When it comes to tax and Christmas or summer work functions, whether for staff, clients or a mixture, get it wrong and you could face a hangover from late payment penalties, interest and questions from Inland Revenue on other parts of your business.
You are in business to make money, so it makes sense to know the rules around the treatment of expenditure on entertainment; otherwise, that precious cash can unnecessarily end up with the taxman.
The first rule to be aware of is that to be deductible for tax purposes (either 100% or 50%), the expenditure must be in relation to running your business, which can include staff, clients and prospective clients and suppliers.
Paying for a lunch with a friend using the company credit card will not be tax deductible, as it is not related to your business.
If you pass the first test of whether or not the expenditure relates to your business, the next step is to be aware that not all spending on entertainment will be 100% tax deductible.
What happens when you arrange to finish work early one afternoon and put on a barbeque and some drinks for the staff? As a general rule, only 50% of the cost can be claimed as an expense for income tax purposes.
The situation does not change if there are clients involved or if suppliers, families or even if the accountant attends the party.
Perhaps you are contemplating putting on a function at a nearby pub or restaurant but you will still be faced with only 50% of the cost being deductible for tax.
It is also common for many businesses to have a formal Christmas function with the cost of entertainment, food and drink fully paid or subsidised by the business. Again, the rules around entertainment will apply so that only 50% of the cost is deductible.
Sometimes, employees may make a contribution to the Christmas function.
If this is the case, the contribution is deducted from the cost before working out the amount that can be claimed as an expense.
Cost of function per head 100.00 including GST
Less amount paid by each employee (20.00)
Less GST (10.43)
GST exclusive cost 69.57
Less 50% non deductible (34.79)
Deductible Amount $34.78
You will see in the above example that we have deducted GST, which raises another hook to watch out for – GST adjustments on the non-deductible portion of the expense.
But you need not worry about making any GST adjustment until the end of the year. The tax rules allow you to claim all the GST and only adjust for the GST on any non-deductible expenditure once a year.
This annual adjustment is usually made by your accountant when they complete your annual financial statements.
Do gifts of food and wine also fall under the entertainment rules?
Thankfully, they do not. The cost of gift baskets or wine and food provided to business contacts and staff will fall outside the entertainment rules and they are 100% deductible.
Fringe Benefits Tax
However, gifts may leave you with a Fringe Benefit Tax (FBT) headache if you provide them to staff; past, present and future.
If employees can choose when they enjoy the entertainment, for example, a restaurant voucher given at Christmas time for their hard work during the year, then it will be subject to FBT.
But as with most tax-related matters, there is an exception.
You do not have to pay FBT if the benefits given to employees in a quarter is less than $300 per employee and no more than $22,500 for all employees in a 12-month period.
Some businesses like to make donations to charities around Christmas time.
Food or drink donated to a charity (for example, at a Christmas party in a children’s hospital) is 100% deductible.
If you are looking for Christmas entertainment that is 100% tax deductible, you have to travel overseas to get it!
However, watch out for FBT, as this may or may not apply.
Andrew Hill is a Partner & Business Advisor at BDO Auckland, which is a part of the BDO network of independent chartered accounting and business advisory member firms. Email: Andrew.Hill@bdo.co.nz Website: www.bdo.nz
The above is a general overview and it is essential that you talk to your own accountant to clarify any expenditure you are contemplating.