Christmas parties and gifts – Entertainment or FBT or PAYE?
Tax Alert - December 2020
By Nick Cooke & Angie Leung
With Christmas now less than four weeks away and restrictions on gatherings relaxing, some employers may be busy planning Christmas parties, while others may be looking to provide gifts to their employees (either goods or vouchers), or both. Some businesses may also be considering gifts for customers. Regardless of what your business is planning to do for Christmas this year, it’s important to consider and apply the relevant tax rules, which are frequently misunderstood or overlooked altogether. Certain benefits provided may be subject to either the fringe benefit tax (FBT) regime or entertainment regime and so it's important businesses are aware of when each regime applies.
In addition, in some instances what may appear to be fringe benefits may actually be subject to PAYE, depending on how the benefit is provided.
Entertainment versus fringe benefit tax
The entertainment regime restricts deductibility to 50% of cost for certain expenditure that provides both a private and business benefit. Such expenditure includes recreational events away from the business premises and can capture food and drink regardless of where it is consumed.
In contrast, FBT is a tax borne by employers on the value of non-cash benefits provided to employees in connection with their employment, so arguably includes the provision of entertainment.
As a rule of thumb, 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.
Therefore, where the benefit can be enjoyed at the employee’s discretion and is unrelated to their employment duties, the FBT regime will apply and expenditure will be fully deductible for employers.
Once it has been determined that there is a fringe benefit, it may be necessary to confirm whether this is actually a benefit subject to FBT or whether it is a reimbursement of costs which could be subject to PAYE. As a rule of thumb, if an employer has a legal obligation to pay for something it is subject to FBT. If an employee incurs a cost and is reimbursed by the employer it may be subject to PAYE.
Let’s consider some examples:
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 would include incidental costs such as hiring crockery, glassware or utensils, waiting staff, and music or other entertainment.
In the spirit of assisting employees to get home, some employers also provide transport for employees to and/or from the event. If an employee’s presence at the event is expected as part of their employment (due to the networking and social cohesion aspects of the event), then there could be arguments to support the transport benefit being exempt from FBT, on the basis the travel is provided to enable the employee to perform their employment duties. If attendance is not expected as part of their employment duties, then there is a risk FBT should apply to the employer provided travel. If the employee organises their own transport and is reimbursed for the cost, if this is taxable it would be subject to PAYE rather than FBT.
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 a voucher for a restaurant meal as a gift, and the employees can choose when to use the voucher, the cost of the voucher will be subject to FBT.
Providing employees with Christmas gifts
Most gifts including drink bottles, keep cups, and clothing would be subject to FBT in the first instance, as these benefits are able to 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 can also be subject to various exemptions, such as the de minimis exemption.
Providing customers with Christmas gifts
A quirk of the entertainment regime is that Inland Revenue considers that it applies to the provision of any food and drink, rather than food and drink that is consumed at an event or function. Back in 2016, Inland Revenue made this position clear when they issued 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 is fully deductible but the wine and cheese is only 50% deductible.
Individuals other than employees
Where invitations to events are extended to or benefits are provided to an employee’s spouse, typically the same rules will apply to the spouse that apply to the employee. This is because the FBT rules extend to associated persons of the employee.
If you would like further information about any of the topics in this article, please contact us.
December 2020 Tax Alert contents
- Christmas parties and gifts – Entertainment or FBT or PAYE?