Christmas time means different things to different people, but for a business, there are common issues that you need to understand regarding entertainment expenses and their impact on FBT.
According to the Inland Revenue, An entertainment expense where the benefits are enjoyed or received by employees may be subject to fringe benefit tax (FBT).
There are 3 major types of business entertainment expenses:
- 100% deductible, not liable for FBT
- 50% deductible, not liable for FBT
- 100% deductible, liable for FBT.
We have included a list of various scenarios below to help you see where your end of year Christmas party or work bonuses might fit into each of these categories.
Is your Christmas work party tax deductible? Does it matter whether it is held on business premises?
Expenditure on entertainment is only 50% deductible for tax purposes. This applies to deductions for spending on food and drink or celebration meals, whether they are on or off premises. There are exceptions— light refreshments for employees, such as afternoon tea, are fully tax deductible.
What if I need to hire items for our Christmas party?
The 50% tax limitation applies to any expenditure on hiring wait staff, crockery, glassware, utensils, furniture, music or entertainment associated with a Christmas party.
What if I take my clients or staff out for Christmas lunch, is it tax deductible?
The cost of taking colleagues out for an end-of-year lunch or dinner would be 50% tax deductible.
Are gifts to staff and clients tax deductible?
The cost of gifts other than food or drinks is generally tax deductible. If you buy food, drinks, or even supermarket vouchers, this expense is only 50% deductible.
Remember, gifts to staff must be under $300 per quarter (including GST) to be fully tax deductible. If the cost exceeds this amount, or if total gifts or discounted services to staff for the year exceed $22,500 FBT will be payable to Inland Revenue. In this instance, costs can still be claimed.
My staff can’t use public transport due to public holiday schedules. Is a transport allowance for them tax deductible? Will I need to deduct PAYE from the allowances paid?
Expenses incurred on reimbursing staff for travel expenses are tax deductible. However, whether the allowance will be taxable to staff, and hence require a deduction of PAYE, depends on the circumstances.
An allowance to reimburse extra transport costs to staff is exempt from income tax, depending on whether employees incur the costs in connection with their employment, and for the employer’s benefit.
For allowances paid to staff unable to use public transport, the first $5 will be taxable income to the employee, and you would be required to deduct PAYE on the $5. Any additional amount paid will be tax-free provided it compensates the staff member for the additional transport costs.
Additional costs are those that staff incur on top of their usual travel costs. Employers need to make a reasonable estimate of the amount of expenditure incurred by the employees. Any costs reimbursed over and above this level or for non-work related reasons require PAYE to be deducted.
What is the tax treatment of cash bonuses for staff?
PAYE must be paid on cash bonuses and included in the employee’s wages for the week.
A full breakdown of what type of expense falls into what category, can be found here on the Inland Revenue website.
On a final note as you are celebrating the end of what we hope is a great year for your business, we wanted to remind you of 4 HR tips to ensure all of your team stays safe.
- Remind staff about drink-driving laws. Ensure that staff have a transport plan travelling to and from Christmas work events. Reiterate the rules about alcohol and company vehicles.
- Remember, you are responsible for your team when they are at a work function. As an employer, remember your business is responsible for after-work functions where alcohol is served, whether the party takes place at the office or an outside venue.
- If something goes wrong, contact your HR team asap. HR departments or consultants are designed to handle employee incidents, and if something needs to be reported, they need to know. Poor behaviour at a work event can lead to disciplinary cases. It’s vital to log issues through the proper channels.
- Have a responsible senior staff member available. While you might be off the clock, ensure at least one senior staff member remains alcohol-free during the festivities. A responsible host should be in place to deal with emergencies and ensure everyone gets home safe and sound.
If you have any questions about your end of year festivities from a tax perspective, we’d be happy to help. Contact our team here – and enjoy your break.