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Physical or virtual Christmas celebrations: what employers need to remember

Tax Alert - December 2021

By Amy Sexton & Anna Zhang


Christmas is fast approaching, and the welcome move to the new COVID-19 Protection Framework with its relaxing on the gathering rules may encourage some employers to reconsider their plans and gather with their employees for a long-awaited (and needed) celebration. Others perhaps are thinking of holding a virtual Christmas Party or sending gifts to their working from home employees. It is great that we can start planning these festive celebrations again but is also important to consider the tax rules for these festivities, especially for employers planning a non-traditional celebration.

Entertainment vs FBT vs PAYE

Benefits provided to employees during Christmas time by employers will generally trigger one of three tax regimes: the entertainment regime, the fringe benefit tax (FBT) regime, or the PAYE regime. The common characteristics of each of these regimes are summarised in the table below to help you identify which rules you may need to apply, and the associated tax implications you need to be aware of.

 

Tax regime

 

Benefit characteristics

 

Tax implications

 

Entertainment

 
  • Benefits that have both a private and a business benefit
  • Includes recreational events away from business premises
  • May include food and drink
  • Benefits are not received in the course of, or as a necessary consequence of employment duties

     
  • Expenditures are restricted to 50% of cost for certain expenditure that provides both a private and a business benefit
  • A supply is deemed to take place for GST purposes on the non-deductible proportion



     

FBT

 
  • Non-cash benefits provided to the employees, can be enjoyed at the employee’s discretion and is unrelated to their employment duties


     

 
  • Expenditures are 100% deductible
  • Pay FBT at the chosen rate
  • De minimis threshold for unclassified benefits

 

PAYE

 
  • Costs incurred by employees and that are reimbursed by their employers or funded by an allowance
     

 
  • Expenditures are 100% deductible
  • PAYE may or may not apply


 

Examples

Let’s consider some examples appropriate for 2021, starting with a traditional Christmas party, followed by a few celebration ideas for the COVID-19 working from home era.

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. Employers can only deduct 50% of these expenditures incurred.

Vouchers for uber eats / restaurant / café / hospitality

Many employers are encouraging their employees to support local retailers and hospitality businesses after the lockdown by providing vouchers. If the employee can choose when to use the vouchers, then the FBT regime kicks in and the cost of the voucher is subject to FBT.

Gift baskets for employees

What could be nicer than a gift basket for a virtual Christmas party or movie night? Gift baskets containing drink bottles, keep cups, clothing, food and drink will typically be subject to FBT as employees can enjoy these benefits at their discretion.

Remember though that any benefit subject to FBT can also be subject to various exemptions, such as the de minimis exemption.

Gift baskets for customers / clients / suppliers

To thank stakeholders for all their support in the past challenging year, businesses may send gift baskets containing food or drink items to customers, clients or suppliers. Spending on these items will only be 50% deductible under the entertainment regime. If the gift basket also contains other items that aren’t food and drink (for example soap or tea towels), the expense must be apportioned between being fully deductible (non-food and drink items) and 50% deductible (food and drink).

Employee reimbursement

Perhaps as an employer you have told to your employees to have a “dinner out on us” and to expense claim it. This type of expense called “expenditure on account of an employee”. Once your employee has provided a receipt you will need add the full amount of the taxable benefit to your employee’s salary or wage, with PAYE then being deducted from the total gross amount. Child support, student loan deductions and Kiwisaver are all assesessed on your employee’s gross earnings, which includes taxable benefits. The expense will be 100% deductible for the business.

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.

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.

Please don’t hesitate in contacting your usual Deloitte advisor to discuss any queries you may have further.

Whatever your festive season celebration and holiday plans are, Deloitte wishes you and your families a Merry Christmas and Happy New Year, along with a few days with your feet up enjoying the (fingers crossed) hot and sunny weather. See you in 2022.

December 2021 Tax Alerts

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