If you are intending to have a staff party or function for Halloween, Guy Fawkes, Melbourne Cup race day or Christmas, there are tax rules that dictate what your business can claim as a deduction.
Although businesses are able to claim a deduction for expenditure on costs associated with staff functions, certain expenditure is classified as “entertainment expenditure” and the deduction is limited to 50% of the amount that would otherwise be allowed as a deduction.
There are five categories of entertainment expenditure for which deductibility is limited to 50%, subject to several exclusions. These include expenditure on a marquee or similar exclusive area, whether it is permanent or temporary, at a sporting, cultural or other recreational event occurring off the business premises (including tickets and rights of entry). Therefore, if your business is looking at providing a “staff shout” at the local Guy Fawkes event, or taking a marquee at a local Melbourne Cup race day event, the costs would be classified as entertainment expenditure, and the deduction would be limited to 50%.
Further, if you are looking to provide food and drinks for your staff at one of these functions or you are looking to take your staff out for drinks, again the costs would be classified as entertainment. The costs would be deductible, but only to the extent of 50%.
The entertainment expenditure includes the costs of hiring crockery, glassware, and utensils, waiting staff, music or other entertainment, such as fireworks or hiring a ghost storyteller.
If you chose instead to provide your staff with an airline ticket to fly to Melbourne that they can use at any time (even if it is intended to be for the Melbourne Cup) or if you provide them with a voucher for a costume hire that they could use for Halloween or at Christmas time, the cost would not be treated as entertainment expenditure. Instead, the cost would either be captured within the fringe benefit or monetary remuneration rules (depending on whether you gave vouchers or cash) and would be fully deductible to your business.
In the case of entertainment or a fringe benefit, the amount does not become income to your employees, but if you choose instead to give cash, the amount will be income of the employee.
For more information please contact your Crowe Horwath tax adviser.