With Christmas just around the corner, most businesses will be thanking their employees and clients with gifts or entertainment. While tax might be the last thing you have in mind, make sure you’re not caught out by a surprise tax obligation. 

Generally, if you provide gifts or entertainment for your team, clients, or any other business contacts, some of your expenses are tax deductible. Below we help you understand what you need to know about tax during the festive season.

Staff gifts and entertainment

Gifts given to staff are usually fully deductible and exempt from Fringe Benefit Tax (FBT) where the total cost is less than $300 inclusive of GST per staff member in one quarter. A tax deduction and GST credit can also be claimed. To qualify, gifts should involve ‘non-entertainment’ expenditure and could include vouchers, hampers, flowers, and wine. Just bear in mind that the total combined benefits provided to all employees in a year cannot exceed $22,500.

As for entertainment, if you invite your team to an event that qualifies as a business-related entertainment expense which is only 50% deductible (see examples below), you are not liable for FBT as well. So, if you are entertaining employees at a party or you’ve hired a boat or holiday accommodation and the expenses are only 50% deductible, it isn’t subject to FBT.

Cash bonuses for staff

Bonuses need to go through the payroll system and PAYE and other applicable payroll taxes need to be deducted, like any other wage or salary payment. A bonus payment is classed as a ‘lump sum’ payment and is taxed at a flat rate based on what income range the employee falls into. 

Client gifts

When giving gifts to clients, some gifts are fully tax deductible while others will be only 50% deductible where they include food and drink or other ‘entertainment’. These examples can be used as a guide:

50% deductible

• Basket of gourmet food
• Box of chocolates/biscuits
• Christmas ham
• Bottle of wine or six pack of beer
• Meal voucher

100% deductible

• Book or gift voucher
• Presents (not food or drink)
• Movie tickets
• Tickets to a rugby game
• Calendar

Functions and events
Like client gifts, some entertainment expenses are 50% tax deductible, while others are fully deductible. Here are some examples to help you:

50% deductible

• Food and drinks for a social function held at a restaurant, bar, or in the office
• Function hosted in a marquee or corporate box at a sporting event, including the cost of tickets and any food and drink provided
• A weekend away for the team at holiday accommodation in New Zealand, including any food and drink provided

• Donating to a Christmas party in a children’s hospital
• Providing morning and afternoon tea for your team
• Holding the Christmas party in Fiji (maybe one for next year?!)

GST
Don’t forget that you need to make a GST adjustment for entertainment expenses which are 50% deductible. This adjustment needs to be made at the time your income tax return is filed.

The tax implications of Christmas giving can be a difficult area to navigate. If you’d like more information or advice, please contact us online or speak to your Nexia advisor.