IS YOUR CHRISTMAS SPIRIT TAX DEDUCTIBLE?

Christmas is fast approaching and so is the time that businesses may reward customers and staff with Xmas functions and Xmas gifts. This article considers the deductibility of these expenses.

Fully Deductible

Gifts to clients are 100% deductible, provided they do not come within the Entertainment Rules (below). For example, gifts to clients of movie tickets, books or calendars would be fully deductible.

Entertainment Rules

The following is a list of the types of entertainment where deductibility is limited to 50%:

• The cost of corporate boxes, corporate marques or tents

• The cost of accommodation in a holiday home or time-share apartment

• The cost of hiring a pleasure craft

• The cost of food and beverages enjoyed in any of the three locations listed above

• Food and beverages enjoyed on or off the business premises for a social event

GST on these expenses is also limited to 50%.

So gifts of beer, wine and food to clients will be 50% deductible, as will food and beverages provided at a Xmas social function with clients or staff. 

However there is an exception where the benefit is provided to an employee and the employee can choose when and where to enjoy the benefit, or the benefit is enjoyed outside of New Zealand. For example, a meal voucher given to an employee would come within the FBT rules rather than the entertainment rules, as the employee can choose when and were to enjoy the meal.

FBT Rules

Gifts to staff are generally treated as a fringe benefit unless the benefit is covered by the entertainment rules. However, if the value of the gift is less than the FBT exemptions for employees and employers, then FBT will not be payable. These exemptions are:

• $300 per quarter per employee (if the employer pays FBT quarterly); or
• $1,200 per annum per employee (if the employer pays FBT on an annual basis); and
• Total unclassified fringe benefits provided by the employer to all employees is not more than $22,500 per annum

For more information:

• Inland Revenue provides a guide on Entertainment expenses – IR268 http://www.ird.govt.nz/forms-guides/number/forms-200-299/ir268-guide-entertainment-expenses.html