This is World Cup season!
No surprise that a group of friends and colleagues may wish to have a bit of fun and organise a tipping competition. When the rules are set and winners take it all, not many people would think about tax! That is because tax does not generally apply here, and winnings are all exempt from tax like the lottery.
However, when an employer wants to use it as a marketing tool and attract public attention or simply bond his or her employees more by offering some incentives, e.g. a dollar for dollar contributions or simply a cash price of $1,000 into the pool, would the employer get any tax deduction for this cash contribution?
A short answer is yes but there are a couple of side issues to be considered.
The issue number 1- In relation to the prizes that may be available to clients / the public, the business entity should generally be able to deduct the costs incurred on prizes to be given away to existing or potential customers for the purposes of promoting its business. It is clearly business related, i.e. there is a genuine expectation of generating future business income from the clients or potential clients because of the goodwill and marketing generated from the activity.
However, not all business-related expenditures are deductible. Tax law specifically rules out the entertainment expenses as non-deductible unless a specific exception applies. The definition of entertainment includes entertainment by way of food, drink or recreation. The term recreation is defined to include amusement, sport or similar leisure-time pursuits. The World Cup seems to fit in this definition well.
However, the costs associated with entertainment can be deductible if they relate to promoting or advertising to the public a business or its goods or services, unless some people have a greater opportunity to get the benefits of the entertainment than ordinary members of the public have.
So if the competition is open to ordinary members of the public and is easily accessible to them, this exception can apply, especially if the business is incurring the costs to advertise its business.
The issue number 2- When the business offers this benefit to its employees only, tipping competition cash prizes could potentially be treated as a fringe benefit. While FBT applies, the business may still get deduction for cash price but would be subject to some unpleasant fringe benefit tax.
However, the minor benefits exemption may. This exemption can be available where the notional taxable fringe benefit is less than $300 per employee and it must also be unreasonable to treat the minor benefit as a fringe benefit (based on a number of factors, e.g. provided irregularly).
Depending on the amounts involved this could be the case for the prizes offered.
