Article
The Christmas tax conundrum
Tax Alert - December 2022
By Amy Sexton & Robyn Walker
With Christmas just around the corner, not only is it time to unleash Mariah Carey and Michael Bublé on the masses, but it’s also time for the annual work Christmas party and token of appreciation. After the last few years, we are sure that everyone is looking forward to relaxing with colleagues with a few fruit mince pies and cold beverages before heading off on holiday.
Regardless of what your business is planning to do for Christmas, it's important to remember that different tax rules will apply to different festive choices. These tax implications are often overlooked when providing benefits to employees and clients and so to save any uh-oh moments next year, let's review the differences between the entertainment, FBT and PAYE regimes.
Entertainment v FBT v PAYE
As a general rule of thumb, when it comes to food and drink the entertainment regime overrides the FBT regime and typically applies, unless:
- The employee can choose when to enjoy the benefit, or the benefit is enjoyed outside New Zealand; and
- The benefit is not received or used in the course of, or as a necessary consequence of, the employee’s employment duties.
As another rule of thumb, PAYE trumps FBT when it comes to determining the tax treatment of any accommodation provided to employees for any extended Christmas parties.
Examples
Let's consider some practical examples that your business may come across.
Costs associated with organising a Christmas party event off premises.
Expenditure on venue hire, food and drink will be subject to the entertainment regime. Expenditure also includes incidental costs such as hiring crockery, glassware or utensils, wait staff and music. Employers can only deduct 50% of the expenditure incurred.
Providing employees with food and drink
Food and drink provided on premises at a party, reception, or celebratory meal, as well as taking employees out for food and drink off premises at restaurants, would all be subject to the entertainment regime. However, if an employer was to give employees vouchers for a restaurant meal as a gift, and the employee can choose when to use the voucher, the cost of the voucher will be subject to FBT.
Providing employees with Christmas gifts
Most gifts, such as drink bottles and keep cups, would be subject to FBT in the first instance, as these benefits can be enjoyed at the employee’s discretion. Similarly, gift baskets containing food and drink, which typically fall within the entertainment regime, would also be subject to FBT for the same reason.
Note that any benefit subject to FBT may qualify for an FBT exemption, such as the de minimis exemption. The de minimis exemption excludes all unclassified benefits from FBT provided that:
- The total value of all unclassified benefits provide to all employees is less than $22,500 in the previous 12 months (this amount includes all benefits provided to all employees of associated employers); and
- No employee has received more than $300 of benefits in an individual FBT quarter (or $1,200 for annual filers).
Providing customers with Christmas gifts
An odd quirk of the entertainment regime is that Inland Revenue considers that it applies to the provision of any food and drink, not just to food and drink consumed at a function. Inland Revenue made this position clear with an operational position specifying that if a business provided a customer with a gift basket containing wine, cheese, tea towels and soap the tax outcome would be that the tea towel and soap were fully deductible but the wine and cheese was only 50% deductible.
Cash bonuses to employees
Cash bonuses paid by an employer to an employee are taxable under the PAYE regime, this is a payment made in connection with the employee’s employment and not a payment that is regularly included in the employee’s salary and wages. A cash bonus should be taxed at the ‘extra pay’ rate.
Using a company vehicle for personal travel
Given there is likely to be a desire to travel around the country this summer, some employees may be using their company vehicles as their means of transport during the holidays. Employers need to remember that FBT will arise whenever a company vehicle is available for an employee to use privately. If an employee pays for their own petrol, provided evidence is provided to the employer, these costs may be deducted from the taxable value of the fringe benefit and reduce the amount of FBT payable.
Hopefully, this clarifies some of the Christmas expenses fishhooks before you are snagged with an expensive mistake, but if you have any further queries please contact your usual Deloitte advisor.
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