The festive season brings joy, but for businesses, it also means navigating the complexities of tax rules, particularly around Fringe Benefit Tax (FBT), Pay-As-You-Earn (PAYE) tax, and entertainment expenditure rules. These tax regimes apply to costs associated with staff parties, gifts, bonuses, and other festive spending.
Key Tax Regimes and Their Implications
Entertainment Expenditure Rules:
These rules limit the tax deductibility of certain entertainment-related expenses to 50%. This is because such expenses often include a private enjoyment component (e.g., food and drink at a work event).
If your business organises a Christmas party, costs like venue hire, food, and drinks are covered under these rules, with only 50% being deductible. The same applies to incidental expenses such as hiring waitstaff or utensils.
Fringe Benefit Tax (FBT):
FBT applies to non-cash benefits employees can enjoy at their discretion, such as vouchers or gift baskets.
Gifts like wine or chocolates are often considered fringe benefits, even if they might also fall under entertainment expenses, and are subject to FBT. However, FBT exemptions may apply if:
The total unclassified benefits for all employees are under $22,500 annually.
No single employee receives more than $300 in benefits per quarter.
PAYE Rules:
These apply to monetary benefits provided to employees, such as cash bonuses or reimbursements for holiday expenses.
Bonuses must be taxed at the "extra pay" rate under PAYE, as they are considered income.
Practical Scenarios
Christmas Party Off-Premises: Costs for organising a party, including food and venue hire, fall under the entertainment rules. Only 50% is tax-deductible.
Cash Bonuses: Any monetary bonus given to employees is taxable under PAYE at the "extra pay" rate.
Employee Gifts: Gifts like vouchers for personal use are subject to FBT. For example, a restaurant voucher allows employees to choose when and how they use it, making it a fringe benefit.
Gifts to Clients: Gifts containing food or drink (e.g., wine and cheese in a gift basket) are only 50% deductible, whereas non-food items (e.g., towels or soap) are fully deductible.
Tips to Simplify Compliance
Understand Overlaps: Some expenses may fall under multiple regimes. For example, a gift basket with wine and chocolates might involve both FBT and entertainment rules.
Leverage Exemptions: Utilise FBT exemptions where possible, especially for smaller gifts.
Plan Tax-Efficiently: Consider the tax implications before choosing between a party, gifts, or cash bonuses. For instance, organising a Christmas lunch might have different tax outcomes than giving vouchers.
Final Thoughts
Navigating the tax treatment of Christmas-related expenses can be tricky, but understanding the nuances of FBT, PAYE, and entertainment rules can save your business money and ensure compliance. Planning ahead and consulting with us can make all the difference.
For further details on FBT and related tax rules, visit Inland Revenue's website and Business.govt.nz.