At this time of year we often sit back and look at the year that has been – where did it go?
A lot of businesses also take this time to thank the staff with gifts and/or a Christmas function, without thinking about the tax implications.
Not getting this right could see you face a hangover from late payment penalties, interest and questions from Inland Revenue on other parts of your business.
It makes sense to know the rules around entertainment expenditure otherwise the taxman may get upset – and we don’t want that to happen, do we!
Let’s see – is it business related?
First of all the expenditure must relate to either clients or staff – going out for a meal with a friend and using the work credit card doesn’t make it tax deductible.
Is it 50% or 100% deductible?
The next step is to understand if the expenditure is 50% or 100% tax deductible…
Parties – As a general rule, any party or dinner you will have with employees or clients (even if you invite your accountant), will only be 50% deductible for income tax purposes. That doesn’t change even if you have the function at a nearby pub or restaurant.
Gifts – What about gifts of food and drink, do these also fall under the entertainment rules? Unfortunately, the cost of gifts of food or drink provided to clients or business contacts are also subject to the 50% deduction rule. A gift of food or drink given to an employee is generally subject to fringe benefit tax (FBT).
Additionally, other gifts given to employee are also subject to the dreaded FBT.
Non-cash gifts including gift vouchers are subject to FBT. This can cause a huge headache but following some simple guidelines will leave you without the hangover.
If the total of non-cash gifts given to employees in a quarter is less than $300 per employee – and less than $22,500 for all employees during the year – you don’t need to worry about FBT – those gifts are exempt.
A cash gift on the other hand, or even a gift that is convertible to cash, is generally taxed at the same rate as their normal remuneration.
If you’re looking for Christmas entertainment that is 100% tax deductible, you’ll need to travel overseas to get it! But then you will need to watch out for FBT.
I wonder what the team will get in their Christmas stockings this year?
This post is by Jason Lougher. Jason is a chartered accountant who moved back to the Bay of Plenty his favourite part of the world to work with small and medium enterprises. Jason’s passion is taxation and effective tax structuring, trust setup and intergenerational planning, Inland Revenue audits and tax disputes and business development. Jason works closely with the other directors to combine their skill sets to achieve the best outcome for clients. Additionally Jason is on the NZICA Bay of Plenty Local Leadership Team and is a Business Mentor with Business Mentors New Zealand. Legacy Chartered Accountants has offices in Whakatane and Tauranga.