It is quite common for employers to reward employees with gifts on top of their normal salary and wage from time to time. Most small business owners would not have a business without the small team of dedicated employees that come to the office every day and work like they own the place.
What is also fairly common is business owners accounting for these gifts incorrectly for tax purposes and, as a result, often claiming Goods and Services Tax (GST) credits and tax deductions they are simply not entitled to.
Employee Gifts and FBT
When you choose to give an employee a gift or incentive, other than a commission or bonus that is processed as part of payroll, you need to consider Fringe Benefits Tax (FBT) and its interaction with Income Tax and GST. (Very) generally speaking, if an employer gives an employee a gift the employer needs to pay FBT on the taxable value of the gift at the top margin tax rate. Even if your employee only pays an average margin tax rate of 20%, you pay FBT on the amount at 49%.
If you fail to satisfy your FBT obligations in regard to the gift you cannot claim a tax deduction for the expense nor can you claim the GST paid on it.
Why do the ATO even care? Seriously?!
The easiest way to explain this is to work through what any decent tax accountant would advise you to do if we did not have Fringe Benefits Tax. Lets say you need a new employee right now. You’ve advertised online and ‘Clodie’ applied for the position. Clodie is great and you’d really like to hire her. She’s highly qualified, in fact she seems over qualified. You’re not sure you can afford to pay the salary Clodie is asking for.
This is where your accountant steps in and walks you through the concept of salary packaging. Rather than paying Clodie the $70,000 salary she wants you put together a package in which you pay Clodie’s rent of $30,000 per year and you make her car payments of $15,000 per year. She receives a small nominal salary of $20,000 in addition to these payments just to cover general living expenses and incidentals. So, in total you’ve paid Clodie $65,000 when she was asking for $70,000.
However, there is one more variable to consider, Tax. When you issue Clodie’s PAYG Payment Summary it only shows her salary of $20,000. The rent and car payments are not salary amounts. With a tax free threshold of $18,200 and access to the low income tax offset Clodie won’t pay any tax despite having received $65,000 in total from you for the year. The tax saved makes up the gap between your offer and Clodie’s asking price. You’ve got yourself a great new employee partially funded by the federal government, ka-ching!
To stop employers exploiting the system in this way Fringe Benefits Tax was introduced. Now the FBT payable on Clodie’s rent and car payments would be significantly higher than the benefit derived by her tax savings. Your total cost of employment would be well in excess of the $70,000 Clodie originally asked for by implementing the salary packaging options.
Is there any way to give employees a gift without all this hassle?
There certainly is, but it requires careful consideration of the types of gifts you are going to give your employees. The easiest way to give your employee a gift without having to deal with all this nonsense is to focus on items that are exempt from FBT. The two most common exemptions used by small business owners are the Otherwise Deductible rule and the Minor & Infrequent exemption.
The otherwise deductible rule exempts any item from FBT if it would have been deductible to the employee had they purchased it themselves. For example, if you had given Clodie a computer as part of her salary package and she uses that computer for work purposes then there is no need to pay FBT on the gift. You are also entitled to claim a tax deduction for the cost of the computer and you can claim the GST paid.
The same would apply where a trade business owner gifted tools to an employee which they use on site working for the employer. If the employee had purchased them with their own money they could have claimed a tax deduction for the amount. Therefore, the tool gift is ‘otherwise deductible’ for FBT purposes.
The real benefit here is the GST credits. If Clodie’s computer was $1,100 (GST inclusive) and she purchased it herself it would cost $1,100. However, if her employer gifts it to her the employer is typically registered for GST. They claim the GST back and Clodie is given a computer worth $1,100 but the net cost to the employer is only $1,000.
Minor and Infrequent
Fringe Benefits which are both Minor and Infrequent are exempt from FBT. To be ‘Minor’ the gift needs to cost less than $300. That’s the easy, clear cut part. The more difficult part to define and satisfy is the ‘infrequent’ requirement. Mainly because the ATO has never clearly stated how often is ‘too’ often. Even giving a gift once a year at Christmas time can be sufficient enough to qualify as ‘frequently’ if you do it every year. I usually recommend business owners looking to give minor gifts to employees do it at different times of the year and vary the items being given (unless they are otherwise deductible).
It’s not tax effective to give employees gifts and incentives that are captured by FBT unless the employee’s salary is so high that they pay top margin rate in their own name anyway. If you’re considering giving gifts to employees on a regular basis I’d strongly recommend seeking some professional advice regarding all the variables before implementing the strategy.
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