Tax Alert


Thinking of gifting food and drink for Christmas? Be aware!

Tax Alert - October 2016

By Robyn Walker  and Veronica Harley

Does your business commonly send your clients or suppliers a thank you gift of a bottle of wine or some treats to eat at Christmas? Well, Inland Revenue has just spoiled the party with the recent release of an operational statement declaring that gifts of food and drink are “entertainment” and potentially subject to the 50% deduction limitation rule. 

Anyone who has stopped to consider making an entertainment adjustment as part of the tax return process has probably thought to themselves that the rules have some rather unusual distinctions between what is and is not subject to the rules, and therefore taxpayers are more likely to have relied on Inland Revenue guidance on the application of the rules.

When you read Inland Revenue’s guidance, such as the IR268 Guide “Entertainment expenses: What you need to know about making claims”, there is no mention of gifts to clients.  All entertainment in the form of food and drink is described in the context of food and drinks which are immediately consumed.  Gifts themselves don’t ordinarily fit into what the layperson would consider to be “entertainment”.  

It is likely that many businesses have been treating this expenditure as fully deductible to date on the basis of advice previously issued by Inland Revenue in Business Tax Update newsletters issued in 2011 and 2012.  Initially Inland Revenue said that expenditure incurred in relation to gifts of food and drink provided off-premises are generally 100% deductible, and then in the next publication issued a further clarification stating that they were only fully deductible if “provided or consumed…away from the taxpayer’s business premises, e.g. a business lunch at a restaurant”. 

Inland Revenue now accept that this latter statement did not make the position clear and may have lead to some taxpayers treating this expenditure as fully deductible.  Accordingly Inland Revenue has, once and for all, clarified the current technical position and issued an operational statement to explain how and from when taxpayers are expected to apply the new rules.

The operational statement contains the following example:


Bob is a real estate agent. Each time he arranges the sale of a house, Bob delivers a bottle of champagne to the owner. He also sends a gift basket by courier to the purchaser. The gift basket contains a bottle of wine, some cheese and various household items such as tea towels and soaps.

Bob will only be able to deduct 50% of the cost of the bottle of champagne. This is because he is providing entertainment in the form of drink and doing so off his business premises.

For the gift basket, Bob can deduct the full cost of the tea towels and soap, because an appropriate apportionment should be made for items that are not food and drink. However, he can only deduct 50% of the cost of the wine and cheese (or, if the cost is not separately identifiable, an amount appropriately apportioned as the cost of the wine and cheese).

While some may be exasperated by this outcome, particularly given the likely dollars involved compared with the compliance costs of apportioning the cost of gifts between food and drink and non-food and drink components, Inland Revenue are arguably applying the rules technically correctly in many cases, albeit the rules were probably not drafted originally with gift baskets in mind. 

What do the entertainment rules say?

Entertainment off premises

The limitation rule applies to deductions for expenditure on food and drink that a person provides off their business premises.

Entertainment on premises

The limitation rule applies to deductions for expenditure on food and drink that a person provides, other than light refreshments such as a morning tea and whether or not guests are present,—

a.     on their business premises at a celebration meal, party, reception, or other similar social function:

b.    in an area of the premises that at the time is reserved for senior employees to use and is not open to all the person’s employees working in the premises.

Note: the above are subject to a number of exemptions, including for entertainment provided outside of New Zealand, entertainment while travelling on business and entertainment provided at conferences that are at least four hours long.


The entertainment rules have remained largely unchanged since they were introduced in 1993, and this position illustrates they are well overdue for some modernisation with compliance costs in mind.

Regardless of the merits of the interpretation and current policy position, the Commissioner has stated she will apply this interpretation for tax positions taken on or after 1 September 2016. While Inland Revenue have said they will not seek to actively identify incorrect deductions claimed prior to this date, over-claimed deductions identified in the course of investigation or audit will be disallowed.

If you traditionally send clients or suppliers bottles of wine or gift baskets at Christmas time as a business thank you, please be aware of this change as you compile your list of “entertainment” expenditure for your accountant or tax advisor. 

Please don’t hesitate in contacting your usual Deloitte advisor to discuss your tax position further.

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