The festive season is upon us! It’s a time for giving, sharing and navigating the tax treatment of Christmas-related expenditure. While the work Christmas party and gift giving bring joy, they can also cause confusion when it comes to understanding the tax implications for both employers and employees.
No matter what your business is planning to do for Christmas, with your employees and clients, it’s likely that FBT, PAYE or the entertainment rules will apply to your costs and picking which one applies can be difficult.
The entertainment expenditure rules limit tax deductions to 50 per cent of costs for certain types of entertainment. This is because a portion of such expenditure contains a component of ‘private enjoyment’ even when it’s part of a work event.
This type of expenditure is usually captured by the entertainment regime, which overrides the FBT rules. That is unless the employee can choose when to enjoy the benefit or the benefit is enjoyed overseas, and the benefit is not received or used as part of the employee’s regular duties. For example, if you took your staff out for a Christmas lunch, the entertainment rules would apply; if you gifted employees a voucher for a restaurant, the FBT rules will apply.
Finally, the PAYE rules will apply to any monetary compensation, such as bonuses, provided to employees in connection with their employment.
Common scenarios
> Christmas events – on or off premises: Expenditure on food, drink and any associated costs, such as venue hire, crockery, and wait staff, will be captured under the entertainment expenditure rules. It is 50% deductible, whether held on or off site.
> Cash bonuses for staff: Cash bonuses or irregular payments related to employment are taxable under the PAYE rules. These payments should be taxed at the PAYE ‘extra pay’ rate.
> Christmas gifts to employees: Most gifts to employees that can be enjoyed at the employee’s discretion are subject to FBT. This includes gift baskets containing food and drink. Because the employee can enjoy these when they choose, the FBT rules apply, not the entertainment rules.
Some benefits subject to FBT may qualify for an ‘FBT exemption’. For example, the de minimis rule exempts unclassified benefits from FBT provided that: the value of all unclassified benefits provided to employees, not just your Christmas gifts, is less than $22,500 (measured at a group level) over the previous 12 months, and no employee has received more than $300 of benefits in the FBT quarter ($1,200 for annual filers).
Unclassified benefits are those that are not specifically provided for in the FBT regime, such as gifts.
> Vouchers to employees: If an employer gives employees vouchers for a store or restaurant as a gift to be used at their discretion, the voucher would be subject to FBT. On the other hand, if the employer agrees to reimburse the employee for a personal meal out, this would be subject to PAYE and not FBT.
> Gifts to clients and customers: Inland Revenue considers that the entertainment expenditure rules apply to the provision of any food and drink. Their view is that, if a business provides a client or customer with a gift basket containing wine, cheese, towels, and soap, the cost of the towels and soap are fully deductible but the wine and cheese is only 50% deductible!
Navigating the tax implications of holiday perks can be confusing. We will be pleased to answer any questions or provide further clarification. We wish you all a happy holiday!
