It is coming to that time of year again where Christmas is around the corner and the New Year follows shortly thereafter. While it is commonly a time for celebration and an annual vacation, it can be a complex time for a business owner.
There are many aspects to take into consideration and these will be covered:
Part 1 – The Annual Shut-Down Guide
- Shut-Down Payments
- Public Holidays
- House Keeping
Part 2 – The Annual Christmas Guide
- Bonus payments
- Gifts and Christmas Parties / FBT
- Christmas Pay Checklist
The complexity comes when working with varying Awards or working conditions and when you have a mix of people going on leave, some remaining at work, some that have no leave, and those that want to work but cannot.
What is a Shut-Down?
A shut-down, according to Fair Work, is when a business closes or slows down its operation to a skeleton staff during a specific period. The reasons may be that it is not viable for the business to be operating during this period because it may be a quiet time or many staff are away on leave.
Know Your Award
Whilst it is possible that you may already be across the Awards for the employees, it is good practice to refer to the specific conditions that apply to a shutdown, such as during Christmas. The conditions can vary for each Award, industry and state. This will impact on leave entitlements and other contributing factors.
Should the employees be covered by a registered agreement, then check the terms that relate to a shut-down and/or the Christmas break. To find a registered agreement, go to the Fair Work Commission website.
Shut-Down Payments
All full-time and part-time employees must be paid during this period. It is to be treated as leave. Casuals are not paid during this time given that no work is undertaken.
Depending on the type of Award or Agreement, it may or may not outline if an employee can be advised that they “must take leave” during the shut-down. The Award might indicate that the employer may request the employee take leave.
When nothing is stated in the Award or the Agreement, then the employee cannot be forced to use their leave, or be forced to take unpaid leave. Typically, you may be able to negotiate a favourable arrangement to both parties, such as partial paid and unpaid leave.
It is imperative that all terms and conditions relating to the employee’s contract are adhered to during the shut-down.
Refer to the relevant Award or Agreement in the event that there is not enough leave accrued to cover the shut-down period. Some Awards state that the employee will receive unpaid leave during the period; where as others are able to take paid leave in advance. In the event that the employee does not agree to take unpaid leave or leave in advance, the employee is entitled to be paid their usual wages.
Public Holidays
When public holidays fall during an employee’s leave, these are to be treated as public holidays and not as annual leave – it is treated as though they would have worked that day should they not have been on leave. The public holiday pay should not affect their leave accrual, and simply be paid as another working day.
An example of what can occur:
Mary is a full-time employee who has put in leave for the duration of 7 days.
This includes Anzac Day, which is a public holiday, and falls on a Thursday.
Because Mary is a full-time employee, Mary would need to be paid for Anzac Day.
This means that Mary is only taking 6 days of annual leave, not 7.
Mary is a full-time employee who has put in leave for the duration of 7 days.
This includes Anzac Day, which is a public holiday, and falls on a Thursday.
Because Mary is a full-time employee, Mary would need to be paid for Anzac Day.
This means that Mary is only taking 6 days of annual leave, not 7.
When an employee takes sick leave on either side of a public holiday, they are still entitled to be paid for the public holiday as though they would have been at work that day. The usual sick leave process applies unless there is any evidence that demonstrates otherwise.
An exception would be where the employee has been rostered to work on a public holiday, and this is not a day that they would usually work. If they were to then call in sick, the employee would not be paid for that day. Additionally, should the employee be on unpaid leave, then there will be no payment made for the public holiday.
Working on Public Holidays
All employees receive their base pay for hours worked on a public holiday.
The varying entitlements are included in the Awards or Agreements for every employee, including how public holidays will impact the employee’s pay.
Some of the entitlements which need to be considered:
- Additional pay; i.e. public holiday rates
- Extra day off or annual leave
- Minimum shift lengths on public holidays
- Any agreements made as a substitute of another day for the public holiday
Employees cannot be forced to work on a public holiday. However, an employer can make this request if it is reasonable to the type of employment. Equally, the employee can refuse to do so when it is based on reasonable circumstances.
To understand what is deemed “reasonable”:
- Circumstances for the employee that are personal; i.e. family responsibilities
- The amount of pay and whether there is any increase; i.e. penalty rates.
- The type of work undertaken as well as the needs of the business
- Whether the employee’s agreement entails working on public holidays
- The type of employment status of the employee – full-time, part-time, casual or shift work
- The amount of notice provided to either party
The collective circumstances of the employee need to be considered prior to requesting for the employee to work on a public holiday.
Not Working on Public Holidays
With the exception of casual employees, employees that would normally work on the specfic day that the public holiday has occurred are to be paid their usual base rate in conjunction with their ordinary hours that they would have worked.
The base rate does not include:
- Penalty rates
- Loadings
- Overtime
- Monetary allowances
- Bonuses or any incentive-based payments
Please note that it is unacceptable to change an employee’s day of work to avoid making this payment.
An example of this would be:
Steven is a part-time employee that works from Tuesdays to Thursday.
This year Boxing Day fell on a Monday.
Because Steven does not typically work Mondays, he will not be paid for this holiday.
Steven is a part-time employee that works from Tuesdays to Thursday.
This year Boxing Day fell on a Monday.
Because Steven does not typically work Mondays, he will not be paid for this holiday.
House Keeping
- Notification to all employees of the employer’s intention to shut-down, and the planned dates of the shut-down.
- Appropriate forms and information received from the employees to con rm days on leave, and the con rmed intention of each employee.
Calculation of days that each employee will not be present at work and is entitled to leave. - Note how many public holidays there are during the shut-down period.
- Be across any employees that will be working during the shut-down period or on a public holiday, including any relevant penalty rates or changes to the rate of pay for any employee.
- Confirm if leave is to be paid during a normal pay cycle, before Christmas, or when the shut-down is to occur.
- Is there a pay run during the shut-down and if so, what are the implications (if any)?
- Give yourself enough time to prepare the pay run, as often in preparation of an annual shut-down it will take longer than usual to process the pay run.
Annual Shutdown Guide
Part 2
The time of the annual shut-down for each business is arriving quickly as Christmas is now only a matter of a few short weeks away. Yet, there is still much to get done before then.
In this part of the Annual Shut-Down Guide we will be covering:
- Bonus payments
- Gifts & Xmas Parties / FBT
- Annual shut-down Checklist
Be sure to use the checklist at the end of this article and the house-keeping section from Part 1 (from last month eBrief) to help you be well prepared for the “silly” season.
Christmas Bonus Payments
It is not uncommon for bonuses to be paid to employees around Christmas time. This reflects the end of a quarter or the end of the year period that is to be the basis of the bonus. This means that the performance bonus can cover the year or the quarter and in some circumstances the month.
In the event that the bonus is paid once throughout the financial year, this is termed a “one-off” bonus and this will only be taxed within the year that it is paid.
Bonuses are often based on performance however, and can vary in terms of commission or salary. This will depend on the specific role of the employee and the industry award that the role and business pertains to.
Note: a bonus payment is distinct from a back payment, which relates to wages that should have been paid in a prior financial year. Back payments are treated differently and are based on the time frame and the amount of back payment; this governs whether the amount is included in Lump Sum E or Gross Payments.
Taxing a Christmas Bonus
When paying commission, bonus or a similar type of payment that covers less than twelve months, the ATO’s Schedule 5 – Method A uses the number of pays that the payment relates to, which can be over 52 weeks or over 12 weeks depending on type of payment.
For example; a Christmas bonus covers the whole year therefore apportion over 52.
Here is a step-by-step instruction on how to calculate this:
- Calculate the employee’s gross earnings excluding any additional payments for the current pay period. Round this amount omitting the cents.
- Use the appropriate tax table to confirm the amount of tax that is to be withheld from your employee’s gross earnings in step 1.
- Add any additional payments to be made in the current pay period together and divide the total by the number of pay periods in the financial year (i.e. 52 weekly pay periods, 26 fortnightly pay periods or 12 monthly pay periods).
- Add the amount at step 3 to the gross earnings at step 1.
- Use the appropriate tax table confirm the amount of tax that is to be withheld from the amount at step 4.
- Subtract the amount at step 2 from the amount at step 5.
- Multiply the amount at step 6 by the number of pay periods used in step 3.
- Multiply the additional payment being made in the current pay period by 47%.
- Use the lesser amount of step 7 and step 8 for the withholding on the additional payment.
- Calculate the total PAYG withholding for the current pay period by adding the withholding on the additional payment (step 9) to the withholding on the gross earnings (step 2).
When it comes to salary sacrificing a bonus payment, this can only be undertaken if there was a written arrangement already in place prior to the bonus coming into effect. Otherwise, it must be treated as wages and cannot be sacrificed.
Christmas Parties and FBT
The treatment of FBT comes into effect when the cost of $300 has been reached and/or exceeded. This is in conjunction with any are other conditions that meet and pertain to FBT.
The cost of providing a Christmas party is income tax deductible to the extent that it is subject to FBT. Therefore, any costs that are exempt from FBT cannot be claimed as an income tax deduction. GST credits can only be claimed to the extent that a cost is tax deductible. Therefore, if you cannot claim it as a deduction, you cannot claim the GST credits either.
The provision of a Christmas party for an employee may be a minor benefit and exempt from FBT if the cost of the party is less than $300 per employee and certain conditions are met. This provision also applies to the employee’s associate (family member) or spouse.
The ATO have guidelines in regards to FBT as it relates to different business structures. Speak with the Tax Agent or refer to the links below for more assistance.
| Christmas party held at your premises on a work day | |
|---|---|
| If only employees attend | No FBT, NOT tax deductible |
| Current employees and spouses @ $180pp | No FBT (minor exemption applies for spouse) |
| Employees and clients @ $365pp | Employees – No FBT and not tax deductible Clients – No FBT and not tax deductible |
| Employee associate @ $365pp (family members) | FBT applies as value more than $300pp |
| Christmas party held at other premises | |
| Only employees attend @ $195pp | No FBT (minor exemption applies), not tax deductible |
| Employees and associates @ $195pp | No FBT (minor exemption applies for both), not tax deductible |
| Employees, associates and clients @ $365pp | Employees & associates – FBT applies as value more than $300pp Clients – No FBT and not tax deductible |
Not Subject to FBT
- Salary and wages
- Acquisition of shares under employee approved scheme
- Superannuation employer contributions
- Termination payments that includes a company car given or sold
- Certain benefits provided by religious institutions to their religious practitioners
Exempt from FBT
- Minor benefits <$300
- Portable electronic device
- Computer software
- Protective clothing
- Briefcase
- Tool of trade
Gifts and FBT
A gift that is provided to an employee that is below and/or up to $300 is considered a minor benefit and is to be treated separate from the Christmas party. These are two individual transactions and this relates to any gift provided to an employee during the year, not just during the Christmas season.
Common gifts can include vouchers, gift cards and so forth.
From a bookkeeping perspective it is treated as follows:
- The gift is less than $300. This makes the gift a tax deduction and GST credits can be claimed.
- When the gift is above $300, it is possible that FBT will apply to those that receive the gift; i.e. the employee. This is the tax-deductible part that is not subject to FBT.
Gifts such as a holiday, membership to a club, or tickets to a theatre, sporting or musical event are considered to be entertainment.
- For minor benefits, under $300, the gift is not tax deductible and no FBT applies.
- For employees given a gift over $300, the gift is tax deductible but it is also subject to FBT
Gifts to Suppliers, such as wine, food, hampers, vouchers, etc., are not considered to be entertainment.
- Non-entertainment gifts to clients or suppliers are deductible and GST is claimable, no FBT implications.
Gifts such as a holiday, membership to a club, or tickets to a theatre, sporting or musical event are considered to be entertainment.
- For clients and suppliers, the entertainment gift is not tax deductible, no FBT applies and no GST is claimable.
- If the gift is a minor benefit (i.e., less than $300 value), then the gift is tax deductible, and therefore GST is claimable for gifts to employees and their family members, clients and suppliers. No FBT applies to gifts of less than $300.
- For gifts over $300, FBT may apply for employees and their family members, but FBT does not apply to clients or suppliers.
- Gifts such as a holiday, membership to a club, or tickets to a theatre, sporting or musical event are considered to be entertainment.
- For minor benefits, as above, the gift is not tax deductible and no FBT applies. Also for clients and suppliers, the entertainment gift is not tax deductible, and no FBT applies.
- For employees this is not a minor benefit, the gift is tax deductible but it is also subject to FBT.
Providing gifts to clients during the Christmas period is a personal preference which is at the discretion of the business. In some industries clients may not be permitted to accept gifts so it is best to check this first.
The treatment of gifts – whether to employees or clients, business parties where employees are in attendance can be complex, and while the basis of FBT is straightforward, there can be variables which come into effect due to the industry, the conditions of the gifts or the event, as well as the amount that has been spent.
It is good practice to check available resources or speak with your tax agent if you are uncertain.
Annual Shut-Down
A great way to think of an Annual Shut-down is like that of an end of month procedure.
The thing to keep in mind is the variables:
The thing to keep in mind is the variables:
- Leave calculation and leave loading
- Bonus or commission payments
- Expenses for the Christmas party or gifts to staff, and whether there are FBT implications
- The duration between the shutdown, to when the office is reopening, and how this impacts on the pay run, supplier payments and compliance obligations.
Content sourced from the Institute of Certified Bookkeepers.
