Tax deductibility of Entertainment expenses

Recently a few new clients called to understand what type of entertainment expenses are deductible for tax purpose and what's not. Technically, expenses incurred in earning assessable income are deductible for tax purposes. Most business related expenses are fully deductible. If the expense doesn’t help your business earn gross income, it’s private and you can’t claim it as a tax deduction. A principle, easy enough to get, right? Well, it turns out that its not so simple in relation to some expenses. Given that its relatively easy to extend an argument in favour of a position one is taking, the IRD has specified some rules in relation to some of expenses - entertainment is one of them.

This article discusses, with some examples what type of entertainment is deductible for tax purposes and what type is not. We have used examples of Christmas parties below as some shops & cafes have already started to get setup for Christmas parties!
​
Deductibility also impacts GST & FBT so its important that one understands this carefully.

Entertainment

It becomes a little trickier when there’s an element of private enjoyment. You might think that the firm’s Christmas party for clients is a business related expense and should be fully deductible because it’s promoting your business, products or services.

Generally speaking, if there’s an element of private enjoyment, the expenses (in addition to the food and drink) associated with events where you entertain clients and/or staff will only be 50% deductible. For instance, this would include the hire of crockery, glasses, waiting staff and music.

Accordingly, if your clients OR employees OR anyone associated with the business have a greater opportunity to enjoy the entertainment than the general public, you can only deduct 50% of the costs.

There are exceptions of course!

Entertainment supplied for charity is 100% deductible. For instance if you throw a Christmas party for the children’s ward at the local hospital, this is fully deductible.

Entertainment enjoyed outside New Zealand is 100% deductible. If you take the team to Fiji or Cook Islands for Christmas (lucky them!), all costs (net of amounts contributed by staff if any) will be fully deductible.

Functions and events

 Some entertainment expenses are fully deductible but some are not. Use these examples as a guide.
50% deductible

• Christmas drinks for team members or clients in the office or in the pub. 
• Hire of a launch or a ferry to entertain clients
• Restaurants providing food and drinks to team members at a social function in their restaurant
• Staff Christmas party on or off the business premises
• Function hosted in a marquee at the races (or in a corporate box at the rugby). Includes the cost of tickets and any food and drink provided
• A weekend away for the team at holiday accommodation in New Zealand. Includes any food and drink provided.
• Taking existing / potential clients out for drinks and food or buying tickets to sporting or entertainment events for them.

100% deductible

• Donating food to a Christmas party in a children’s hospital
• Providing morning and afternoon tea for your team
• Providing entertainment, including food and drink at your promotional stand for the Cracker Christmas Festival
• Holding the Christmas party in Fiji (woo-hoo!)
• Food and drinks at a conference or a large meeting (like a shareholders' meeting or a hui) you're holding.
• Coffee / tea at the local café meeting with a business contact to discuss work related matters (as its classified at "light refreshments). We consider upto ~$10 (a muffin & a hot beverage) per attendee as reasonable "light refreshments".

0% deductible

• Taking your family (who don’t work with you in your business) out for dinner to thank them for being patient while you worked long hours and paying for this using the business credit card.

GST

If that’s not enough to think about, you will need to make a GST adjustment for entertainment expenses which are 50% deductible. This adjustment will be required to be made at the time your income tax return is filed. Of course, we can help and advise you on this.

Accounting

At a practical level, this is the easiest part! You will need to open 2 entertainment accounts in your general ledger:

1. Deductible Entertainment and
2. Non-deductible Entertainment. When setting up the tax profile of these accounts, setup 15% GST for the 1st one and 0% GST for the second one.

When coding an expense item that is 100% deductible entertainment, code all of it to account 1 above. When coding an item that is 50% deductible, code 50% to deductible entertainment account and 50% to non-deductible account. For the 50% that is deductible, if setup correctly, the system should be able to claim GST input tax credit correctly on 50% amount that is deductible. For the 50% that is non-deductible, the system will not claim GST input tax credit at all.
​
Regarding coffee, tea etc at a local café to meet with a business contact to discuss work related matters, we recommend that you code these to a separate account called meeting expenses as more and more people are working from home or from shared offices and holding work related meetings at local cafés is often cheaper than booking meeting rooms etc.

FBT on gifts and entertainment

If you are giving gifts to your team you may also be liable for fringe benefits tax. There's a $300 exemption from paying FBT per employee per quarter so if the value of the gift is less than $300 you may be exempt. However, if the value of total benefits for an employee goes over $300 for the quarter year (and provided the total value of all benefits doesn’t exceed $22,500 for the year), the full value of the benefits is subject to FBT.
​
As for entertainment events, if you invite your team to an event that qualifies as a business-related entertainment expense which is only 50% deductible, you are not liable for FBT as well. So if you are entertaining employees at a party or you’ve hired a launch or holiday accommodation and the expenses for that are only 50% deductible, it isn’t subject to FBT. (On the other hand, if the event is being held outside New Zealand, it will be subject to FBT.)
​
There are exceptions to this that make it a tricky area so if you’d like more information on a whether a specific event you’re hosting is 50% deductible but may also be liable for FBT, please contact your advisor at Core Business Services Ltd.

Key message
The key message here is that its often not so simple to determine deductibility of entertainment expenses. The nature of expense, its purpose, timing etc are often relevant in determining that. The IRD's position is very clear - as long as you're able to evidence the above, you should be fine.

---

Disclaimer
The above publication discusses business issues generally and is not intended to be specific advice. Whilst every effort has been made to provide valuable, useful information, Core Business Services Ltd, any related suppliers, associated companies & practices accept no responsibility or any form of liability from reliance upon or the use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only. Please do consult with your advisor or call this firm for information / advise specific to your circumstances before finalising any particular course of action.