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As we enter into the new year, with many economists predicting a slowing of the economy, planning your business’s cashflow is more important than ever.

Studies suggest that the failure to plan cash flow is one of the leading causes of small business failure. To this end, a cash flow forecast is a crucial cash management tool for operating your business effectively.

Specifically, a cash flow forecast tracks the sources and amounts of cash coming into and out of your business over a given period. It enables you to foresee peaks and troughs of cash amounts held by your business, and therefore whether you have sufficient cash on hand to fund your debts at a particular time.

Moreover, it alerts you to when you may need to take action – by discounting stock or getting an overdraft, for example – to ensure your business has sufficient cash to meets its needs. On the other hand, it also allows you to see when you have large cash surpluses, which may indicate that you have borrowed too much, or you have money that ought to be invested.

In practical terms, a cash flow forecast can also:

• make your business less vulnerable to external events in the economy, such as interest rate rises
• reduce your reliance on external funding
• improve your credit rating
• assist in the planning and re-allocation of resources, and
• help you to recognise the factors that have a major impact on your profitability.

At this point distinction, a distinction should be drawn between budgets and cash flow forecasts. While budgets are designed to predict how viable a business will be over a given period, unlike cash flow forecasts, they include non-cash items, such as depreciation and outstanding creditors. By contrast, cash flow forecast focus on the cash position of a business at a given period. Non-cash items do not feature. In short, while budgets will give you the profit position, cash flow forecasts will give you the cash position.

Cash flow forecasting can be used by, and be of great assistance to, the following entities:

• business owners
• start-up business
• financiers
• creditors

A cash flow forecast is usually prepared for either the coming quarter or the coming year. Whether you choose to divide the forecast up into weekly or monthly segments will generally depend on when most of your fixed costs arise (such as salaries, for example). When you are making forecasts, it is important to use realistic estimates. This will usually involve looking at last year’s results and combining them with economic growth, and other factors unique to your line of business.

When forecasting overheads, usually a forecast will list:

• receipts
• payments
• excess receipts over payments (with negative figures displayed in brackets)
• opening balance
• closing bank balance.

Reach out to us if you would like to know more.

The eligibility age for downsizer contributions reduced from 60 to 55 years from 1 January 2023. This means if you are age 55 or older, you could invest the proceeds of the sale of your family home to your superannuation outside of your standard contribution caps.

DOWNSIZER CONTRIBUTIONS

From 1 January 2023, if you’re aged 55 years or older you may be eligible to make a downsizer contribution of up to $300,000 (or $600,000 for a couple) to your superannuation fund from the proceeds of the sale of your home where specific requirements are met.

Downsizer contributions can be a great way of boosting your superannuation after retirement. As well as the extra capital they introduce, the contributions can also earn investment income that is either tax-free if you commence an income stream with the funds or be taxed at a concessional tax rate of as low as 15% whilst in accumulation phase.

ELIGIBILITY REQUIREMENTS

To be eligible to make a downsizer contribution, you must answer ‘yes’ to all of the following conditions:

1. You must be aged 55 or over from 1 January 2023 (or age 60 or over for any downsizer contributions made between 1 July 2022 and 31 December 2022. Note, prior to 1 July 2022, the eligibility age was 65 years and over).
2. The amount of the contribution is an amount equal to all or part of the sale proceeds (capped at $300,000 per person) of a qualifying main residence, where the contract of sale of the main residence was exchanged on or after 1 July 2018.
3. The home was owned by you or your spouse for 10 years or more prior to the sale. Further, your home must be in Australia and must not be a caravan, houseboat or other mobile home.
4. The proceeds of selling your home are either fully exempt or partially exempt from capital gains tax under the main residence exemption or, if the home was acquired before 20 September 1985, would have been exempt.
5. You make the downsizer contribution within 90 days of receiving the proceeds of sale (ie, usually settlement date).
6. You complete and provide the ‘Downsizer contribution into super form’ (NAT 75073) which is available on the ATO website and provide it to your superannuation fund either before or at the time of making the downsizer contribution.
7. You have previously not made a downsizer contribution from the sale of another home.

Provided that the above conditions are met:

• There is no obligation to purchase a new home or to move to a smaller or cheaper home…you can even move into another home you own!
  You simply need to sell your home and meet the above criteria to make a downsizer contribution.
• There is no maximum age limit to make a downsizer contribution.
• The downsizer contribution does not count towards your non-concessional or concessional contributions caps. The contribution is in addition to these caps.
• There is no requirement to meet a work test or work test exemption to make a downsizer contribution, and
• Downsizer contributions can be made regardless of the size of your total superannuation balance (TSB). This means a downsizer contribution can still be made even if you have more than $1.7 million in superannuation.

DOWNSIZER CONTRIBUTIONS COUNT TOWARDS YOUR SUPER BALANCE

While downsizer contributions can be made regardless of what your TSB is, once the downsizer contribution is made to superannuation it forms part of your TSB.

At this point, the downsizer contribution will increase your TSB which may impact your eligibility to:

• Make carry forward concessional contributions
• Make non-concessional contributions
• Receive government co-contributions, and
• Receive a tax offset for spouse contributions.

Similarly, a downsizer contribution will also count towards your transfer balance cap (TBC), which applies when you move your superannuation into retirement phase to commence an income stream.

So if you intend to use your sale proceeds to commence a superannuation income stream in retirement, it’s important to note that you have a personal TBC of up to $1.7 million on the total amount that can be transferred from a superannuation account into a tax-free superannuation income stream. You can find out your personal TBC by contacting the ATO or logging myGov.

PRESERVATION CONSIDERATIONS

Although the age to make a downsizer contribution has reduced to age 55, you should be aware that the contribution will be preserved until you satisfy a condition of release, such as retirement after reaching your preservation age (currently age 59) or ceasing a gainful employment arrangement after reaching age 60.

However, if you have retired or met another condition of release that frees up your superannuation, the downsizer contribution could still be accessed to provide an income stream but it will have to be by way of a transition to retirement income stream, which is slightly more restrictive than a regular income stream, such as an account-based pension.

NEED ADVICE?

Although making a downsizer contribution may seem to be a straightforward strategy, there are a number of eligibility requirements and nuances that you must be aware of when utilising these rules. If you’re thinking about downsizing and contributing to superannuation but want more information, we can help explain the rules in further detail and discuss how you may benefit from this scheme, based on your particular circumstances. n

The ATO has released its new year’s resolutions…and there is not a gym in sight!

According to the ATO, the five new year’s resolutions to keep if you want to stay on top of your tax and super in 2023 are:

1. Know if you’re in business or not

Are you earning an increasing income from a sidehustle?

If you answer ‘yes’ to a few of the following questions, the more likely it is your activities are a business:

• Do you intend to be in business?
• Do you intend and have a prospect of making a profit from your activities?
• Is the size or scale of your activity sufficient to make a profit?
• Are your activities repeated and continuous?
• Are your activities planned, organized, and carried out in a business-like manner? For example, do you:
  • keep business records and have a separate business bank account?
  • advertise and sell your goods and services to the public, rather than just to family or friends?
  • operate from business premises?
  • maintain required licences or qualifications?
  • have a formal business plan or budget?
  • have a business name or an ABN?

We can help you make this call as to whether your side-hustle may be a business.

2. Keep business details and registrations up to date

It’s important to keep your ABN details up to date as emergency services and government agencies use this information to support businesses during disasters. Also, if you’re going to earn over $75,000 this financial year, you’ll need to register for GST. Even if your turnover is below this threshold, it may be advantageous to register.

3. Keep good records

Good record keeping helps you manage your business and its cash flow. It also is your defense should the ATO make an enquiry about your affairs, or select your business for an audit. Feel free to approach us if you need assistance with your record keeping practices.

4. Work out if the PSI rules apply to you

The Personal Services Income (PSI) rules are a suite of ATO provisions designed to prevent persons who derive income from their personal services from “splitting” or “alienating” that income with other persons, and therefore minimising the overall tax payable.

If you cannot pass one of the tests within the PSI rules and do not have a personal services business determination (PSBD) from the Commissioner, then regardless of the trading structure you choose, your PSI income derived will be classified as PSI, which means:

• you will be unable to claim certain deductions against your PSI (basically, your deductions will be limited to those of a normal employee)
• your PSI, less allowable deductions, will be attributed to you, and therefore included in your individual tax return, and taxed at your individual marginal tax rate as though you were an
  employee.

We can assist you in determining whether these rules apply to you and answer any questions you have.

5. Look after yourself

The last few years have thrown some curve balls at small business, so it’s good to be prepared. If you’re struggling, the NewAccess program can help. It’s free, confidential, and designed for small businesses doing it tough.

Chat with us if you want to know more about these hot-button new year issues.

Have you missed the deadline to apply for a director identification number (director ID)? If so, you can still apply! The ATO says it will take a reasonable approach with directors who are trying to do the right thing. Importantly, directors who need additional time to apply (beyond 14 December 2022), can request an extension of time by completing an Application for an extension of time to apply for a director ID.

To recap, a director ID is a unique 15-digit identifier that a company director applies for once and keep forever. By allowing regulators to trace directors’ relationships with companies over time, director IDs will help prevent illegal activity and level the playing field for businesses.

Director IDs are administered by the Australian Business Registry Services (ABRS), which is managed by the ATO.

WHO?

You need a director ID if you are an eligible officer of:

• a company, a registered Australian body or a registered foreign company under the Corporations Act 2001 (Corporations Act)
• an Aboriginal and Torres Strait Islander corporation registered under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (CATSI Act).

An ‘eligible officer’ is a person who is appointed as:

• a director
• an alternative director who is acting in that capacity.

You also need a director ID if you are a director of a:

• corporate trustee, for example, of an SMSF
• charity or not-for-profit organisation that is a company or Aboriginal and Torres Strait Islander corporation
• registered Australian body, for example, an incorporated association that is registered with the Australian Securities and Investments Commission (ASIC) and trades outside the state or territory in which it is incorporated, or
• foreign company registered with ASIC and carrying on a business in Australia (regardless of where you live).

WHO DOESN’T?

A director ID is not required if you are a director of an incorporated association (with no ABRN) registered with the Australian Charities and Not-for-profits Commission (ACNC), company secretary but not a director, acting as an external administrator of a company, run your business as a sole trader or partnership.

It has also been recently clarified by the ABRS that directors who resigned their directorship before 31 October 2021 are not required to obtain a director ID. Deceased directors, as they are unable to personally apply, are also exempt.

In summary, if you run a company that is a small business, are a corporate trustee of an SMSF, operate a not-for-profit or even a large sporting club, it’s quite likely that you’re a director, and therefore you’ll need to apply for your director ID.

HOW?

The easiest way to apply for a director ID is online at the ABRS website – www.abrs.gov.au/directorID. To access the online application, use the myGovID app with at least a standard identity strength to log in to ABRS Online. You must apply personally – we as your advisor cannot apply on your behalf, however we can advise you around eligibility, and answer any other questions you may have.

While we cannot apply for adirector ID on your behalf, we can advise you around eligibility, and answer any other questions you may have.

Electric vehicles are set to become more affordable for both households and businesses after the government sealed a deal with crossbench Senators on legislation to exempt low and zero emission cars from fringe benefits tax (FBT).

The new law introduces an electric car discount in the form of an FBT exemption. This allows for car fringe benefits comprising the use or availability for use of an eligible car that is a zero or low emissions vehicle to be exempt from FBT.

Specifically, a car benefit will be an exempt benefit for a year of tax if:

• the car is a zero or low emissions vehicle (note the scheme has been extended to include plug-in electric and internal combustion hybrids until 1 April 2025)
• the value of the car at the first retail sale was below the luxury car tax threshold for fuel efficient vehicles (currently $84,916), and
• the car is first held and used on or after 1 July 2022.

The FBT exemption would mean a customer with a gross income of $95,000 using a 36-month novated lease through their employer to purchase a 2022 Tesla model Y would see their take-home pay reduced by $1,364 a month, compared to $1,863 under the current rules, according to Inside Edge. Over the course of the lease, the total saving to the buyer would be $29,451 compared to a standard car loan.

Employers are the other big winners from the changes, which will remove the FBT liability on company-owned electric vehicles provided as part of a salary package for personal use by employees.

Under the earlier example, a Tesla valued at $64,000 currently results in a company FBT charge of around $12,500, according to Treasury calculations. This would be reduced to nil where the conditions above are met.

Car fringe benefits that are exempt from FBT will continue to be included in the employee’s individual fringe benefits amount for the purposes of determining the employee’s reportable fringe benefits amount for each FBT year in which the exempt benefit is provided.

Your reportable fringe benefits amount is used for:

• calculating your liability for the Medicare levy surcharge
• calculating your adjusted taxable income in determining whether a child is a dependant for Medicare levy purposes
• determining your entitlement to the private health insurance rebate
• determining whether you are liable for Division 293 tax for superannuation contributions
• determining your eligibility for the government co-contribution for personal superannuation co-contributions you made
• determining your eligibility for the low-income super tax offset for concessional (before tax) super contributions you or your employer pays into your super fund
• determining whether you can offset your business loss against other income (non-commercial losses)
• working out if you are entitled to reduce your employee share scheme discount
• working out the amount you must repay against your
  • Higher Education Loan Program (HELP)
  • Vocational Education and Training Student Loan (VETSL)
  • Student Financial Supplement Scheme (SFSS)
  • Student Start-up Loan (SSL)
  • ABSTUDY Student Start-up Loan (ABSTUDY SSL)
  • Trade Support Loan (TSL) debt
• determining your entitlement to a tax offset for
  • contributions you made to your spouse’s superannuation
  • invalid and invalid carer
  • zone or overseas forces
  • Medicare levy surcharge (lump sum payment in arrears)
  • seniors and pensioner
• determining your eligibility for family assistance payments, including
  • Family Tax Benefit Part A and Part B
  • Child Care Subsidy
  • Parental Leave Pay
  • Dad and Partner Pay
• working out your child support obligations.

Contact us if you would like to know more about this new law.

The ATO has issued new draft guidelines around a new method (the revised fixed rate method) of calculating work-from-home running expenses from 1 July 2022 (as an alternative to calculating the actual work-related portion of all running expenses).

The new revised fixed rate method will replace both:

• the 52 cents fixed-rate method set out in paragraph 5 of Practice Statement PS LA 2001/6 (for electricity and gas expenses, home office cleaning expenses and the decline in value of furniture and furnishings), and
• the short-cut (COVID-19) 80 cents method (for all additional running expenses).

You are eligible to use the revised fixed-rate method from 1 July 2022 if you:

• work from home to fulfill your employment duties or to run your business (a separate home office or dedicated work area is not required)
• incur additional running expenses that are deductible, and
• keep and retain records of the time spent working from home and of the additional running expenses incurred.

New rate

The new rate of 67 cents (replacing the fixed rate of 52 cents in PS LA 2001/6) was “based on the Australian Bureau of Statistics (ABS) household expenditure survey with consideration of annual Consumer Price Index (CPI) weightings”. However, given that the recent Federal Budget forecast a 50% increase in electricity bills alone over the next two years, the adequacy of the new 67 cent rate is open to question.

Furthermore, in arriving at the new rate, there was no explanation or reconciliation to the 80 cents per hour rate in place under the COVID-19 shortcut method. The new 67 cent rate represents a 16.25% reduction on that COVID rate.

Further undermining the adequacy of the new 67 cent rate is that it is inclusive of certain expenses that were not included under the former 52 cent rate. As noted in footnote 3 of PCG 2022/D4, the fixed-rate method in PS LA 2001/6: allowed 52c per hour for each hour a taxpayer worked from their home office to calculate their electricity and gas expenses, home office cleaning expenses and the decline in value of furniture and furnishings. In addition, a separate deduction for the taxpayer’s work-related internet expenses, mobile and home telephone expenses, stationery and computer consumables and the decline in value of a computer, laptop or similar device could be claimed.

However, PCG 2022/D4 at paragraph 23 proposes that the revised 67 cent fixed rate under the new rules is inclusive of:

• internet expenses
• mobile and/or home telephone expenses, and
• stationery and computer consumables.

The inclusion of these expenses within the revised fixed rate, when coupled with the current high inflation environment, means that there is a high likelihood that taxpayers may be worse off when moving from 52 cents to 67 cents.

Record keeping

From 1 January 2023, this will become more onerous under the new revised fixed rate method.

Under that method, you will need the keep a record of the actual hours worked from home (e.g. timesheets, rosters or a diary kept contemporaneously). This is more onerous than the 52 cent method where you only needed to keep a record to show how many hours you worked from home. You could do this over the course of the year, or if your work from home hours are regular and constant, by keeping a record for a representative four-week period. The ATO under the new revised fixed rate method also requires evidence in relation to each of the running expenses listed above. For energy, mobile and/or home telephone and internet expenses, one bill per item needs to be retained. If the bill is not in your name, additional evidence is needed to prove that you incurred the expenditure. For stationery and computer consumables, one receipt needs to be kept for an item purchased.

Summary

All told, under the new method, the amount that can be claimed will potentially be lower, while the compliance obligations are higher – the taxpayer not only needs to keep a record of times spent working from home, but also there is a need to keep an invoice/receipt for each of the additional costs, such as an electricity bill. This is a new requirement which never formerly existed under either of the replaced fixed rate methods.

While the new draft guidance offers a transitional arrangement until December 2022, individuals currently availing themselves of the 52 cent fixed rate method will need to consider whether they can meet the additional administrative burden from 1 January 2023, or whether the “actual expenses” method is a more achievable alternative.

If you are uncertain which method is best for you, contact us directly to discuss your circumstances.

Hiring additional employees to help with surging end-of-year demand? A New employment form, accessed through ATO online services, will help reduce your compliance time.

It’s an easy way for your employees to provide you and the ATO with the information that the ATO need. If your new employee has a myGov account linked to the ATO, once signed in they can:

• access ATO online services
• go to the ‘Employment’ menu
• select ‘New employment’ and complete the new form.

Your employees will need your ABN to complete the form. When they submit the form, their tax file number (TFN) declaration details are sent straight to the ATO, so you as their employer do not need to do this. The form will then enable them to print and give you the summary of their tax details. You’ll need the summary so you can input the data into your system.

The New employment form can also be used to collect a range of information. For example, employees can use it to authorise variations to the amount you withhold from their pay for tax or the Medicare levy, or to advise you of their choice of super fund. They can also use it to update their tax circumstances with you, for example, if:

• their residency status has changed
• they no longer have a government study and training loan
• they are claiming the tax-free threshold from a different employer.

This is an alternative to your employee completing a Tax file number declaration and Superannuation standard choice form to obtain their details.

When your employee completes the online commencement forms, this needs to be done within 28 days of them starting.

Other issues

You’ll also need to confirm your new worker is legally allowed to work in Australia. Australian citizens, permanent residents and New Zealand citizens are legally allowed to work here. If you believe the worker is a foreign national (other than a New Zealander), you must confirm they have a visa with permission to work. More information about employing migrant workers is available on the Department of Home Affairs website.

If you’re hiring someone on a working holiday visa (subclass 417 or 462), you must also register as an employer of working holiday makers. You need to do this before paying them.

If your business has a contract with a labour-hire firm, then they’re responsible for pay as you go (PAYG) withholding, super guarantee and fringe benefits tax obligations. Regardless of how the activity is described, if a labour-hire firm supplies workers to your business, they must withhold from payments to individual workers.

To be clear, it is the labour-hire firm that needs to withhold tax from individual workers under a labour-hire arrangement whether they are an employee or independent contractor.

As your tax practitioner we can help you with the tax and super issues surrounding putting on a new worker, including determining if they are an employee or contractor.

From 1 July 2021, the law was changed to allow for six-member SMSFs (up from five members).

At the time of writing, the uptake has been slow so far with just 228 funds with six members. At the other end of the spectrum, it is permissible to have single member funds. The main advantage of doing so is that you have total control over your retirement savings, and the investment decisions in respect of those savings. However, there are some issues to be mindful of.

Number of trustees

An SMSF trustee is a person responsible for ensuring an SMSF is maintained for the purpose of providing retirement benefits, and complies with the investment and regulatory rules. The trustee can be a company or an individual. You can set up your SMSF with only one member; however the superannuation legislation requires you to have two individual trustees or a corporate trustee for the fund.

If you have a corporate trustee for a single-member SMSF:

• The corporate trustee company can have one or two directors, but no more.
• The fund member must be the sole director or one of the two directors.
• If there are two directors and the fund member is an employee of the other director, the fund member and the other director must be relatives.

If you choose to have a corporate trustee:

• The corporate trustee company can have one or two directors, but no more.
• The fund member must be the sole director or one of the two directors.
• If there are two directors and the fund member is an employee of the other director, the fund member and the other director must be relatives.

Loss of capacity

If the sole member loses legal capacity, then the person who holds an enduring power of attorney for the member may act as trustee of the fund in their place. This is an important matter to attend to before setting up your SMSF.

If the sole member was also the sole director of a trustee company, then the shareholder of the company will need to appoint a replacement director.

If the member was the only shareholder, then the probate of the member’s will needs to be granted before a new shareholder is appointed.

Death

In the event that the sole member passes away, then the other trustee will be left with total control of the fund. If the sole member was also the sole director of a trustee company then the same consequences from the loss of legal capacity will appy (see earlier).

Retaining residency

The SMSF must remain an Australian

superannuation fund in order to retain its complying status. Whether the super fund does so depends on meeting the following tests:

1. Be established in Australia.
2. Have its central management and control ordinarily in Australia.
3. The fund must have either at least 50% of the fund’s assets linked to active members who are residents in Australia or not have any active members.

Thus, having a single member SMSF may limit your ability to travel overseas for extended periods.

All told, there is no ideal number of members to have in your SMSF, and it will depend on your circumstances.

In a recent speech, ATO assistant Commissioner Justin Micale outlined the ATO’s latest compliance issues for those who operate an SMSF.

ID fraud and investment scams

While ID fraud and investment scams are still quite rare in the SMSF sector, they are becoming more prevalent.

In the 2022 financial year, the ATO identified increasing numbers of individuals who were victims of identity fraud where SMSFs were registered without their knowledge or consent. Luckily for most victims the ATO detected the fraud early so it could protect their super, but not for all.

These scammers are becoming increasingly sophisticated, impersonating well-known Australian companies and using personal details to gain trust.

They use various methods to contact people such as email or cold calling, pretending to be financial advisers and encouraging them to transfer their superannuation into a new SMSF or investment product. The investor is often promised high returns.

Once they have their personal information, they seek to use it to establish an SMSF, rollover money into the fund and steal retirement savings.

This reinforces the need for individuals to treat contact from any third parties in relation to their investment and superannuation choices with an abundance of caution.

Illegal early access

Early access is the most common risk in the sector.

It occurs when individuals access their retirement savings before meeting a condition of release. Not only is this illegal, but money taken out of superannuation early has a detrimental impact on an individual’s retirement nest egg.

There are only limited circumstances where a member can legally withdraw their super early, such as where a member reaches their preservation age and retires, is 65 years old (even if not retired) or has died.

Non-lodgment of SMSF annual returns

The lodgment of an SMSF annual return is a fundamental obligation for all trustees/members including those in retirement phase.

There are around 24,000 funds who haven’t lodged their first return and a further 80,000 lapsed lodgers with one or more outstanding returns.

Lodgment is vital to ensure your SMSF retains its complying status on SuperFund LookUp as funds which have overdue returns by more than two weeks may have their regulation details removed. This restricts the SMSF from receiving rollovers and employer contributions.

Regulatory contraventions

In the 2022 financial year, the ATO received contravention reports for 13,558 funds with 39,997 contraventions being reported. This is an increase of nearly 3.5% in the number of SMSFs with contravention reports lodged and an increase of nearly 6.3% in the number of contraventions reported compared to the 2021 financial year.

The most common contravention relates to members having accessed their retirement savings early, which is often reported as a loan to a member or a payment standards breach.

The main drivers of regulatory contraventions are financial stress, poor record keeping and a lack of understanding of the rules.

Audits

Adequacy and independence were two key issues identified.

Key to a robust audit is the SMSF documentation. Trustees and their advisors must provide their nominated auditor with all the relevant documentation for the SMSF’s accounts and financial transactions for the year.

Record keeping is key. Documentation of an SMSF audit itself is also necessary to determine that the audit has been properly conducted. This is the case even if there were no contraventions.

Trustees also need to appoint auditors who are genuinely independent.

Director IDs

All existing directors, including directors of a corporate trustee of an SMSF, are now required by law to have a director ID by 30 November 2022. It’s not too late to comply, as the ATO is taking a softly-softly approach to compliance in this area.

If you have any questions around SMSF compliance, we’re here to help.

Christmas is traditionally a time of giving, including employers showing gratitude to their workers for a job well done throughout the year. However, depending on the nature and value of the gift, and also who it is gifted to, such magnanimity can attract unwanted tax consequences. So how as an employer do you gift most tax-effectively this festive season?

Gifts to employees and their associates (e.g. spouses)

The first step is determining whether the gift constitutes entertainment. Gifts that constitute entertainment include tickets to movies, plays, sporting events, theatre, restaurant meals, holiday airline tickets, and admission tickets to an amusement park. On the other hand, the following gifts are not entertainment: Christmas hampers, bottles of alcohol, gift vouchers, perfume, flowers, and pen sets.

Where an entertainment gift costs less than $300 (GST-inclusive) and is provided infrequently throughout the year, there will generally be no Fringe Benefits Tax (FBT), no deduction will be allowed, and no GST credits can be claimed. Where the cost is $300 or more, FBT will apply, and a deduction and GST credits can be claimed.

Where a non-entertainment gift is in play, and it costs under $300, no FBT will apply, but a deduction and GST credits can be claimed. Where the cost is $300 or more, FBT will apply, and a deduction and GST credits can be claimed.

All told therefore, the best result for an employer (at least from a tax standpoint) is to provide a nonentertainment gift under $300.

Gifts provided to third parties (e.g. clients, suppliers, contractors etc.)

Where gifts are provided to these recipients, the $300 threshold has no relevance.

Gifts that constitute entertainment (irrespective of cost) do not attract FBT, cannot be deducted, and no GST can be claimed.

By contrast, non-entertainment gifts do not attract FBT, however a deduction and GST credits can be claimed – again, irrespective of cost.

Cash bonuses

Alternatively, instead of gifts, employers may wish to provide cash bonuses to their staff. From a tax perspective, the attraction of doing so is that it shifts the tax burden away from the employer and onto the employee. That is, the cash counts as assessable income for the employee while the employer can claim a deduction. No FBT is payable by the employer on a cash bonus.

Leave bonus

Another benefit that may be considered by employers is a leave bonus. For example, allowing workers to finish up for the year a couple of working days before Christmas and not have that count against their annual leave balance, noting that this may be a quiet time of the year for business anyway. There are no adverse tax consequences for either party. The added benefit for the employer is that, unlike a cash bonus, there is no immediate cashflow impact.

If you need assistance with the tax treatment of your Christmas giving, including Christmas parties, don’t hesitate to reach out to us.