For employers, the Christmas period is a time to splurge a little (or a lot) on staff. It might be a Christmas party, or taking them out to lunch; maybe a Christmas gift like a box of chocolates, or a blow-up Santa, or a company boat trip.
But there’s no such thing as a free turkey – not for the giver anyway. EY’s Jo Doolan and Claire Dilks have advice on what fringe benefit tax you need to pay on all those lavish (or not so lavish) Christmas treats for staff, and what deductions you can claim.
On the first day of Christmas my employer gave to me….
A team-building weekend at a bach in the Wairarapa
The bad news is holiday accommodation is subject to what tax types call the “50% entertainment expenditure limitation”, which means employers can claim only a 50% deduction for these costs and – as an added festive bonus – must pay GST on the non-deductible element.
The good news is if entertainment expenditure limitations apply, then fringe benefit tax doesn’t – and vice versa.
Determining whether to apply an entertainment deduction restriction or the FBT rules is easy; entertainment takes precedence unless the employee:
- can choose when to receive or use the benefit, or
- does not receive or use the benefit in the course of employment duties.
Confused? Read on and all will become clear…
On the second day of Christmas my employer gave to me….
Corporate attendance at the Boxing Day races
Is this in the course of employment duties? Yes? Then your employer can claim a 50% entertainment deduction on that one. Or is it simply a jolly day out? Then your employer will be liable for FBT.
On the third day of Christmas my employer gave to me….
A staff morning tea
Hosting a Christmas morning tea for staff on your business premises should be fully deductible because the 50% limitation rule above does not apply to light refreshments like morning teas.
FBT should also not apply to this benefit as it is being provided on the employer’s premises and, therefore, falls under the FBT “on-premises” exemption.
On the fourth day of Christmas my employer gave to me….
A Christmas party with blow-up Santa
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.
In terms of paying FBT, food and drink provided at an office Christmas party will generally not be a fringe benefit. BUT…
…it 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); or
- chooses when to receive or use the benefit.
On the fifth day of Christmas my employer gave to me….
Training on the entertainment rules in the Cook Islands, all expenses paid
Good news! The entertainment expenditure limitation rule doesn’t apply to the enjoyment of entertainment outside New Zealand.
FBT will not apply as the benefit is received in the course of employment duties.
On the sixth day of Christmas my employer gave to me….
A voucher for $500 for a meal at the local five-star restaurant for a night of my choosing
As you can choose when to enjoy this benefit, FBT and not entertainment expenditure limitations will apply.
On the seventh day of Christmas my employer gave to me….
Dental treatment for the broken tooth from that fight I got into with the drunk guy from accounts at the Christmas party
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).
On the eighth day of Christmas my employer gave to me….
Dental treatment for my partner for the broken tooth he suffered when he weighed into the fight too
This treatment is also subject to FBT (or PAYE) because the payment is made as a consequence of the employment relationship.
On the ninth day of Christmas my employer gave to me….
An all-staff Christmas harbour cruise
You can get a 50% tax deduction on expenditure on yachts or other pleasure craft.
On the tenth day of Christmas my employer gave to me….
A hamper with a partridge and a pear tree, cost $400
Note: Partridge and pear tree not shown
Gifts such as bottles of wine or food hampers are likely to be subject to fringe benefit tax since the employee can usually choose when to enjoy the gifts. However, since they attract a liability for FBT, their cost should be fully deductible.
On the eleventh day of Christmas my employer gave to me….
A measly box of chocolates and a cheap coffee mug with “YOU’RE THE BEST” in non-permanent marker
FBT would apply, but luckily non-specific benefits falling under a minimum value threshold are exempt from FBT. That is, if you pay FBT on a quarterly basis and give non-specific benefits, (or “unclassified benefits” to use the legislation terminology) costing, in total, $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.
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 for all employees per annum.
Common examples of these types of unclassified benefits include Christmas gifts, childcare, travel or vouchers. Don’t forget the $300 is an aggregate threshold, so you need to combine all small-value FBTable amounts to determine if you qualify. If you received the meal voucher and hamper as well as this delightful mug the low value exemption won’t apply.
On the twelfth day of Christmas my employer gave to me…
Her autobiography in three bound volumes
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.
However, you are likely to be hit with fringe benefit tax unless the FBT minimum value exemptions (described above) apply.
After that, my employer reckoned I’d had enough and started handing out gifts to clients instead…
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.
Final accountants’ warning: 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 and Claire Dilks are tax specialists at Ernst & Young firstname.lastname@example.org, Claire.email@example.com