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Taxing the fall-out of Christmas largesse
My top tax question leading up to Christmas concerned enthusiastic, if misguided, employee participation and a broken tooth. During Christmas party revelry, a partner of an employee broke a tooth in a fight with an employee. In the spirit of goodwill the business decided to meet the repair costs which were over $2,000. Is this subject to tax?
As we celebrate the ‘season of giving’, one thing is certain, the spirit of goodwill does not extend to your celebrations and gifts being tax-free.
For employers, the Christmas period is a time to splurge a little (or a lot) on your staff; you may throw them Christmas parties; you may take them out to lunch; you may give them Christmas gifts; you may also have to pay fringe benefit tax (FBT) on those perks.
The FBT regime determines whether the benefit you have provided is a fringe benefit and whether it is subject to FBT.
Whenever you offer perks to staff, you also need to consider the entertainment expenditure regime.
The entertainment expenditure regime determines whether you can claim a full deduction or a 50% deduction for entertainment costs you have incurred. For example, if any of the entertainment you provide staff includes attendance at a corporate box at a recreational event; holiday accommodation; expenditure on yachts or other pleasure craft; or certain food and drink, you only be entitled to a 50% deduction for these costs (we refer to this as the 50% entertainment expenditure limitation).
If a perk is subject to FBT, you are allowed a full deduction for that expenditure.
If any of the perks you provide are not subject to FBT, and are not subject to the 50% entertainment expenditure limitation, you are also likely to get a full deduction for the expenditure as long as it is deductible under the general deductibility rules (e.g. incurred in deriving assessable income).
We consider some of the more common office Christmas traditions below.
Staff Christmas party
Generally, expenditure on food and drink at the staff Christmas party is 50% deductible under the entertainment expenditure regime. Incidental expenditure such as hiring crockery, cutlery, wait staff, music or a band/DJ should also be 50% deductible.
Food and drink provided at an office Christmas party will generally not be a fringe benefit. It only becomes a fringe benefit if the employee:
- doesn’t receive or use it in the course of employment (or as a necessary consequence of their employment); and
- either chooses when to receive or use the benefit; or enjoys the entertainment outside New Zealand.
Staff Christmas morning teas
If you are hosting a Christmas morning tea for staff on your business premises, the 50% entertainment expenditure limitation should not apply (since the 50% limitation rule does not apply to light refreshments such as morning teas). This means the expenditure should be fully deductible to you.
FBT should also not apply to this benefit as the benefit is being provided on the employer’s premises and, therefore, falls under the FBT “on-premises” exemption.
Staff Christmas gifts – food and drink
In addition to Christmas parties, lunches and morning teas, you may decide to give each employee a small Christmas gift of food or drink such as a bottle of wine or a food hamper.
Gifts such as bottles of wine or food hampers are likely to fall under the FBT regime and be subject to FBT since the employee can usually choose when to enjoy the gifts. Since the gifts are likely to attract a liability for FBT, their cost should be fully deductible.
Bear in mind certain fringe benefits falling under a minimum value threshold are exempt from FBT; that is, if you pay FBT on a quarterly basis and give benefits costing $300 or less per employee per FBT quarter, (and in the current and previous three FBT quarters you provided benefits of $22,500 or less for all your employees), you are not liable for FBT on unclassified fringe benefits such as the above-mentioned Christmas gifts. If you account for FBT on an annual or income year basis you will also be exempt from paying FBT on the benefits if the total taxable value of unclassified benefits provided does not exceed $1,200 per employee per annum or $22,500 per employer per annum.
Other staff gifts
If you give employees a Christmas gift other than food or drink, such as a book, the cost of the book should be fully deductible for tax purposes.
Most gifts given to employees other than food or drink are likely to fall under the FBT rules with FBT payable on the cost of benefits provided. Again, bear in mind the FBT minimum value exemptions (described above) may apply.
Clients / business contacts
If you are thinking of giving, or have given, gifts (other than food and wine) to clients or business contacts, the cost of these gifts should be fully deductible for tax purposes.
If, on the other hand, the gift you are giving is food or drink related, the expenditure may only be 50% deductible since there is deemed to be a private benefit. The cost of taking a client out for a pre-Christmas lunch or dinner should also generally be 50% deductible due to a deemed private element.
To answer the broken tooth question. Yes, meeting the cost of the dental repairs is subject to FBT (where you contract with the dentist) or PAYE (where cash is paid to the employee or to the employee’s dentist on the employee’s behalf). This is the case despite it being an associate of an employee who was damaged, as the payment is made as a consequence of the employment relationship.
As we enjoy summer do not let the spirit of goodwill extend to not getting the tax status of your generosity right; get it wrong and penalties and use of money interest still apply.
Joanna Doolan is a Tax Partner with EY and Claire Dilks is a Senior Tax Manager with EY.
Until 31 January contact Claire Dilks and she will answer your FBT questions.