Are you having a staff party or celebrating with clients during the festive season? Are you buying them gifts to say thank you for a great year? We have a few tips to ensure you claim correctly.
When you’re entertaining customers or staff, some entertainment expenses are tax deductible while others aren’t. The basic concept is that an expense is business-related if it helps 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 may think the Christmas party for customers is a business-related expense and should be fully deductible as it’s promoting your business, products or services. Inland Revenue don’t agree, as 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.
There are exceptions. Entertainment supplied for charity is 100% deductible, examples such as a Christmas party you fund for the local children’s hospital is fully deductible. Holding your Christmas party in Fiji is also full deductible, as it’s outside of NZ, that might also be very popular with your staff!
Functions and events
Some entertainment expenses are 50% deductible, others 100% - here’s some examples to help you through it:
- Christmas drinks for staff or customers in the office
- Christmas drinks for staff or customers in the pub
- Hire of a boat to entertain clients
- Restaurants providing food and drinks to staff at a social function in their restaurant
- Staff Christmas party on or off the business premises
- 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 food to a Christmas party in a children’s hospital
- Providing morning and afternoon tea for your team
- Holding the Christmas party in Fiji (woo-hoo!)
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.
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:
- Bottle of wine or six pack of beer
- Meal voucher
- Basket of gourmet food
- Box of chocolates/biscuits
- Christmas ham
- Book or gift voucher
- Tickets to a rugby game
- FBT on gifts and entertainment
- Movie tickets
- 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.
As for entertainment, 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 boat or holiday accommodation and the expenses are only 50% deductible, it isn’t subject to FBT.
There are exceptions to all of this that make it a difficult area to navigate, so if you’d like more information or advice, please speak to your Nexia Advisor or click here to contact us.