Entertainment, Gifts & Bonuses
With the Christmas season approaching at an alarming speed, now is an appropriate time to refresh your understanding of the Entertainment, gift and bonus deductibility rules.
You are entitled to claim for business related entertainment expenses however that claim could be 100% deductible or limited to 50% depending on the nature of that expense, it could also be subject to the FBT rules. Entertainment includes gifts, business promotion items (for existing or new business contacts), staff functions, client functions, events or offering freebies. You need to ensure copies of invoices/receipts are kept to support the deduction.
Entertainment – 100% deductible business expenses include food and drink while travelling on business; food and drink provided at a conference; light meals provided for senior managers; or promoting your business, products or services.
The 50% deductibility rule will always kick in if the nature of providing those expenses is for the main purpose of entertainment and not business promotion. A deduction will be limited to 50% if entertainment is provided that includes a private element such as away from the work place or out of usual work hours including corporate boxes or similar; holiday accommodation; recreational boats; food and drink at work for social events (other than providing light refreshments); food and drink offsite or gifts of food and drink. Where a deduction is limited to 50%, GST is only claimable on the deductible portion.
Entertainment also could be subject to the FBT rules if the benefit is enjoyed by employees in their own time, at their own leisure and at a place they choose to enjoy it, for example gift vouchers. There are further rules around FBT to consider here too.
Gift Vouchers – This cost is 100% deductible, however, will be subject to the FBT rules as the recipient is able to spend and enjoy the voucher or gift as they like – in their own time, at their own leisure and at a place they choose to enjoy it. This may also be applicable for membership and subscriptions paid on behalf of employees.
There is no claim for GST purposes when purchasing gift vouchers as there is not a supply of a good or service. The redemption of a voucher will, however, trigger a GST disclosure.
Bonuses – These payments made to employees are deductible to the business and taxable at the lump sum or “extra pay” rate as part of the employees wages. These payments could include annual or special bonuses; cashed in annual leave; retiring or redundancy payments or back pay. Your payroll software should be able to calculate a lump sum payment tax deduction alternatively the IRD website shows how this calculation should be done.