As the Christmas season approaches or birthdays arrive, many companies opt to show their appreciation for their workers’ hard work and devotion by gifting them. What appears to be a simple gesture, however, might have tax repercussions that firms must be aware of. We’ll dig into the tax treatment of employee gifts in this blog, assisting companies in navigating the complexity and making educated decisions that benefit both the firm and its employees.
Step 1: Determine if the Gift Constitutes Entertainment
The first crucial step is to assess whether the gift falls under the category of entertainment. Gifts that are considered entertainment include items like tickets to movies, theatre plays, restaurant meals, amusement parks, and holiday airline tickets. On the other hand, gifts like Christmas hampers, bottles of alcohol, gift vouchers, perfume, and flowers are not categorized as entertainment.
Step 2: Gifts Costing Less Than $300 (GST-Inclusive) and Provided Infrequently
If the gift is non-entertainment costs less than $300 (including GST) and is provided infrequently, the tax treatment varies based on the situation.
- If the answer is yes, and the gift meets the criteria, then no Fringe Benefits Tax (FBT) is applicable. Additionally, the employer cannot claim a deduction or GST credit for the gift.
- If the answer is no, indicating that the gift exceeds $300 or is provided frequently, FBT applies. However, in this scenario, the employer is entitled to claim a deduction for the gift and can also claim any GST credits associated with the gift.
Step 3: Gifts Costing More Than $300 (GST-Inclusive) and Provided Frequently
For gifts that exceed the $300 threshold or are provided frequently, the tax treatment slightly changes:
- If the answer is yes, indicating that the gift costs less than $300 (including GST) and is provided infrequently, no FBT is payable. Moreover, the employer can claim a deduction for the gift and can also claim any associated GST credits.
- If the answer is no, which means the gift costs more than $300 or is provided frequently, FBT applies. However, the employer can still claim a deduction for the gift and is eligible for any related GST credits.
Optimal Approach: Non-Entertainment Gifts Under $300
From a tax standpoint, it’s evident that providing employees and their associates with non-entertainment gifts that cost less than $300 (including GST) is advantageous for employers. This approach helps avoid FBT liability while still enabling the employer to claim deductions and GST credits. These gifts include a wide range of thoughtful options, such as personalized items, technology accessories, books, and more.
Consideration: Cash Bonuses
An alternative approach is to provide employees with a cash bonus. In this scenario, the cash amount will be considered assessable income for the employee and is deductible for the employer. While this approach shifts the tax burden to the employee, it provides them with the flexibility to choose how they wish to spend the bonus.
Showing thanks to employees through gift-giving is a fantastic habit for companies. However, it is critical to consider the tax consequences of these contributions. Employers can strike a balance between showing thanks and successfully managing tax duties by providing non-entertainment presents costing less than $300 (including GST). To maintain compliance with tax legislation and to make educated decisions that benefit both the firm and its valued employees, always speak with tax specialists or accountants.