Not only is Christmas the time to unleash Mariah Carey and Michael Bublé on the masses, it’s also time for the annual work Christmas party and token of appreciation. After the last few years, I’m sure most of you have enjoyed relaxing with colleagues with a few fruit mince pies and cold beverages before heading off on holiday.
Regardless of what your business might have done in the lead up to Christmas, it’s important to remember that different tax rules will apply to different festive choices.
These tax implications are often overlooked when providing benefits to employees and clients and I warn you the results are not always logical! So to save any uh-oh moments in the new year, let’s review the differences between the entertainment, FBT and PAYE regimes.
As a general rule of thumb, when it comes to food and drink for employees the entertainment regime overrides the FBT regime and typically applies, unless:
- The employee can choose when to enjoy the benefit, or the benefit is enjoyed outside New Zealand; and
- The benefit is not received or used in the course of, or as a necessary consequence of, the employee’s employment duties.
On the other hand, food and drink enjoyed with clients or other business contacts will usually be subject to the entertainment regime.
Examples
Let’s consider some practical examples that your business may come across.
Costs associated with organising a Christmas party event off premises
Expenditure on venue hire, food and drink will be subject to the entertainment regime. Expenditure also includes incidental costs such as hiring crockery, glassware or utensils, wait staff and music. Employers can only deduct 50% of the expenditure incurred.
Providing employees with food and drink
Food and drink provided on premises at a party, reception, or celebratory meal, as well as taking employees out for food and drink off premises at restaurants, would all be subject to the entertainment regime.
However, if an employer was to give employees vouchers for a restaurant meal as a gift, and the employee can choose when to use the voucher, the cost of the voucher will be subject to FBT.
Providing employees with Christmas gifts
Most gifts, such as drink bottles and keep cups, would be subject to FBT in the first instance, as these benefits can be enjoyed at the employee’s discretion. Similarly, gift baskets containing food and drink, which typically fall within the entertainment regime, would also be subject to FBT for the same reason.
Note that any benefit subject to FBT may qualify for an FBT exemption, such as the de minimis exemption. The de minimis exemption excludes all unclassified benefits from FBT provided that:
- The total value of all unclassified benefits provide to all employees is less than $22,500 in the previous 12 months (this amount includes all benefits provided to all employees of associated employers); and
- No employee has received more than $300 of benefits in an individual FBT quarter (or $1,200 for annual filers).
Providing customers with Christmas gifts
An odd quirk of the entertainment regime is that Inland Revenue considers that it applies to the provision of any food and drink, not just to food and drink consumed at a function.
Inland Revenue made this position clear with an operational position specifying that if a business provided a customer with a gift basket containing wine, cheese, tea towels and soap the tax outcome would be that the tea towel and soap were fully deductible but the wine and cheese was only 50% deductible.
Cash bonuses to employees
Cash bonuses paid by an employer to an employee are taxable under the PAYE regime, this is a payment made in connection with the employee’s employment and not a payment that is regularly included in the employee’s salary and wages. A cash bonus should be taxed at the ‘extra pay’ rate.
Vouchers given to staff will generally be subject to FBT.
Donations in lieu of gifts
These days many businesses are opting to provide donations in lieu of physical gifts to staff and clients. Provided this is done as a corporate donation then the normal donation deductibility rules will apply and a deduction should be available provided the company has a taxable profit for the year.
Hopefully this clarifies some of the Christmas expense fishhooks before you are snagged with an expensive mistake but if you have any questions please get in touch.
