GIFTS TO EMPLOYEES / ASSOCIATES / THIRD PARTIES

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INTRODUCTION

It’s quite common, especially at Christmas time, for employers to give small gifts to their employees as well as third  parties such as clients, suppliers, customers, contractors etc. These gifts typically take the form of bottles of wine, movie tickets, gift vouchers etc. The tax treatment of these gifts from an employer standpoint, depends upon a range of factors including:

  • To whom the gifts are provided (e.g. employees or clients?)
  • Whether the gifts constitute entertainment
  • The dollar value of the gifts, and
  • The frequency with which they are provided.

Without an understanding of this area, bookkeepers may incorrectly account for GST on these gifts, and also may make incorrect journal entries which can impact the way in which the accountant deals with FBT and income tax at year-end.


OVERVIEW

Before examining the technicalities in this area, the following flow chart provides an overview of the rules. Return to this user-friendly flowchart as and when you need to:

 

Diagram 1 – Gifts Provided to Employees/Associates

This Flowchart allows you to assess the tax treatment of gifts provided to employees and/or associates.

Dai FC 1

 

Diagram 2 – Gifts Provided to Third Parties e.g. Clients, Suppliers, Contractors etc.

This Flowchart allows you to assess the tax treatment of gifts provided to third parties.

Dai Diagram 2


TYPE OF GIFT

From an FBT perspective, there are two categories of gifts – entertainment and non-entertainment. This distinction matters because, as we shall see later, different tax treatment applies depending on the classification of the gift as either entertainment or non-entertainment:

1.1. Entertainment

Gifts that constitute entertainment include:

  • Tickets to movies, plays, sporting events, theatre etc.
  • Restaurant meals
  • Holiday airline tickets, and
  • Admission tickets to an amusement centre.
2.2. Non-Entertainment

Gifts that do not constitute entertainment include:

  • Christmas hampers
  • Bottles of alcohol
  • Gift vouchers
  • Perfume
  • Flowers, and
  • Pen sets.


RECIPIENT OF GIFT

Different tax treatment may apply depending on who the recipient of the gift is – an employee/associate on the one hand, or a third party such as a client/supplier on the other hand.

 

Employee/Associate

Under the FBT legislation, an employee is defined to mean a current, future or former employee. A current employee is a person who is entitled to receive salary and wages (including company directors). It follows therefore that where a worker is classed as a contractor rather than an employee for PAYG purposes, and the employer provides them with a gift, then for the purposes of this paper, they will be classed as a third party (along with clients, suppliers etc.) rather than an employee/associate.

While the main category of “associates” is spouses of employees, any of the following are also under the FBT legislation classed as associates of an employee:

  • The relatives of an employee including a de facto spouse
  • A partner in a partnership (whether or not the partnership still exists)
  • A spouse or child of a partner in a partnership (unless the partner is acting in the capacity of a trustee)
  • A trustee of a trust estate (e.g. a trustee of a trust or a non-complying superannuation fund)
  • A company that is effectively controlled (either individually or collectively) by the person or associates of the person – including any companies that are controlled by that company, and
  • A person deemed to be an associate under the FBT legislation e.g. a same sex partner.

Therefore, if a gift is provided to any of the above, then for the purposes of this paper, the rules relating to employees/associates will apply.

 

Third Party

For the purposes of this paper, a third party is a person/entity who is not an employee/associate of the employer including clients, suppliers, contractors, customers etc.


MINOR BENEFIT

Although FBT is not a BAS provision, and therefore a BAS Agent cannot charge a fee for providing FBT- related  services,  in  considering  the  bookkeeping  treatment  of  gifts  made  by  your  clients  an understanding of the minor benefits exemption from FBT is essential. If the minor benefit exemption applies, this will affect the FBT, income tax and GST treatment of gifts provided to employees and associates. It will not however affect the FBT, income tax or GST treatment of gifts provided to third parties.

Under the minor benefits exemption, a gift that an employer provides to an employee/associate is exempt from FBT if both of the following two conditions are met:

  1. The notional value of the gift is less than $300 (GST-inclusive) and
  2. It would be unreasonable to treat the gift as a fringe benefit.

Condition 1: The $300 Threshold

There are three important points to note about the $300 threshold:

  • It is GST-inclusive (i.e. $272 GST-exclusive)
  • Where multiple minor benefits are provided to an employee at the same time (e.g. at Christmas time where meals and a gift are provided at the same time), each benefit will have its own $300 exemption threshold (i.e. $300 for the meal entertainment, and a separate $300 threshold for the gift).
  • It is applied separately to the employee and their associate. Therefore, if an employee and their associate (e.g. spouse) each receive a gift from the employer, then the employee and their associate each have their own separate $300 threshold.

Condition 2: Unreasonable to Treat the Benefit as a Fringe Benefit

The existence of Condition 2 means that contrary to widespread belief, the minor benefit exemption is not automatically satisfied if the gift is valued at less than $300 (GST-inclusive). Rather, Condition 2 must also be satisfied. In determining whether it is unreasonable to treat a minor benefit as a fringe benefit (Condition 2) the following factors all must be considered:

1. The frequency and regularity with which associated benefits (i.e. similar or identical gifts) have been provided to the employee/associate

If similar gifts have been provided to the employee on a frequent or regular basis, then this makes it less likely that the gift in question will be exempt from FBT. The Tax Office has not specified an exact number of times a benefit can be provided before it is considered frequent (and therefore less likely to satisfy the minor benefit exemption).  However, Taxation Ruling TR 2007/12 contains the following example which would be quite common in workplaces where the employer provides gifts for staff:

EXAMPLE 

An employer provides each of its employees with a modest gift at Christmas time. The range of gifts provided by the employer includes a bottle of whisky, perfume or a store voucher. It is the employer’s policy to provide gifts to employees on only a few special occasions throughout the year. The gifts provided to each employee are always valued at less than $300. 

Because the value of the gift to an employee is below the minor benefits threshold, it is necessary to consider Condition 2, namely if it would be unreasonable to treat the minor benefit as a fringe benefit. 

The Christmas gifts are provided infrequently but on a regular basis (being every Christmas). However the sum of the value of all gifts, where they are identical or similar benefits, in this year and all other years is not considered substantial, and there are no other associated benefits provided in connection with the gift. There would be no difficulties in determining the value of the benefit and the benefit was not provided to assist the employee deal with an unexpected event. On the facts, the gift is also not wholly or principally a reward for services. 

On balance, having regard to the various factors in Condition 2, it would be concluded that it would be unreasonable to treat the benefit as a fringe benefit. Accordingly, the gift provided to the employee is an exempt benefit.

We can see from this Tax Office example that even where an employer provides Christmas gifts every year, as well as gifts on other special occasions (e.g. birthdays, engagements etc. these are unlikely to be classed as being frequently provided (despite being provided regularly i.e. every Christmas). Therefore, such gifts are more likely to be exempt from FBT.

As we shall see later, where a benefit is exempt from FBT, certain income tax and GST consequences will flow from this.

2. The aggregate value of the gift and any associated benefits provided to the employee in the current FBT year and in any prior FBT years

The greater the cumulative value of the minor benefits provided, the less likely the minor benefit exemption will apply. For instance if there are  several benefits  each totaling just under $300 but cumulatively totaling thousands of dollars, then although all are below the $300 threshold, the minor benefits exemption is less likely to apply than if the several benefits totaled just over $300, for instance. The Tax Office has not however cheap viagra australia provided any concrete guidance in terms of an exact dollar figure in this area.

3. The practical difficulty in valuing the benefit and any associated benefit

The more difficult it is to quantify the value of a benefit and/or to keep the necessary records in relation to the benefit, the more likely it is that the minor benefit exemption will apply. In relation to gifts, they typically are not difficult to value (i.e. they are usually valued at the amount that was paid to acquire them in the first place).

4. The circumstances in which the benefit and any associated benefit is provided

This includes a consideration of the following:

  • Whether the benefit was provided as a result of an unexpected contingency (e.g. the employer lending you their vehicle for emergencies during the year). If so, the minor benefit exemption is more likely to apply, and
  • Whether the benefit is considered to have been provided to an employee as a reward for their services. This can often be the case with gifts provided to employees (e.g. under staff incentives schemes). If so, the minor benefits exemption is less likely to apply. 

EXAMPLE – Monthly reward Scheme 

Sports Buzz is a subscription magazine. To obtain new subscribers it employs telemarketers to phone the public and sell subscriptions. To provide incentives for staff, the employer gives a monthly prize to the telemarketer with the best sales figures. The prize is a gift voucher to the value of $200 which can be redeemed at the local shopping centre. Throughout the year, one of the employees, Damon, wins four such awards.   The company’s bookkeeper wonders whether these vouchers are exempt from FBT under the minor benefits exemption. 

Answer 

With reference to the previous four factors, although each is valued at below $300, the four $200 vouchers are unlikely to be exempt from FBT under the minor benefits exemption because: 

1] The vouchers have been provided to Damon on a frequent and regular basis (i.e.  four times during the year, with the possibility of 12 per year) 

2] The aggregate value of vouchers is $800 and therefore quite significant. The value of any vouchers provided in prior years can also be taken into consideration 

3] There is no difficulty in determining the value of the vouchers (i.e. they have a face value of $200 each)

4] The benefit was not provided to assist Damon to deal with an unexpected event. Furthermore, the vouchers are provided as a reward for services rendered (i.e. for exceptional work performance).

EXAMPLE – Gift vouchers provided on an ad-hoc basis (adapted from TR 2007/12) 

Sandy is a lawyer. At the end of a particularly arduous trial, her employer provided her with a $100 gift voucher in recognition of the long hours she worked during this time. She also received a similar $100 voucher in the previous FBT year after she won a case for a big client. The company’s bookkeeper wonders whether these vouchers are exempt from FBT under the minor benefits exemption. 

Answer

With reference to the above four criteria, although under Criteria D there is no difficulty in determining the value of the vouchers, the two $100 vouchers are likely to be exempt from FBT under the minor benefits exemption because: 

1] With just two vouchers provided in the past two years, the benefit has not been provided on a frequent or regular basis. The vouchers are only provided on an ad-hoc basis 

2] With a value of just $200 over the past two FBT years, the aggregate value of the vouchers is low.


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TAX TREATMENT– EMPLOYEES/ASSOCIATES

As per the earlier flow-chart the tax treatment of gifts provided to employees/associates depends on whether the gift constitutes entertainment.

Non-Entertainment Gifts

Gifts that do not constitute entertainment (see earlier list) will attract FBT unless they satisfy the minor benefit exemption. Where they satisfy the minor benefits exemption, no FBT will apply.

From an income tax perspective, an employer can claim a tax deduction for the cost of these non- entertainment  gifts  provided to  employees  and  their  associates  (excluding  GST).  This  is  the case regardless of whether any FBT is payable.

Likewise GST is claimable in full regardless of whether the employer is liable for FBT

Entertainment Gifts.

Gifts that constitute entertainment (page 2) will be eligible for consideration as a minor benefit (see earlier). Where the conditions for the minor benefit exemption are satisfied, however, the employer cannot claim a tax deduction.

Likewise, from a GST standpoint, where the benefit is exempt from FBT as a minor benefit, no GST can be claimed.

Entertainment that is provided to employees/associates that does not constitute an exempt minor benefit will be eligible for GST credits and a tax deduction but is subject to FBT.


TAX TREATMENT – THIRD PARTIES

Non-entertainment gifts

When provided to third parties, these gifts will not attract FBT regardless of their value. The employer can claim a (GST-exclusive) tax deduction for the cost of the gift to the supplier, client etc. and can also claim GST credits.

Entertainment gifts

When provided to a third  party, these gifts are not subject to FBT. However they are not tax deductible and GST credits cannot be claimed.

Using the diagrams 1 and 2, the following Case Study ties all the above information together:


CASE STUDY – TAX TREATMENT

Ben operates a furniture manufacturing business and decides to host a Christmas party at a restaurant for his employees and key clients (the meal cost was $400 per head). Aside from providing dinner and drinks, each attendee receives a $320 bottle of vintage wine, a $110 pen and a $50 Gold Class movie ticket. To determine the tax treatment of these gifts, Ben’s bookkeeper works his way through the diagrams 1 and 2. 

Employees 

Movie Tickets

  • These constitute entertainment
  • They are valued at less than $300 and are therefore exempt from FBT as minor benefits (provided they satisfy Condition 2 of the minor benefit exemption)
  • Consequently, no FBT is payable, no deduction can be claimed and no GST credit can be claimed.

 Wine

  • This does not constitute entertainment
  • This is valued at more than $300 and therefore is not a minor benefit
  • Consequently, FBT applies, a deduction can be claimed (GST-exclusive) and GST credits can be claimed.

Pen

  • These do not constitute entertainment.
  • They are valued at less than $300 and are therefore exempt from FBT as a minor benefit (provided they satisfy Condition 2 of the minor benefit exemption)
  • Consequently, no FBT is payable, a deduction can be claimed (GST-exclusive) and GST credits can be claimed.

Meals

  • These constitute entertainment
  • They are valued at more than $300 and therefore are not a minor benefit
  • Consequently, FBT is payable, a deduction can be claimed (GST-exclusive) and GST credits can be claimed.

Clients

Movie Tickets

  • These constitute entertainment
  • Consequently,  regardless  of cost,  no  FBT  is  payable,  no deduction can  be claimed and no GST credits can be claimed

Wine

  • This does not constitute entertainment
  • Consequently, regardless of cost, no FBT is payable, but a tax deduction can be claimed (GST-exclusive) and GST credits can be claimed

Pen

  • This does not constitute entertainment
  • Consequently, regardless of cost no FBT is payable, a tax deduction can be claimed (GST-exclusive) and GST credits can be claimed.

Meals

  • These constitute entertainment
  • No FBT is payable, no deduction and no GST credits can be claimed

BOOKKEEPING

When recording gifts in a chart of accounts it is important to use accounts that characterise and give guidance as to the appropriate FBT and income tax treatment. A Jim’s Bookkeeper might use the following:

  • Gifts – employee FBT
  • Gifts – employee no FBT
  • Gifts – clients
  • Entertainment – employee FBT
  • Entertainment – employee no FBT
  • Entertainment – clients

Returning to our earlier Case Study, using the above accounts, the postings for the individual items for both employees and clients would be as follows:

Employees

  • Movie Tickets:  Entertainment – employee no FBT
  • Wine:  Gifts – employee FBT *
  • PenGifts – employee no FBT *
  • Meals:  Entertainment – employee FBT *

Clients

  • Movie Tickets:  Entertainment – clients
  • Wine:  Gifts – clients *
  • Pen:  Gifts – clients *
  • Meals:  Entertainment – clients

*the transaction is GST creditable

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Disclaimer—The information contained in this edition was first written in July 2014. Information contained herein is general in nature and is intended to provide guidance to bookkeepers in providing bookkeeping services for their clients. It is not intended to be taken as a substitute for you or your clients seeking professional advice in relation to their own specific circumstances.

Acknowledgement – Australian Bookkeepers Network Pty. Ltd

Copyright – No part  of this publication may be reproduced without the express permission of Australian Bookkeepers Network Pty. Ltd.