Date posted: 07/12/2022

Christmas expenses: What is deductible?

Before you get too far into your office party planning, it is important to understand what expenses are fully deductible and/or liable for Fringe Benefit Tax (FBT).

In brief

  • Gifts for employees.
  • Gifts for clients.
  • Cash bonuses for employees.

With Christmas now less than two weeks away, employers are busy planning Christmas parties or looking to provide gifts to their employees. Some businesses may also be considering gifts for clients. But before you get too far into your office party planning, it is important to understand what expenses are fully deductible and/or liable for Fringe Benefit Tax (FBT).

Generally, there are 3 ways a business entertainment expense may be taxed:

  • 100% deductible, not liable for FBT: Entertainment expenses will be 100% deductible and not liable for FBT if they’re completely business related.
  • 50% deductible, not liable for FBT: Entertainment expenses will be 50% deductible and not liable for FBT if they are not completely business related. This includes entertainment that is away from work or out of usual working hours, so it has a 'significant private element'. The expense will be 50% deductible even if you think the private element was more or less than 50%.
  • 100% deductible, liable for FBT: Entertainment expenses will be 100% deductible and liable for FBT if they are received by employees because of the work they do.

But how do we determine the correct tax treatment of a particular Christmas expense (i.e. whether it is subject to the entertainment tax rules or the FBT rules)? A useful starting point could be to consider:

  • who the recipient is (e.g. an employee, a client);
  • whether they are receiving or using the benefit in the course of their employment duties (or it’s a necessary consequence of performing employment duties); and
  • whether they are able to choose the time they will enjoy the benefit.

FBT will apply if the benefit is enjoyed outside New Zealand. Deductibility of the expenditure will be determined by the general deductibility rules and not the entertainment tax rules.

Gifts for employees

Gifts given to employees are usually fully deductible and exempt from FBT where the total cost is less than $300 inclusive of GST per staff member in one quarter (or for annual payers, $1,200 in a tax or income year). A tax deduction and GST credit can also be claimed. However, the total combined taxable value of unclassified benefits provided to all employees in the current and last 3 quarters of the year (or for annual payers, in the tax or income year) cannot exceed $22,500.

Here are some common Christmas scenarios:

Benefit received Tax treatment
Employer gives each employee gift and/or dining vouchers (recipient can decide when to dine) to the value of $200

FBT applies subject to the de-minimis thresholds for unclassified benefits

Cost would usually be deductible and not subject to the entertainment tax rules

Employer pays the travel expenses for out-of-town employees to attend the Christmas function (attendance at the Christmas function is not considered a benefit received in the course of employment duties)

FBT applies subject to the de-minimis thresholds for unclassified benefits

Cost would be deductible as employee remuneration costs and not subject to the entertainment tax rules

Employer gifts two bottles of wine to employees for Christmas

FBT applies subject to the de-minimis thresholds for unclassified benefits

Cost would usually be deductible and not subject to the entertainment tax rules

Employer gifts a Christmas food hamper to employees at the end of the year

FBT applies subject to the de-minimis thresholds for unclassified benefits

Cost would usually be deductible and not subject to the entertainment tax rules

Employer hosts a Christmas party in New Zealand for employees

FBT rules do not apply (the employees cannot choose when they enjoy the benefit)

Cost (including venue hire, incidental costs, e.g. equipment hire, wait staff, music) would be 50% deductible under the entertainment tax rules

Employer rewards high performing employees with an all-expenses paid trip out of town staying at a retreat

Some of the expenses (e.g. cost of food and drink) would be 50% deductible

Cost of accommodation at the retreat would be fully deductible but subject to FBT

Travel costs would be fully deductible but subject to FBT

Individuals other than employees

Where invitations to events are extended to or benefits are provided to an employee’s spouse or partner, typically the same rules will apply to the spouse or partner that apply to the employee. This is because the FBT rules extend to ‘associated persons’ of the employee.

Christmas gifts for clients

If your Christmas giving includes gifts to clients, some gifts will be fully deductible while others will be only 50% deductible, where they include food and drink or other ‘entertainment’.

Here are some common examples:

50% deductible 100% deductible
  • Basket of gourmet food
  • Box of chocolates or biscuits
  • Christmas ham
  • Bottle of wine or six pack of beer
  • Meal voucher
  • Corporate box or VIP restricted area access (including admission tickets) to a sports game
  • Calendar
  • Presents (not food or drink)
  • Book or gift voucher
  • Movie tickets
  • Flowers
  • General admission tickets to a sports game

GST

Although the entertainment rules apply to deductions in your income tax return, you may also need to make a GST adjustment. If you’re registered for GST, you can usually deduct the full amount of all your business-related entertainment expenses in your GST return. You will need to make an annual adjustment for any entertainment expenses that are 50% deductible.

Cash bonuses for employees

If you pay a bonus, then this will need to go through the payroll system and PAYE and other applicable payroll taxes need to be deducted, like any other wage or salary payment. A bonus payment is classed as a ‘lump sum’ payment and is taxed at a flat rate based on what income range the employee falls into.

Refer to Inland Revenue’s website for more detailed information.

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