27 November 2023

The festive season is upon us, and many businesses are in full swing planning Christmas celebrations and rewarding key clients and staff members with gifts and bonuses.

Tax is seldom top of mind, and even less so at this busy time of year. However, in order to avoid a nasty surprise in the new year, we recommend you spend some time thinking about the tax implications that can arise on some of these costs, primarily Fringe Benefit Tax (FBT).

What is FBT and how does it interact with the payroll and entertainment rules?

Many people think that FBT only applies to motor vehicles provided by companies to their staff and other larger benefits. However, any non-cash benefit (including gifts and vouchers) provided to employees and their families by their employer can be considered “fringe benefits”. The provision of items can create a surprise tax liability for the employer.

There are exceptions, the most notable being the ‘de minimis’ threshold, which removes the FBT liability on these types of Christmas benefits, provided they:

  1. Do not total more than $300 per employee between 1 October and 31 December, and
  2. Total benefits of this type provided to all employees do not exceed $22,500 across the last 12 months.

The FBT rules interact closely with our PAYE and entertainment legislation, and all three regimes are relevant at this time of year.

The entertainment rules override the FBT rules, meaning FBT does not need to be considered around items like staff and client events and parties (these costs instead being subject to a 50% tax deduction limitation). And FBT differs again from payroll or PAYE, as the PAYE regime only taxes cash payments made to employees (such as salaries, wages and cash bonuses).

We’ve set out below answers to some common questions we receive around these three regimes around Christmas:

1. How do I treat the costs of the annual staff Christmas party?

If you’re throwing a Christmas party for your staff, their family, and/or clients, either at your premises or out at a bar or restaurant, there is a private benefit element to the spend. Therefore as a general rule, the entertainment rules apply, as these rules override the FBT rules in most circumstances. It does not usually matter whether the party is thrown during work hours or not.

Generally only 50% of the costs related to the event are tax deductible.

If an employee has contributed to the cost of the event (for example by buying a subsidised ticket), this amount is offset prior to the operation of the 50% expenditure limitation on the net balance of the cost remaining. For example, if an employer incurs $200 on entertainment and the employee contributes $50 towards this cost, the employer’s net cost is $150. The employer would then be allowed to claim a deduction for 50% of $150, which is $75.

2. What about the transportation to and from Christmas event?

If you are planning to meet the cost of your staff’s transportation to and from your Christmas event, and attendance at the event is not compulsory (i.e. part of the staff member’s employment duties), there is a potential FBT risk for the transportation where the employee can choose when and how to travel.

In addition, if the employee arranges their own transportation (for example a taxi or Uber) and is reimbursed for the cost, the reimbursement is a cash payment subject to PAYE instead of FBT (and the amount would need to be grossed up as a taxable payment and run through payroll).

Wherever arranging transportation to the event is necessary or desirable (say the function is in a remote location and will involve alcohol), employers should ideally book the transport, for example a bus departing to and from your premises at fixed times. This is then most likely to fall within the entertainment regime alongside the other event expenses (refer to item 1 above) as the element of employee choice is then removed.

3. What is the tax treatment for gifts and vouchers I’ve given to my employees for Christmas?

Expenses incurred on gifts, prizes, and vouchers for employees are usually eligible for a full tax deduction for the employer, categorized as staff expenses.

The FBT rules apply, and you need to consider if you have breached either of the de minimis thresholds mentioned above. If you have, FBT needs to be calculated and paid on the value of the gifts or vouchers provided (with the FBT paid also deductible for the employer).

4. I am giving my remote workforce a voucher to a restaurant, as they cannot attend the Christmas party at the head office. Is that entertainment expenditure too?

Even though the voucher may be in lieu of the Christmas party (which is likely subject to the entertainment rules), the provision of a voucher, that the remote worker can choose when to redeem, is subject to FBT, rather than the entertainment rules. Refer to item 3 above for more information.

5. What about gifts provided to clients?

Deductions for gifts provided to clients are subject to the 50% entertainment limitation rule if they are in the form of ‘entertainment’ i.e. food or drink items, a meal at a show, or tickets to a game or a show).

If the gift does not meet the definition of an ‘entertainment’ item (i.e. a non-perishable item such as an umbrella or torch), the cost may be fully deductible if it qualifies as a business expense.

6. I always pay a small cash bonus to staff at Christmas time. Does any tax need to be paid on this?

Yes. When cash bonuses are given to employees, the correct treatment of these payments (regardless of the value whether nominal or significant) is to calculate the grossed up amount (i.e. add the tax due on top of the cash given at the employee’s marginal rate) and report this gross income through your payroll.

Talk to our experts

If you would like more information on Christmas expenses and Fringe Benefit Tax (FBT), please contact your Nexia advisor. If you are not already a client and are interested in learning more about our Tax or Business Advisory services, please get in touch with one of our three offices in AucklandHawkes Bay or Christchurch.

Written by Jono Boyce and Ashley Lin and

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