Office Christmas parties and client gifts: a deductible expense?
3 December 2021
With the Christmas season almost upon us, many businesses are starting to organise Christmas parties and gifts for clients and employees. 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).
Business entertainment expenses are split into the following three categories:
100% deductible expense and not liable for Fringe Benefit Tax.
50% deductible expense and not liable for Fringe Benefit Tax.
100% deductible expense and liable for Fringe Benefit Tax.
Let’s look at each of these categories in more detail to see what kind of expenses would fall into them.
1. 100% deductible, not liable for FBT
For an expense to fall into this category, it needs to be completely business related. Examples of such expenses include:
Meals that an employee purchases during travelling for business purposes only (in some circumstances these situations maybe 50% deductible).
Entertainment that is linked to promoting your business as long as the public has the same access to this as your employees (e.g. food and drinks at an expo).
Branded stationery (in some circumstances, is 50% deductible).
Food and beverages supplied at a conference, education course or similar event that staff attend where the duration is at least four hours.
Light meal provided during a board meeting.
2. 50% deductible, not liable for FBT
Expenses in this category are not completely business related (i.e. has a significant private portion included).
This could occur if the entertainment is away from work or out of usual working hours even where the private portion was more than 50%. The expense will be 50% deductible.
Examples of this include:
Food and drink you provide for social events such as a Christmas party.
Gifts of food and drink that benefit your business and are enjoyed privately by the person who receives them. (e.g. if you give a bottle of wine to each customer who buys an item from you).
'Supporting expenses' for other entertainment that is 50% deductible, such as hire of wine glasses.
3. 100% deductible, liable for FBT
An expense such as entertainment received by an employee as a reward for the work they do and good performance (e.g. a restaurant gift voucher), is 100% deductible but liable for Fringe Benefit Tax.
Monetary bonuses to employees (or ex-employees) are not liable for FBT and will more than likely get caught as a bonus/lump sum payment and subject to PAYE.
Taxing lump sum payments can potentially change employees tax obligations (i.e. pushing the employee tax obligations into a higher tax bracket), therefore you may need to deduct PAYE at a higher rate and you may have to make other deductions for student loans, KiwiSaver or child support. A lump sum or extra pay could increase the employee family income and affect their Working for Families entitlements.
If your business provides free gifts and prizes, subsidised or discounted goods and services to employees, you should review the IRD’s Fringe Benefit Tax Guide to determine if your business may be entitled to the “general exemption” from paying Fringe Benefit Tax. As always, good record keeping is important.