BDO flags ‘festive tax traps’ for businesses as year end approaches
Businesses need to be aware of some of the important nuances that exist with deductions for Christmas parties and entertaining, says BDO.
With roughly a month left to Christmas, BDO tax partner Mark Molesworth said many businesses at this time of year are planning Christmas parties, entertainment and giving gifts to clients and staff.
Mr Molesworth said there are some important rules for accountants and businesses to remember when determining whether gifts and entertainment are deductible.
“If we’re talking about entertaining our clients, then we need to remember that what the business spends on entertaining clients in terms of sitting down to lunch for example is not deductible,” said Mr Molesworth.
“People don’t necessarily think about that non-deductibility issue and another tie-up with that non-deductibility issue is the inability to claim input tax credits for GST on that component.”
Often the transaction will hit the accounting system and the accountant will simply code it without thinking about it, he said.
“Or in 12 months time when they go to lodge the tax return they have to go back and reanalyse who was at the Christmas party and how many of them were staff and how many of them were clients and those sorts of things,” said Mr Molewsorth.
“If we can capture that data at the data entry point while we’re thinking about it, then that makes everybody’s life a whole lot easier.”
Mr Molesworth said there is also a distinct difference between taking a client out to lunch or the alternative, giving them a gift.
“If you’re going out for lunch then that’s entertainment, but if you give them a bottle of wine and you don’t sit down and open it immediately to drink it with them then that’s just a gift,” he said.
“It’s not entertainment so it remains deductible. Clearly you want to do what your clients enjoy doing but there is certainly a difference in the tax outcomes between entertaining someone and giving them a gift.”
In terms of Christmas party planning, Mr Molesworth said it's worth remembering that if the business can keep the cost of the staff Christmas party below $300 per head and you don’t entertain staff regularly, then that should be exempt from fringe benefits tax.
“So maybe consider how generous you’re feeling as an employer,” he said.
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