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22 Dec 2016
The Christmas Grinch has arrived in the form of the IRD.
Recently, the Commisioner announced that food and drink provided in the form of a gift will be subject to the entertainment rules. This is a complete u-turn on the previously accepted treatment, where 100% could be claimed for gifts to suppliers and clients. Previously, gifts of food and wine to employees were also 100% deductible, as long as the value did not exceed the limits set under the FBT rules.
If a gift includes food and drinks as well as other items, e.g. a gift basket, the cost has to be apportioned.
The Christmas Party
In short, expenditure on entertainment is only 50% deductible for tax purposes. This includes associated costs such as venue hire, music etc. Whether the party is hosted on your own premises or offsite, it still is classed as entertainment. Light refreshments, such as morning tea, provided on business premises are an exception to this rule and are 100% deductible.
Staff Gifts & Bonuses
A cash bonus is taxable income to the employee and will be subject to PAYE. It is a fully deductible employment expense.
A gift voucher that is exchangable for cash is treated as a cash bonus.
Most other staff gifts, apart from food and drink, are treated as an unclassified benefit under the fringe benefit tax ( FBT) rules and 100% deductible subject to limits.
As long as all fringe benefits in that quarter do not exceed $300 for that employee (or $1200 per annum if FBT annually) and the value of unclassified benefits for all employees for the year does not exceed $22,500, the gift would be exempt from FBT.
As it is an all or nothing approach, once the threshold is exceeded, the whole value of the gift is subject to FBT, not just the surplus
These are really a marketing and promotion exercise and as such, we consider they would be 100% deductible and should be included in your advertising and promotion expenses. However, if they include food and drink, the 50% limitation would apply to that portion, under the IRD’s new rules.
Client Christmas Drinks
To claim 100% deductibility for this, the function must be open to the public. An example of this is some Kaitaia businesses who have pre-Christmas evenings open to anyone who wants to attend.
All other client Christmas functions will be subject to the normal entertainment rules and thus limited to 50% deductibility.
The entertainment and FBT rules are quite complex and each claim can be very different. If you are unsure of your obligations, feel free to contact me.
The team at PKF wish you a safe and merry Christmas and a happy and prosperous New Year.
For more information on how we can help your business, get in touch