Show Me the Perks Podcast | ‘Tis the season for Tax Savings

Kim

Good day, I’m Kim Bigg, and welcome to our podcast tailored for small and medium-business owners who want to understand more about accounting and tax in Australia. Please note the insights and tips we share in this podcast are general in nature and are not designed to replace personalized advice.

Your financial situation is unique, so it’s essential to weigh the information we discuss against your specific goals, current financial status, and individual needs. Seeking professional advice is always your best bet for making informed decisions that align with your personal circumstances.

Hi, everyone. I’m Kim Bigg, and welcome to Episode 4 of our podcast, Show me the Perks, a series tailored for small and medium businesses and their owners in which we offer practical insights around the big accounting and tax matters in Australia. We are recording this episode on the 30th of November, 2023. With me today, I have Neil Oakes, Director of Perks Accountants and Wealth Advisors in the Technical Tax Division.

So, for this episode, we will be discussing Christmas time tax considerations for SMEs, so who better to have with us than Neil, the Christmas Grinch himself? Neil, tell us a little bit about yourself, including what your current role is. Tax specialist, is that your role?

Neil

Yes, so I’m the Director in charge of our Technical Tax Division here. Work closely with Lee Yeager, who you had on Episode 1 we did, and hopefully, I’ll live up to his performance today.

Kim

Maybe you can be the best interviewee from the tax specialist team. That would be a good bar to level up to.

Neil

No, maybe.

Kim

Maybe not. Yeah, so tell us a bit about yourself. Tell us a bit about what does it mean to be a tax specialist. How does one finish school, wake up one day, and think, I know what I’m going to be. I’m going to be a tax specialist.

Neil

Can’t say anyone ever wakes up with that realization. It’s more something you just fall into.

Kim

The job found you?

Neil

The job finds you.

Kim

You just like taking tax from people.

Neil

Exactly. Exactly. Keeping your lot in line.

Kim

Or the other way around. You’re like making sure people don’t pay as much tax as they legally can.

Neil

It’s all about making it fair, Kim.

Kim

That’s very diplomatic of you, Neil. Very good. Previous roles to Perks?

Neil

Previously to Perks, worked in the SA state government for a few years.

Kim

There seems to be a theme here.

Neil

Yeah?

Kim

Lee Yeager was there as well.

And then to another smaller accounting firm called Fennell Allen & Co which is now Pitcher Partners, and now into Perks. Been here since 2004.

Kim

Very good. So that is 19 years, nearly 20. Very good. Now, just a brief extra little piece of information because it ties into the theme we’re looking to run for today. So for those listeners who don’t know, Neil is not a native Australian-born, he’s born in South Africa, I believe?

Neil

Correct.

Kim

When did you move to Australia?

Neil

1988, the bicentennial year.

Kim

Don’t want to give away your age, so I won’t talk about how old were you when you turned up. That’s up for contention as well, to be honest. So when you came across, where were you living in South Africa?

Neil

Joburg.

Kim

Excellent. Very good. And enjoying Australia ever since. The only reason I mention South Africa is I’m going to blend that into the example theme for today. So.

Neil

I’m intrigued.

Kim

Had to get something out there on that.

Neil

Yeah.

Kim

I don’t know, do they pay tax in South Africa? They probably don’t, do they?

Neil

I’d suggest they would.

Kim

Send the debt collectors in if you don’t.

Neil

Correct. There might be a little bit more negotiation than what we have over here, but ultimately, people do pay tax there.

Kim

Negotiation. Good. Maybe we should get that over here.

Very good. I’ll jump into it. So, today’s topic, Christmas, so it’s that time of year. Neil’s come back from the buffet from the previous meeting in here where Peter Hill has put on a lovely spread. Christmas time.

Tax-deductible gifts, tax effective in general. So lots this time of year, lots of businesses and SMEs and owners contemplating Christmas shows, team lunches, contemplating giving maybe gifts to some of their staff, some people give out a Christmas bonus. There’s lots and lots of different things that come to mind, obviously, in the spirit of Christmas.

But in the spirit of Christmas is great, but there’s often some tax implications that go with it. Can you give us a brief explanation of a few of the different items to think about when thinking through Christmas entertainment?

Neil

So yeah, there’s four main things that you need to have a think about whenever you’ve got entertainment. OK? So is it deductible for income tax?

Kim

I thought you were going to say, Is it going to be fun?

Neil

That’s taken as given. Is it deductible for income tax? Do you have to pay fringe benefits tax on it? Can you claim input tax credits? And is there going to be a nasty sting in the tail for the employee who has to pay tax on, it if you’re getting a tax deduction for it?

Kim

And when you say input tax credits, in layman’s terms, what are they?

Neil

The GST that you’ve paid to the supplier for the entertainment.

Kim

Must have thought you were back in the state government days. Very good.

So yeah. Tax is what you’re going to pay, you’re going to be tax-deductible. Are you going to get slugged for fringe benefits tax? Fringe benefits tax rate is highest marginal tax rate.

45%.

Neil

47%.

Kim

Can you claim the GST back? 47%?Tax effect to the individual employee.

Very good. So, I’ve got a couple of examples here. So, I haven’t let you know about this, Neil, but I’m going to bring in the example of today, is a South African who’s dear to all Australians Herschelle Gibbs. He dropped the World Cup back in 1999, so he started a seafood business in Australia called Catch of the Day, intriguingly enough.

And he has a team of 30 people, and he wants to take them down for lunch at the pub for his 30 staff. What would Herschelle need to think about? Now, I’m bearing in mind he has now moved to Australia. Let’s assume that’s the case. So we’re talking Australian tax here, not South Afrikaans tax.

Neil

Thanks for the clarification. So essentially, the first..

Whenever you’re taking staff for a meal or you’re doing anything along those lines, you need to work out, are you providing entertainment? So, entertainment doesn’t just include going to a movie, going to a show, all of those sorts of things. You can have a thing called meal entertainment.

Kim

So imagine Herschelle and his team have just found the local pub, I don’t know, at outer harbor, Port Adelaide or something. They’ve just wandered into the pub. There’s 30 of them. They’ve each ordered a meal, a couple of beers, a couple of wines, whatever. This is sort of 2.5 hours sort of thing just to thank everyone for their good performance. How does that sit within the entertainment framework?

Neil

Yeah. So to work out whether it’s entertainment or not, there’s four main questions you need to ask.

So Herschelle would have to sit down and say, Why am I providing this food or entertainment?

So is it merely a refreshment or sustenance? So the classic is, Peter Hill’s had his training in here, there’s some muffins that’s just purely refreshment or sustenance, as opposed to a full meal with alcohol, et cetera.

The second question is you need to have a look at what type of food is being provided. So, if you work out why you’re doing it, refreshment or not, what’s being provided. And the more elaborate the meal, the more likely it is to be meal entertainment.

Kim

So, when you say elaborate, let’s dive into that a little bit. We’ve got Peter Hill who’s turned up to a training session here with, I would say, gourmet muffins and some Danishes that are quite sizeable. Is that what you’re thinking through when you’re thinking through how significant the providing is?

Neil

No, definitely. So when you’re looking at the what, one end of the scale, you’ve got sandwiches–

Kim

Sustenance, just makes sure of a bit of power on.

Neil

Coffee out the end, together with some biscuits, sustenance. Three-course meal or a seven-course degustation, more likely to be entertainment.

Kim

OK. So meal at the pub with Herschelle and his mates.

Neil

I’d say it’s probably–

Kim

Blokes from the seafood joint. They’re not going to eat seafood; they’ve got 30 schnitzels coming up. What are you thinking there?

Neil

I’m tipping we’re more likely at that point in the entertainment arena. The third question–

So of the four questions, the why and what are most important. You then come along and you say, When is the food or drink being provided?

OK, so if it’s during work time, over time, while somebody is traveling overnight for work, something along those lines, then it’s less likely to be meal entertainment.

Whereas if it’s at night time, it’s more likely to be entertainment, or if it’s during work hours at the pub for Herschelle, it’s more likely to be entertainment, I would have thought.

And that brings me to the fourth question, which is where.

All right, so it’s why, what, when and where. Where is the food being provided, sometimes called a location test.

If you’re on your employer’s premises, less likely to be entertainment. That’s going back to Hilly having his seminar here with his gourmet muffins. It’s on client premises, on employer premises, sorry, most likely just purely sustenance, no meal entertainment.

If you’re in a pub where you’ve gone there for the ambience of the pub, people want to watch the horse races while they’re there, all of those sorts of things, you’re more likely to be entertainment. So, I’d say your mate Herschelle has probably got an FBT issue here.

Kim

Hilly may well have had the races on during his seminar as well. So maybe the ambience was more than we think. But I take your point. So, using Herschelle in his example, he’s taken 30 people down to the pub, have given me a bit of a steer here, that this would constitute entertainment because it’s more than just sustenance.

What happens then? So how does Herschelle review this? This Goes into the entertainment line on the business’s profit and loss statement? How does that work from those four items we went through at the start, tax deductibility, FBT, GST, and to the individual staff members who are turning up looking for a free lunch?

Neil

Yeah. So essentially, the golden rule to live by is you don’t get an income tax deduction for meal entertainment, nor do you get input tax credits, unless you pay FBT on it. So there’s a couple of exceptions to that, but that’s the golden rule, is if it was just clients, you’re still not going to get your income tax deduction and you’re not going to get your GST input tax credit on it. In this case, it’s all employees, so we’d have to have a look and say, OK, can we get those deductions and the input tax credit? Yes, we can if we include it for fringe benefits tax purposes and pay FBT on it.

Kim

And if we don’t, perhaps the more conservative route would be to say let’s call it all fringe benefits tax expense Hershcelle’s pay is relevant 47% FBT tax on it and then it’s tax deductible and–

Neil

Just to make a quick point on the 47%, because we don’t want to be misleading. The way when you calculate fringe benefits tax, if you’ve spent $100 on somebody’s meal, the fringe benefits tax will equal round about $100.

So, it’s got to be grossed up first, then you apply your 47%. So it almost doubles, as soon as you pay in fringe benefits tax, you’re essentially doubling your cost.

Kim

So this is a pretty expensive lunch that Herschelle has just bought for his 30 staff.

Neil

I would have thought so, yes.

Kim

– So contrasting that, Herschel could have just done the Peter Hill method of just bringing in some gourmet danishes and muffins, maybe a couple of sandwiches. How would that have been viewed, maybe even just a handful of beers on the side, how is that viewed in contrast to that?

Neil

I think it would be less likely to be considered meal entertainment, if he’s doing it in his training room or his boardroom. He could even potentially have the same schnitzels delivered from the pub and still not be having meal entertainment.

Kim

These guys in the seafood industry, Catch of the Day, he might be just cooking it out the back on his barbecue, so same sort of logic, is it? So if you’re having it in your premises and it’s just in the form of sustenance and then Herschelle may have a couple of little speeches thanking a few people for their work during the year and things like that, this is more in the form of an ordinary expense to the business, maybe put through the staff amenities line or something along those lines, and not entertainment. So quite a significant difference in tax.

Neil

Correct.

Kim

Yeah.

Neil

Correct.

Kim

And in terms of the tax effect to the individual obviously if it’s run through as staff amenities, then it’s fairly–

There’s no effect on the individual staff member, but to contrast that, if it’s an FPT thing, then he is paying fringe benefits tax on it. How might that affect those 30 individuals down at the pub?

Neil

Will not impact the employees, individuals? There are certain fringe benefits that will, that are considered to be reportable fringe benefits. So as soon as you’ve got a reportable fringe benefit, that can impact their various tests like health repayments, Medicare levy, all of those sorts of things. But meal entertainment, you don’t need to allocate that to individual employees. That’s purely an employer tax.

Kim

It’s got to go above a certain level, I think, doesn’t it, before it goes–

Neil

That’d be more than $2,000 worth of reportable fringe benefit before it starts to hit their income statements, as they’re now called.

Kim

Per person.

Neil

Per person.

Kim

That’s a lot of schnitzels down the pub with Herschelle.

Neil

Yeah. It depends on how good the schnitties are and what they charge for them.

Kim

It could be quite expensive, couldn’t they? OK. I’m going to contrast this a little bit. Let’s say Herschelle had had a really good year on the Catch of the Day, and instead of taking them to the local pub, decides to go out to a fancy restaurant. Spouses are coming along, or the staff. Bring your partner, let’s have a good night to thank everyone. So this is more in the form of perhaps a more expensive restaurant meal, et cetera. How does it differ when you have spouses coming along together with their employees?

Neil

Doesn’t really differ at all. Still entertainment. Probably more in the nature of entertainment. If you’re bringing your spouses along, you’re going to a fine dining restaurant.

I suppose benefit of–

We do have what’s called a minor and infrequent benefit, which is exempted, and that would apply. That’s less than $300 as long as it’s minor and infrequent. That would apply to both the employee and to their spouse.

Kim

Yeah.

Neil

OK, so you could essentially give a couple a $600 meal, if it’s the only one that you give for the year and not have any fringe benefits tax associated with it.

Kim

Very good. And I know we’re talking through the Christmas theme here, so Herschelle taking people out for a Christmas lunch or the similar. But say for example, this was let’s call it the Melbourne Cup. You know, it’s just before Christmas, let’s say it’s the Melbourne Cup lunch.

He does the exact same thing, but this time, he invites 30 staff and he also invites 30 clients to come along and have a meal at the pub and watch the race on the TV, hires out a room, perhaps, at the local pub, to bring everyone in. So there’s 60 people, half of them are staff, half of them are clients. How does that work from an entertainment perspective for Herschelle?

Neil

So once again, no real difference. The only thing is–

Kim

Still entertainment?

Neil

Still entertainment. You need a carve out your client proportion. So you’d work out per head,

Kim

50%?

Neil

Non-deductible, no GST.

Kim

So if you spent 10 grand at this Melbourne Cup lunch and splitting it down the middle no trying to decide who drank all the beers or who didn’t, you’re just splitting it down the middle and you’re saying 50% of it will be treated as if it was the employees receiving the entertainment benefit and the other 50% is for clientele. So just explain to me how that works from the clientele side, and probably the employee side as the same as before. The clientele side?

Neil

Clientele side, so no income tax deduction, because you’re not paying FBT.

Kim

Nondeductible.

Neil

– Non-deductible for clients, it’s entertainment. Because it’s nondeductible, no input tax credit. No GST claim on it, either.

Kim

Yep. No tax deduction, no GST.

Neil

Correct.

Kim

Yeah, so almost the exact same example as if they were employees. No difference.

Neil

Correct. The only difference is if it’s employees, is if you pay fringe benefits tax on it, you get your income tax deduction for it, and you get your GST claim.

Kim

Yep. Yep. So he’d be better off explaining that–It’s almost better if there was 60% staff and 40% clientele–

Neil

As long as he’s happy paying fringe benefits tax, because your cost for your employees would be closer to 10 grand.

Kim

Yeah, OK. So it’s not so good.

Neil

Not so good.

Kim

OK.

Neil

Not so good.

Kim

Very good. OK, that’s a good run through of Christmas entertainment. I just want to ask a couple of questions. And this comes up and you get clients and small businesses ringing up about this, or probably the more likely scenario, we just find it in the accounts when we do next year’s tax returns for said clients. A lot of people like to give gifts near the end of Christmas year, so this might be give a bottle of wine to one of their staff, it might be give them a carton of beer.

That’s probably more in line with what Herschelle’s thinking about. He might go and get 30 cartons of beer and just give one to each of them and say, Here you go. Thanks for everything you’ve done. It’s been a great year. Go and enjoy a beer at home by yourself, in a sensible way over a few days.

How do you–

I’m just trying to contrast the different sorts of options where some people give gift cards, some people give cash, some people give cartons of beer or a bottle of wine. How does that transpire into entertainment style of taxing?

Neil

Yeah, so the provision of a bottle of wine, as long as it’s below $300–

Kim

You’re not buying the good stuff.

Neil

Exactly.

You’re not going to have any FBT exposure there. That’s going to be fine.

I have to work through the income tax deductibility of that in a little bit more detail, but chances are, you’re going to get that, because it’s not entertainment. Gift cards is where you start to run into a little bit more analysis that needs to be looked at.

So for example, if you give somebody a $300 Coles Meijer gift card or Woolworths gift card, minor, infrequent, the ITO says you can give up to 10 of those a year, and it would still be considered to be minor and infrequent. So no issue there. Where it comes about is where you might give somebody an experience. All right, so you might give them–

Kim

A gift voucher to go to a tree climb or something–

Neil
Correct, or to get a massage, or something along those lines. That can get caught as entertainment. So it’s not meal entertainment, but it’s entertainment.

Kim

Yeah, right. So they’re going to catch you on that one. And is there a limit to these things, if someone gave a, I guess, a bottle of wine that was worth $500 or an experience gift card, red balloon, or whatever those things are called, where there maybe an $800 essentially gift card, is that where they do get caught–

Neil

Correct. Correct. So to be minor and infrequent needs to be less than $300 in value. So for $500–

Kim

Per year?

Neil

No.

Kim

Per item.

Neil

Per item. And gift cards, the ITO said you can give up to 10 a year, and it would still be infrequent.

Kim

Yup. As long as it doesn’t go over 300 bucks or

Kim

So you can give out $2,999 worth of gift cards per year, as long as they’re on 10 separate times.

Neil

Yeah, and as part of that, you can’t just build that into someone’s employment contract, that that’s what you’re going to get. There needs to be a reason for the gifting as well.

Kim

Yeah. That’s for sure. Most small business owners start to get creative, like mine just did, and then the head of the tax division just shuts that down immediately, so yeah, that’s very good. The only other question I’ve got is similar to these.

How do you weigh up the scenarios here? So clearly, if Herschelle goes down to the pub and buys 30 schnitzels and beers and the ambience is on, if he runs it through his business, he’s paying FBT, because it’s entertainment. If he just pays for this himself, how is this–

Herschelle might look at this and go, I can’t be bothered with all the hassle of lodging an FPT return and doing something else. I’ll just pay for it out of my own pocket, own money, down, and no one will know any different. How does the ITO look at things like that, because it’s still a benefit to those staff members.

Neil

Yeah. The technical answer, Kim, is that there’s provisions within the FBT Act called third-party arranger provisions, where as soon as an employee is provided something as a result of their employment, it doesn’t need to be the employer that provides it. But the employer is still responsible for the fringe benefits tax. So the fact that Herschelle’s providing it, it can still get pulled into the FBT net.

Kim

And is that same if Herschelle sent them along to let’s call it Seafood Christmas Expo, maybe an industry group’s providing some entertainment?

Is there any FBT on those sorts of things? Clearly, the individual is getting a benefit. They’re going along to an industry session, and there’s probably a feed or something.

Neil

What you need to look at is the dominant purpose of that–

Kim

Related to training or something like that. It’ll be fine.

Neil
Also, if the seminar runs overnight so the employees are traveling, then having a meal with alcohol is not going to be considered to be entertainment.

Kim

Yeah. As opposed to a single one-off thing where they’re just sent along to an awards dinner or something where it’s–

Kim

Yeah. So it comes back to dominant purpose.

Neil

Dominant purpose. Are they traveling? Why are they getting this, is really what you want to be getting to the bottom of, when you’re having a look at whether there’s any fringe benefits tax exposure.

Kim

Very good. So this is obviously a Christmas theme. I don’t have any other questions that go with the entertainment, but hopefully, this summary has been enlightening for some of those who have probably already booked their Christmas show for the year. But it’s perhaps given them some insight into how the various Christmas shows might be treated from a tax perspective.

I think sometimes people think it’s all very straightforward. This is a Christmas show for my team. It’s nothing outlandish. Surely, all of it’s tax-deductible and otherwise.

But this episode of the Show me the Perks podcast has hopefully giving us a few key takeaways to think first before we start thinking, Yeah it’s just all going to be a straight tax deduction, and start giving out gifts and entertainment to our staff. Perhaps makes us think twice and think, what am I actually trying to do here?

And is there something I can do where I can do this in a more convenient way for both the individual as well as the business itself to get a slightly better tax outcome? And that could be gift cards periodically through the year rather than just handing out $1,000 one on the 31st of December or 25th of December. If you do it periodically through the year, it’s going to get looked at quite differently than if it’s a one-off event at Christmas time.

So definitely good food for thought. I’ll wrap it up there because historically, I’ve wanted to have a question but I haven’t had a lot of questions come through to the Show me the Perks email address. So just to reiterate, if there are any questions people want to put to the Show me the Perks team, the email address is showmetheperks@perks.com.au.

I went and created a special email address for that, and may well give a prize to the–

First non-FPT prize to the first person who can send me an email to that address and ask a relevant question. So just to encourage people to get off the start line on that one, so.

But no, thank you to all of our listeners, again.

Episode number 4 in the can. Thank you to Neil Oakes for coming along and giving us some insights with that Christmas cheer that every tax advisor provides. And yeah, look forward to speaking to everyone again at our next episode. Thanks, everyone.

Neil

Thanks, Kim.