There are pitfalls in tax laws pertaining to Christmas
function expenses. Photo by James Beech.
As the festive season draws closer, staff and client
functions are on the agenda of many Otago businesses.
But there can be a catch, Deloitte Dunedin tax partner Peter
Truman warns.
The Inland Revenue Department will be monitoring expenditure
on things like staff and client functions and gifts to staff
and clients.
Although the rules relating to those activities are well
published, there were still some pitfalls, he said.
Functions where food, drinks and entertainment were provided
were likely to be subject to the entertainment expenditure
rules. Those rules state only 50% of the expenditure could be
claimed back as a business deduction for tax purposes and
only 50% of the GST content could be claimed back.
Included in the entertainment rules were costs associated
such as venue hire, music or entertainment and waiting staff,
Mr Truman said.
Incidental food provided on the business premises was fully
deductible.
"A morning tea shout for staff on the last day of work for
the year is not subject to the entertainment rules."
The cost of any business function held outside New Zealand
was fully deductible.
Gifts to staff could be subject to fringe benefit tax (FBT).
There was an exemption for small items which meant that no
FBT would be paid if the value of benefits provided over a
three-month period did not exceed $300 per employee and the
total value of all benefits provided over a 12-month period
by the employer - including any related entities - did not
exceed $22,500.
For generous or large employers that did not fit within those
concession, FBT was payable on the full value of staff gifts,
he said.
Employers could choose to calculate FBT based on income
levels of each employee which would have appeal where the
costs savings were sufficient to justify the additional
administration.
Any gifts to clients that consisted of food or drink would be
subject to the entertainment expenditure rules, with only 50%
of the cost being deductible, Mr Truman said.
The cost of other gifts to clients would be fully deductible
to a business.
It was not uncommon for businesses to make gifts to charities
in place of gifts to staff, presumably with the approval of
staff, he said.
Provided the donation was made to a registered charity, the
donation might be a deductible expense for the business.
Deductions for donations made were available provided the
business had a taxable profit for the year of an amount
exceeding the donation made.
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