Taxman also enjoys the Christmas Party, by Dale Adamson
The end of year is fast approaching and many of us will be glad to see the back of 2022, COVID traffic lights and isolation periods. As we start to look forward to Christmas festivities, you may be considering some sort of Christmas function, staff bonuses and employee or client gifts. These expenses are subject to either the entertainment or Fringe Benefit Tax (FBT) rules, which ensure that the taxman gets a Christmas treat too. I have set out below the tax implications of some typical costs over the festive period.
The staff Christmas party
Whether the party is hosted on your own premises or offsite, it is classed as entertainment. Expenditure on entertainment is only 50% deductible for tax purposes. Associated costs such as catering, venue and equipment hire, music etc, are also limited to 50%.
Light refreshments, such as morning or afternoon tea provided on business premises, are an exception to this rule and are 100% deductible.
Staff gifts and bonuses
Most staff gifts, including gift vouchers, apart from food and drink, are treated as an unclassified benefit under the FBT rules and are 100% deductible, subject to limits.
Provided all fringe benefits do not exceed $300 for that employee per quarter (or $1200 per annum) and the value of unclassified benefits for all employees for the last four quarters does not exceed $22,500, the gift would be exempt from FBT. This is an all or nothing approach, which means that once the threshold is exceeded the whole value of the gift is subject to FBT, not just the surplus.
A gift of food to staff, e.g. the traditional ham, cherries, bottle of wine and box of chocolates are subject to the entertainment regime and only 50% deductible.
A cash bonus to your staff is treated as taxable income to the employee and will be subject to PAYE. As this is an employment expense it is therefore fully deductible for income tax purposes. However, in our current circumstances, if you are giving a cash payment to staff as they have worked from home, this payment could be a contribution towards their home office costs and be exempt from tax.This is subject to limitations stated in the IRD determination (EE003).
Gifts are typically a marketing and promotion exercise and as such, we consider they should be 100% deductible and included in your advertising and promotion expenses. However, if they include food and drink, the entertainment rules apply and relief is limited to 50% for that portion e.g. the cost of a gift basket, needs to be split between food/drink item costs and other costs. To maximise deductibility you may consider gifting promotional items such as sunhats, beach balls or maybe umbrellas!
Client Christmas drinks
Client related entertainment is also subject to entertainment rules. The difference is, that if the function is open to the public then 100% deductibility applies . In past years in Kaitaia for example, a number of businesses held pre-Christmas evenings open to anyone who wanted to attend.
All other client Christmas functions will be subject to the normal entertainment rules and thus limited to 50% deductibility.
The 50% entertainment limitation applies to both income tax and GST and it is important to keep good records to make tax time a lot easier and ensure correct treatment can be applied to these expenses.
The entertainment and FBT rules are quite complex and each claim is likely to be different. It is wise to get advice from your accountant if you are unsure of your obligations.