What is often described as a tax is not a tax. It is a limitation on the deductibility of expenditure for taxation purposes and at this time of year the rule bites into the festive joy.
So as you prepare for Christmas fare you should be aware that certain expenditure on ‘entertainment’ will only qualify for a deduction of 50%.
To even get a deduction for 50% you must first pass a test which is that any entertainment must be in relation to the running of your business. The rule does not allow an automatic deduction for all such costs.
If your entertainment expenditure passes the test and relates to your business the next step is to determine whether the entertainment will be 50% or 100% tax deductible.
If you put on a barbeque and drinks for customers or staff as a Xmas shout only 50% of the cost can be claimed as an expense for income tax purposes. The rule also applies to the costs of hiring the BBQ, crockery and glasses, waiting staff and cook and not just the food and drink. The same applies if you put on a function at a pub or restaurant including non-food items such as the cost of the band and transport.
It is not uncommon for the Christmas function to be organised by the Staff Social Club where the cost is subsidised, by the business. Again the rules around entertainment apply so that only 50% of the cost of the employer’s contribution to the Social Club is deductible.
And then there is the traditional Christmas gift to staff or customers.
If the gift includes food or drink the rule will not apply unless you share the gift. So the cost of the gift that includes food and or drink will be 100% deductible but if you eat or drink any of it will be 50% deductible. On the other hand, give a gift of gardening tools and you borrow then the cost will be 100% deductible.
To complicate matters, give a gift of a book/meal/petrol voucher to staff (past, present or future), while the costs will be 100% deductible fringe benefit tax may apply (subject to a complex and limited exemption). Give the same gift to a customer and the cost will be 100% deductible.
Finally, if you give an employee cash it will have to suffer PAYE and KiwiSaver.
And then there is GST….
While you can claim GST on most costs relating to Christmas entertainment you will have to make an adjustment and pay back 50% of the GST once a year on entertainment that is limited to 50%. We generally advise you of this annual adjustment we complete your annual financial statements.
The entertainment rules also extend to Corporate boxes, marquees and tents, holiday accommodation and pleasure craft. So, if you take your staff to the races and you hire a tent with a tote in it and take them there on a boat the 50% limitation rule applies to all costs.
If you’re looking for Christmas entertainment that is 100% tax deductible, you could always take the staff to the Islands as entertainment overseas is fully deductible – but fringe benefit tax may apply.
The above is a mere general overview. Talk to us if you are contemplating any expenditure that may be entertainment. As with most tax related matters the rules are not simple. Inland Revenue takes an active interest in such spending.
For those businesses that don’t like a nasty surprise of more tax to pay than they thought considering the business environment is improving you may want to consider a tax planning session early in the new year.
This may be money will spent and it gives you an insight on how well your business is dong, either contact your own tax advisor or arrange an appointment with us.
To all our readers, a very merry festive season and we look forward to providing some articles of interest with you in the new year.
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Keep an eye out for my next article in the new year!
TAX DATES TO REMEMBER
20th January 2014 - monthly employers PAYE payment...
15 January 2014 - Payment for Oct/Nov 2013 GST Return…
15 January 2014 – 2nd Installment of 2014 Provisional Tax for GST-registered…
one or two monthly filers and non GST registered taxpayers
Posted on Sun, 1 December 2013
by Shawn O'Grady