences e.g. cruises||Flowers|
|Tickets to sporting events||Watches|
|Theatre tickets||Gift vouchers|
|Gym memberships||Beauty products/perfume|
The consequences for employee gifts
As mentioned above, there are FBT and GST implications arising from the giving of gifts to employees. As indicated by the previous section, these implications depend on whether the gift constitutes entertainment and the value of the gift. The implications for tax-exempt entities can be summarised as follows.
Where the gift is entertainment: FBT applies and GST credit available
Where a tax-exempt body makes a gift of entertainment to an employee:
- FBT: Except in limited circumstances beyond the scope of this article, the gift will constitute a ‘tax-exempt body entertainment fringe benefit’ and will be subject to FBT regardless of the value of the gift (as the minor benefits exemption does not apply and assuming no other exemption/concession is available).
- GST: As the gift would be income tax deductible to the entity if it was a taxable entity (only because FBT applies), the entity is not precluded under s. 69-5 from claiming an input tax credit on purchase of the gift.
Where the gift is NOT entertainment, and is BELOW $300: FBT exempt (minor) and GST credit is available
Where a tax-exempt body makes a gift to an employee that is not entertainment, is not within another category of non-deductible expense, and is below $300:
- FBT: Assuming the gift is not only valued at below $300, but also satisfies the infrequent/irregular requirements, the minor benefits exemption will apply to exempt the gift from FBT.
- GST: Assuming the expense is not a ‘non-deductible expense’ had the entity not been an exempt entity, s. 69-5 of the GST Act will not apply and the entity can claim input tax credits on the acquisition.
Where the gift is NOT entertainment, and is ABOVE $300: FBT applies and GST credit is available
Where a tax-exempt body makes a gift to an employee that is not entertainment, is not within another category of non-deductible expense, and is above $300:
- FBT: As the gift is valued at more than $300 the minor benefits exemption will not apply to exempt the gift from FBT. Assuming no other exemption or concession applies, the tax-exempt entity will be liable for FBT based on the value of the gift.
- GST: For the same reasons as above, s. 69-5 of the GST Act will not apply and the entity can claim input tax credits on the acquisition.
The consequences for non-employee gifts
As mentioned above, there are GST implications arising from the making of gifts to non-employees which are dictated by whether the gift constitutes entertainment or not. These implications can be summarised as follows:
- any type of gift (whether entertainment or not) will not be subject to FBT as the recipient is not an employee nor an associate of an employee;
- if the gift constitutes entertainment: as entertainment is not deductible for income tax purposes (under s. 32-5), it will be a ‘non-deductible expense’ for s. 69-5 of the GST Act, and as such the entity will not be able to claim input tax credits on the acquisition of gifts.
- if the gift does not constitute entertainment: assuming the acquisition is made in carrying on the entity’s enterprise, and assuming the expense is not otherwise a ‘non-deductible expense’ for s. 69-5 of the GST Act (had the entity not been an exempt entity), this section will not apply and the entity can claim input tax credits on the acquisition.
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.