If you provide entertainment for your team, clients, or any other business contact, some of your business entertainment expenses are tax deductible.
Fully deductible expenses
1. Meals while travelling on business: The cost of a meal while travelling on business is fully deductible as long as there are no business contacts present.
2. Conferences: The cost of food and drink at a conference or business course, which continues for four hours or more, is fully deductible.
3. Meal allowances: A tax-free meal allowance paid by an employer to an employee working overtime is fully deductible.
4. Executive dining facilities: The cost of a light meal provided to employees in an area reserved for senior management is fully deductible when the meal is provided during the course of the employees’ normal duties.
5. Morning and afternoon teas: Morning and afternoon teas are fully deductible.
6. Promotions open to the public and trade display: Entertainment provided by a business as part of a function open to the public, or at trade displays to advertise the business, are fully deductible. For example: The costs of providing drinks and nibbles at a trade display open to the public.
7. Off-shore entertainment: Entertainment enjoyed outside New Zealand is fully deductible.
8. Monetary sponsorship: The cost of sponsoring entertainment is fully deductible where the sponsorship is principally for promotion or advertising to the public.
9. Entertainment as part of your business: Providing entertainment in the ordinary course of your business is fully deductible. For example: the cost incurred by a restaurant in providing meals to patrons.
10. Samples: The cost of providing samples for advertising or promotional purposes is fully deductible.
11. Charitable entertainment: Entertainment provided to members of the public for charitable purposes is fully deductible. For example: A business donates food to a Christmas party in a children’s hospital.
12. Reviewers: The cost of providing entertainment to a person to review your business for a paper, magazine, book or other medium, is fully deductible.
50% deductible entertainment
The following types of entertainment are limited to a 50% deduction:
- The cost of corporate boxes, corporate marquees or tents
- The cost of accommodation in a holiday home or time-share apartment
- The cost of hiring a boat, jet ski, yacht etc that is used for leisure and not business (these are technically known as pleasure craft)
- The cost of food and beverages enjoyed in any of the three locations listed above, or food and beverages enjoyed on/off the business premises for a social event
- Food and beverages enjoyed off the business premises
- For example: taking customers out to a business dinner, or taking employees out to lunch at a restaurant.
- Food and beverages enjoyed on the business premises. For example: Friday night drinks, or Christmas lunch held on the premises for employees
Goods and Services Tax (GST)
Where you are registered for GST, you can claim the full GST portion on entertainment expenses that are fully deductible. If the entertainment expenses are only 50% deductible, you need to make an adjustment once a year for the 50% non-deductible portion.
The GST adjustment is 15% of the non-deductible entertainment expenses, exclusive of GST (prior to 1 April 2018 the adjustment was 3/23 of the non-deductible expenses). This needs to be returned in the GST return for the period your income tax return is filed or due to be filed (whichever is the earlier).
Fringe Benefit Tax (FBT)
Generally, entertainment expenses that come under the 50% deductibility rules are not subject to FBT. However, if employees (including shareholder-employees) can enjoy an entertainment benefit:
- when they choose, or
- outside New Zealand
And the benefit is enjoyed outside their employment duties, this benefit will be subject to the FBT rules (and usually fully deductible).
Entertainment expenses that
are not deductible
There are some entertainment expenses that are not deductible. Where the expense is not related to generating income for your business, it will not be deductible. For instance, it would not be deductible if you take your family (who don’t work with you in your business) out for dinner to thank them for being patient while you worked long hours and pay for this using the business credit card.
Everyday expenses – context
Sometimes it can be surprisingly difficult to work out whether an expense is deductible or not. You need to look at the context. It can be particularly confusing with food and drink.
To support your claims for business entertainment expenses, keep invoices/receipts, and note the purpose of the expense, who was present and their relationship to your business.
Christmas gift tax deductibility
Gifts to staff or clients – the cost of gifts (other than food and beverages) to staff or clients will generally be 100% tax deductible. Food, beverages and supermarket vouchers are deemed entertainment and only 50% deductible.
As long as your gifts to staff are under $300 for the October to December quarter, and not food and drink, the costs will be 100% deductible. If they are over the $300 threshold then FBT (Fringe Benefit Tax) will be payable to the IRD, however the costs can still be claimed as well.
Cash bonuses for staff – these must be included in the employees wages for the week and are subject to PAYE.
Check out our reference sheet for more details:
The rules are complex. For big ticket items, ask for our advice – feel free to get in touch.