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Welcome to the December newsletter.
Is the Christmas Party Deductible?
Each year we get asked this question many times. Hopefully the following will assist. Please feel free to contact us for a more detailed review of your particular circumstance. With most clients holding some form of Christmas or end of year event, a summary of the (overly complex) rules relating to such events is set out below.
Christmas parties constitute “entertainment benefits” and as such are subject to fringe benefits tax unless specifically exempt or subject to the “minor benefits” exemption. A minor benefit is one that is provided to an employee or associate on an infrequent or irregular basis, and costing less than $100, inclusive of GST, per employee or associate. Holding the Christmas party on the business premises on a working day is usually the most tax effective.
Expenses such as food and alcohol are exempt from FBT for employees – with no dollar limit, but no tax deduction or GST credit can be claimed. However, where the employee’s spouse also attends and the combined cost for employee and spouse is $100 or more, inclusive of GST, there is FBT only on the spouse’s portion of food and drink and a tax deduction and GST credit can be claimed on that portion.
Where the Christmas party is held on the premises on a working day with only employees and clients attending, and only finger food or a light meal is provided with no alcohol, then the entire cost is tax deductible. There is no FBT and a GST credit can be claimed.
Christmas parties held off the premises are exempt from FBT where the cost per head for employees and spouses is less than $100, inclusive of GST, but no tax deduction or GST credit can be claimed. Associates are not counted in the per-head calculation, meaning that the $100 FBT minor benefits exemption applies to the combined cost of employees and their spouses. Therefore, if the combined cost for employees and spouses is $100 or more, GST inclusive, there is FBT on the combined cost, but a tax deduction and GST credit can be claimed on the combined cost.
In all cases, the cost for clients attending the party is not subject to FBT, but no income tax deduction or GST credit can be claimed.
Where the party includes entertainment such as a band or magician that is hired separately to the venue, the FBT minor benefits exemption increases to $125 per employee and/or spouse, inclusive of GST.
Leasing Business Premises
Part 1 - Tax Effective Leasing
Leasing terms for premises is one of the biggest decisions made by any business or property owner.
However many businesses will enter into a lease with very little thought given to the tax consequences. The tax outcomes should be considered prior to a lease being executed to maximise tax efficiency. Whether you are a landlord or tenant, considering the differing tax treatments of cash and non-cash incentives could save you a lot of money.
A landlord will sometimes provide incentives to induce tenants to enter into a commercial lease. Incentives can be in the form of cash, or non-cash goodies such as motor vehicles, holidays, rent-free period, free fit outs etc. These incentives have different tax outcomes for both the tenant and the landlord.
Cash Incentives
If a landlord provides a cash incentive to a tenant to induce them to enter into a lease of business premises the landlord will be entitled to a deduction for the expenditure.
From a tenant’s viewpoint a cash lease incentive from a landlord will be assessable.
Rent-Free Period
Where a landlord provides a rent-free period to a tenant there will be no deduction available because there is no actual loss or outgoing. However the rent foregone represents a reduction in assessable income over the relevant period.
Where a tenant receives a rent-free period this will effectively increase the tenant’s assessable income for the period during which they will not be paying rent.
Fit out paid for and owned by the landlord
Sometimes a landlord will give cash to a tenant with the requirement that they use it to acquire fit out for the premises. If the fit out is owned by the landlord use of the fit out will be effectively tax free to the tenant.
For the landlord the cost of providing for the fit out will be capital expenditure and not deductible. However depreciation deductions may be allowable in respect of plant and equipment.
Fit out paid for by the landlord but owned by the tenant
Where a landlord pays for fit out costs but passes ownership of the fit out to the tenant the cost of the fit out will be assessable to the tenant but the expenditure will be depreciable to the extent that the fit out qualifies as plant and equipment. This can leave the tenant in a very poor cash flow position. For example the provision of a $100,000 fit out to a corporate tenant would create a $30,000 tax bill. This would be reduced by depreciation deductions but in the first year of the lease these may not be significant. The tenant is thus left with no cash and a tax bill. For the landlord the cost of the fit out which passes into the ownership of the tenant is deductible.
Conclusion
Picking the right terms in the lease can save you a lot of money in tax whether you are a tenant or a landlord. For more information please speak to you usual contact at Macquarie Partners.
Next month we will look at tax issues on lease termination.
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Successful Investment Strategies
You may already be aware that Macquarie Partners offers a complete range of Financial Advisory services. However if you did not know this or are unsure of what it really means
click here to access a typical communication from our Financial Advisory division. These updates and newsletters are provided to any client of Macquarie Partners who has requested them or has sought advice previously.
If you are interested in receiving these on a regular basis please contact Belinda Barry on 8853 2601 to arrange.
ATO Key Dates
Friday 21 December 2007
November 2007 monthly activity statements – due date for lodgment and payment
Saturday 22 December 2007
• Due date for lodgment of superannuation assessment variation advices (AVA). Where applicable, for variation of assessment that issued on 15 November 2007
Tuesday 15 January 2008
• Income tax return for taxable large/medium taxpayers as per latest year lodged (all entities other than individuals) – due date for lodgment unless required earlier
- payments for companies and superannuation funds were due 1 December 2007
- payment for trusts in this category due as per notice of assessment
• Income tax return for taxable head companies of a consolidated group (including new registrants) with a member deemed a large/medium business in the latest year lodged – due date for lodgment unless required earlier
• Income tax return and regulatory return for large/medium taxable funds as per latest year lodged – due date for lodgment
Monday 21 January 2008
• Quarterly PAYG instalment activity statement for quarter 2, 2007-08 for head companies of consolidated groups - due date for lodgment and payment.
• December 2007 monthly activity statement – due date for lodgment and payment.
Christmas cards
As clients may know, it is the practice of Macquarie Partners to each year donate to the Smith Family Christmas Appeal what would be the cost of sending Christmas cards to clients. We feel this use of funds to help those in need within our community represents a better use of funds than the sending of Christmas cards. Macquarie Partners wishes you and your family a safe and enjoyable holiday period and a very prosperous 2008.
Office Closure
Please be aware that our office will closed for the festive season from COB Thursday 20 December 2007 through to Friday 4 January 2008. We will reopen for business as usual on Monday 7 January 2008.
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