Entertainment and Christmas gifts over the Festive Season

As the festive season approaches, many businesses in New Zealand plan Christmas parties and other entertainment events for their employees and clients. It can be tricky working out what is fully deductible as a business expense and what isn't. Therefore before you plan that end of year team event or buy gifts for a client it's important to know what the rules are.

Client gifts

Gifts to clients are generally considered business expenses and therefore typically fully deductible. However any gifts that are entertainment (like food and beverages) are always going to be 50% deductible. This is because under the entertainment rules, the cost incurred on food and drinks are considered to have a both a business and private benefit and so the amount that can be claimed is limited.

Below are some examples of what will be fully deductible vs 50% deductible.

50% deductible	100% Deductible
Bottle of wind or box of beer	Gifts that are not food or drink
Christmas ham	Gift voucher
Hamper with gourmet food	Flowers
Box of chocolates	Movie tickets

If you're providing a gift basket which contains food and drink along with other items, the IRD still require the food and drink portion to be only 50% tax deductible while the other items can be fully deductible. If it's not known what the individual cost of the items are, then a reasonable apportionment should be used. Click here for more details on this.

Gifts to staff

Generally, most gifts provided to employees will not be subject to the entertainment rules and therefore will be tax deductible. However, consideration needs to be given to the FBT rules. FBT may be payable on the gifts as they are considered a benefit to the employee that has arisen as a result of their employment.

Where a gift is provided to staff, this will be

an "unclassified benefit" under the FBT rules. The amount of unclassified benefits provided will determine whether any FBT is payable or not. A gift card or voucher to staff is an example of an unclassified benefit.

If the total cost of all unclassified benefits provided to employees exceeds $22,500 for the year or the cost provided to a staff member exceeds $300 in a quarter (or $1,200 for annual payers), then FBT will be payable on all unclassified benefits provided.

Cash bonuses to staff

Cash bonuses paid to staff over the Christmas period will be subject to PAYE. These are considered lump-sum payments and PAYE should be deducted at a flat rate dependent on the employee's level of income.

More information can be found on this at the Inland Revenue’s website.

Functions and events

Just like client gifts, some functions and events are only 50% tax deductible, while others are fully deductible. Below are examples of what is 50% deductible vs 100% deductible.

50% Deductible	100% deductible
Staff Christmas party on or off the business premises	Providing a morning or afternoon tea for your team
Taking clients or staff out for a meal or drinks	Entertainment provided for charity - such as donated food to a Christmas party at a Children's hospital.
Hire of a launch, yacht or recreational boat	Offshore entertainment
Hire of marquees, tent or corporate box at the races or other cultural or sporting event.

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