Ho Ho Ho! Knowing what’s deductible
Do your plans for the festive season include functions to celebrate with clients and the team? What about gifts? If they do, here are some tips on the tax implications.
Entertainment
When you're entertaining clients or colleagues, some entertainment expenses are tax deductible while others aren't. It can be tricky working out what's deductible as a business expense and what isn't.
The basic idea is that an expense is business-related if you spend the money to help your business earn income. Most business-related expenses are fully deductible. If the expense doesn't help your business earn gross income, it's private and you can't claim it as a tax deduction.
It becomes a little trickier when there's an element of private enjoyment. You might think that the firm's Christmas party for clients is a business related expense and should be fully deductible because it's promoting your business, products or services. However:
- if your clients or employees have a greater opportunity to enjoy the entertainment than the general public, you can only deduct 50% of the costs
- if anyone associated with the business has a greater opportunity to enjoy the entertainment than the general public, you can only deduct 50% of the costs
Generally speaking, if there's an element of private enjoyment, the expenses (in addition to the food and drink) associated with events where you entertain clients and/or staff will only be 50% deductible. For instance, this would include the hire of crockery, glasses, waiting staff and music.
There are exceptions. Entertainment supplied for charity is 100% deductible. For instance if you throw a Christmas party for the children's ward at the local hospital, this is fully deductible. Entertainment enjoyed outside New Zealand is 100% deductible. If you take the team to the Gold Coast for Christmas (lucky them) it will be fully deductible. However, if they contribute towards the cost of their airfares (or anything else), you will need to reduce your expense claim by the amount of the contribution.
Functions and events
Some entertainment expenses are fully deductible but some are not. Use these examples as a guide.
50% deductible |
| Christmas drinks for team members or clients in the office |
| Christmas drinks for team members or clients in the pub |
| Hire of a launch to entertain clients |
| Restaurants providing food and drinks to team members at a social function in their restaurant |
| Staff Christmas party on or off the business premises |
| Function hosted in a marquee at the races (or in a corporate box at the rugby). Includes the cost of tickets and any food and drink provided |
| A weekend away for the team at holiday accommodation in New Zealand. Includes any food and drink provided |
100% deductible |
| Donating food to a Christmas party in a children's hospital |
| Providing morning and afternoon tea for your team |
| Providing entertainment, including food and drink at your promotional stand for the Cracker Christmas Festival |
| Holding the Christmas party in Fiji (woo-hoo!) |
0% deductible |
| Taking your family (who don't work with you in your business) out for dinner to thank them for being patient while you worked long hours and paying for this using the business credit card |
GST
If that's not enough to think about, you will need to make a GST adjustment for entertainment expenses which are 50% deductible. This adjustment will be required to be made at the time your income tax return is filed. Of course, we can help and advise you on this.
Gifts
The rule of thumb with gifts is that if they consist of food or drink, you can only claim 50% of the expense as a tax deduction. If you are giving out gift baskets or hampers and some of the contents are food or drink, but not all, the food or drink items are 50% deductible but the other gift items are 100% deductible. When you come to claim the tax deduction, you will need to apportion the expense between the 100% deductible items and the 50% deductible items.
Gifts to clients
If your Christmas giving includes gifts to clients, remember that some gifts will be fully deductible while others will be only 50% deductible. Use these examples as a guide.
| 50% deductible |
100% deductible |
| Bottle of wine or six pack of beer |
Calendar |
| Meal voucher |
Book or gift voucher |
| Basket of gourmet food |
Tickets to a rugby game |
| Box of chocolates/biscuits |
Movie tickets |
| Christmas ham |
Presents (not food or drink) |
FBT on gifts and entertainment
If you are giving gifts to your team you may also be liable for fringe benefits tax. There's a $300 exemption from paying FBT per employee per quarter so if the value of the gift is less than $300 you may be exempt. However, if the value of total benefits for an employee goes over $300 for the quarter year (and provided the total value of all benefits doesn't exceed $22,500 for the year), the full value of the benefits is subject to FBT.
As for entertainment events, if you invite your team to an event that qualifies as a business-related entertainment expense which is only 50% deductible, you are not liable for FBT as well. So if you are entertaining employees at a party or you've hired a launch or holiday accommodation and the expenses for that are only 50% deductible, it isn't subject to FBT. (On the other hand, if the event is being held outside New Zealand, it will be subject to FBT.)
There are exceptions to this that make it a tricky area so if you'd like more information on a whether a specific event you're hosting is 50% deductible but may also be liable for FBT, please contact us.
