CHRISTMAS FUNCTIONS AND ENTERTAINMENT RULES
Entertainment – these rules create a huge amount of confusion don’t they? In this blog we will try and clarify this for you.
You may be able to claim as business expenses events such as Christmas functions or giving gifts to employees.
However, you may not be able to claim all of the costs, and they may also be subject to fringe benefit tax (FBT). FBT is a tax paid on benefits that workers receive as a result of their employment.
You may be able to claim 50% of your party expenses in your GST and income tax returns if the expenses are related to your business. But there’s also a significant private element.
Party expenses you can claim 50% of can include:
- venue hire
- food and drink
You can generally claim 100% of the cost of gifts, such as event tickets or gift vouchers, as a business expense. But you may need to pay FBT on such gifts. If you provide food baskets or wine, you can only claim 50% of the cost of these.
If you provide other types of goodies, like accommodation in a holiday home, use of a corporate yacht or lunch at a restaurant, then these come under entertainment expenses – and are 50% deductible as long as they’re business expenses.
Some business-related entertainment expenses are 100% deductible. Others are set as 50% deductible because they have a significant private element. Even if you think that the private element was more or less than 50% of the expense, you can only claim 50% of the expense as a deduction.
FOOD AND DRINK AT WORK
You can deduct only 50% of the cost of food and drink you provide at your business premises (other than light refreshments):
- at a social event, eg, celebration meal, party, reception, or
- in an area restricted to senior employees, such as an executive dining room.
This rule applies whether the entertainment is provided to staff or to guests invited from outside the business.
ABC Ltd puts on a Christmas party for its employees. It holds the party at work. The company can claim 50% of the costs. Light refreshments, like morning and afternoon teas, are 100% deductible.
GIFTS OF FOOD AND DRINK
Gifts of food and drink that will provide a private benefit to the recipient and a business benefit to the taxpayer are only 50% deductible.
Real estate agent Bob delivers a bottle of champagne to the owner each time he arranges the sale of a house. He can only deduct 50% of the cost of the bottle of champagne as he is providing entertainment away from his business premises in the form of drink. Bob also sends a gift basket containing a bottle of wine, some cheese and various household items such as tea towels and soaps to the purchaser. He can deduct the full cost of the tea towels and soap, because these items are not food and drink. But he can only deduct 50% of the cost of the wine and cheese. If the cost can’t be identified separately, then an appropriate amount should be apportioned.
If you provide entertainment that’s only 50% deductible, you can only deduct 50% of any “supporting” expenses.
- running costs, repairs and maintenance for corporate boxes, holiday accommodation and recreational boats
- hire of crockery, glasses, waiting staff and music.
There are detailed rules about FBT (external link), including for entertainment expenses. There are some thresholds, so you may not always have to pay FBT if you only provide minimal fringe benefits. Check Inland Revenue’s Fringe benefit guide (IR409) to be sure.
If you provide Christmas food and drinks at a local venue, the cost is not subject to FBT – because employees can’t choose when and where to enjoy the benefit. However, the rules for entertainment expenses will apply. Inland Revenue’s Entertainment expenses guide (IR268) will help.
For general rules on Entertainment, check out our earlier blog or contact us for more information.