It's Christmas time and you may be considering paying a Christmas bonus or providing a gift to your employees, for their hard work this year. Perhaps you may also have a celebratory party or event planned for your team. Here are a few tips to consider when planning and recording your Christmas festivities and giving.
Paying a Christmas Bonus:
Although paying a discretionary Christmas bonus does not seem like ordinary earnings, the ATO classes the bonus just like any other ordinary payment. This means that superannuation and PAYG withholding (tax) will be applicable to the bonus payment.
With this in mind, we suggest being very clear when communicating the after-tax amount of the bonus with staff. For example, a $500 bonus promised to a staff member can quickly turn into $350 in the hand once taxation is applied. Also, remember to factor in the superannuation cost (currently 10.5%) to the business when working out the bonus amounts.
Processing a Bonus in Xero: Christmas bonuses must be processed through Single Touch Payroll just like any other salary payment. We suggest running an unscheduled pay run to process the employee bonuses.
Remember to use a Bonuses and Commissions category pay item (or set one up in Xero Organisation Settings > Payroll Settings > Pay Items) to record the bonus on your employee's payslips. The bonus will be subject to PAYG withholding (tax) and superannuation.
Gift Card or Gift: Gift cards and gifts are a popular choice at Christmas time and can be a more tax-effective way to thank your employees than a cash bonus. Occasional gift cards or gifts provided to employees that are under $300 in value are generally free from Fringe Benefits Tax (FBT) under an exemption called the "Minor and Infrequent Benefits Exemption".
Minor non-entertainment benefits (such as gifts, hampers and gift cards not related to entertainment experiences) may also be eligible for a tax deduction and GST credit.
Christmas parties are usually celebratory events involving food and or drinks and are considered an "entertainment" style event for FBT purposes.
If you spend more than $300 per person in providing the food, drink and entertainment for the party it is likely you will have triggered FBT at 47% unless an additional exemption applies. To ensure you stay away from FBT it is wise to ensure the per-person cost is less than $300 per person and falls under the "Minor and Infrequent Benefit Exemption". Partners of employees receive their own $300 threshold.
When recording the cost of the Christmas event in your accounting software please record the transaction as GST Free.
We wish you a safe and happy Christmas holiday season!