Festive largesse is an admirable and eagerly anticipated feature of many Kiwi workplaces, but what tax obligations should businesses be aware of when sharing the love this Christmas?
The answer, perhaps not surprisingly, is more than you might initially think. As a starting point if you incur entertainment costs for business reasons the expenditure will fall into one of two categories, either 100% deductible or 50% deductible. Much of what we can look forward to will be subject to the latter, chiefly because an element of private enjoyment is deemed to exist if the entertainment occurs away from work or outside normal work hours.
On top of that employers might also have to consider whether gifts to employees are subject to fringe benefit tax or the PAYE rules, so potentially there is lots to think about.
Whatever form your celebrations take it pays to keep both eyes wide open on the issue of tax. Nothing deflates your Christmas balloon more quickly than an after-party tangle with the tax man, particularly if the issues are too glaring to ignore and have to be corrected one way or another.
Here is a quick summary that should help you steer clear of trouble or, at the very least, signpost some areas where you might need help:
- Functions and meals: only 50% deductible no matter whether these events are held at work or somewhere more convivial. The limitation also applies to any incidental costs such as taxis and music or performing artists. If employees or other guests pay a contribution this offsets the amount you can claim as a deductible expense. Same principles in reverse if guests pay the bill but the boss provides a subsidy. Some potential for 100% deductibility but essentially this is limited to light refreshments like morning teas for staff, so not usually the most fancied runner at this time of year.
- Travel: If your guests need passports to enjoy what is planned for them then you have a shot at 100% deductibility. Otherwise the 50% limitation will apply for all travel within New Zealand. FBT might also apply. Treatment here is very much driven by fact and circumstance so make sure you talk the detail through with your accountant before committing to something that ends up posing a much larger economic cost than you originally thought.
- Gifts: This depends on what is being given to whom. Gifts of food and drink to clients and business associates are only 50% deductible while other types of gifts are likely to be fully deductible. Gifts to employees may also be fully deductible but are generally subject to the FBT rules, so there could be an additional tax cost if certain thresholds are exceeded (see below). Gifts of money are wholly taxable in the recipient’s hands because they are deemed to be a form of employment income.
- FBT: Applies only to non-cash gifts to employees, including past and future staff and “associates” of staff. If the employee can choose when they receive or enjoy the gift it will be subject to FBT, but only where the value of gifts is more than $300 per employee per quarter or $1,200 in a 12-month period, or alternatively, more than $22,500 for all staff over any 12-month period. Vouchers and food hampers are examples of the types of gifts that qualify as fringe benefits. People often tell me tax is perplexing and occasionally seems heavy-handed or unjust, and that is a pretty fair description of most employers’ experience of FBT. Keep a watchful eye on this complex beast. It has sharp teeth, a large bite and it devours absolutely everything in the net (not just the value of any benefits above the thresholds for exemption).
- Donations to charity: Tax deductible if made to a registered charity. There are plenty of worthy causes, many of whom will need extra help over the next month or two, so it’s nice to include them too if you can.
- GST adjustments: If it doesn’t work 100% for income tax then it is only partially allowable for GST as well, so don’t forget to make output tax adjustments for any non-deductible expenditure. Ordinarily this is an end of year exercise for most businesses and your accountant should pick it up if it drops off your radar.
This article was compiled by Kelvin Scoble.