That’s FBT, not entertainment, right?
Tax Alert - December 2023
By Viola Trnski & Amy Sexton
It’s beginning to look a lot like Christmas., which means there may be FBT to pay, or is it PAYE? Or is it even expenses to claim?
Before you put your feet up at the annual work Christmas party, take a minute to review the tax treatment that will apply to your Christmas-related expenditure. There are many ways to reward staff or celebrate a successful year – and subsequently, there are different tax implications that can arise.
The key areas to be aware of are FBT, PAYE and entertainment expenditure rules. These are a common source of confusion, and their application will ultimately depend on each specific scenario. To get you started, we have set out some background about each regime and applied the rules to a few common examples below.
FBT vs PAYE vs entertainment expenditure
Generally, either the entertainment rules, PAYE or FBT will apply to Christmas parties, gifts, and staff bonuses.
The entertainment rules restrict deductibility to 50% of costs for certain types of expenditure. The policy reason behind this is that there is an element of private enjoyment to any recreational event, whether that be enjoying the hospitality in a corporate box, hosting a Christmas party, or celebrating with a long lunch. Regardless of where it is consumed, food and drink are often captured by the entertainment rules.
FBT applies when non-cash benefits are provided to employees in connection with their employment. While there is some overlap between the entertainment rules and FBT, the entertainment rules will generally override FBT, unless:
- the employee can choose when to enjoy the benefit or the benefit is enjoyed outside New Zealand; and
- the benefit is not received or used in the course of, or as a necessary consequence of, the employee’s employment duties.
For example, if you take your staff out to a restaurant for a long lunch on the last day of work, the entertainment rules would apply and only 50% would be deductible – but if, instead, you gifted them with a voucher for a restaurant to enjoy when, and with whom, they choose to, the FBT rules would apply.
Finally, the PAYE rules apply to monetary compensation provided to employees, including if an employee incurs a cost and is reimbursed by the employer. The PAYE regime captures bonuses and gratuities, as well as when an employer directly pays for a personal debt of the employee.
Entertainment vs FBT vs PAYE
Common scenarios and examples
Costs associated with hosting a Christmas event off-premises
Expenditure on venue hire, food and drink will be subject to the entertainment rules when the event is primarily for entertainment, meaning a deduction of 50% is allowed. This also applies to incidental costs such as hiring glassware, waitstaff, and music.
Vouchers to employees
Food and drink provided on premises at a party, reception, or celebratory meal, as well as taking employees out for food and drink off premises at restaurants, would all be subject to the entertainment regime. However, if an employer were to give employees vouchers for a restaurant meal as a gift, and the employee can choose when to use the voucher, the cost of the voucher will be subject to FBT. If the employer were allow the employee to go out for a meal and reimburse this cost, it would be subject to PAYE.
Gifts to employees
Most gifts are subject to FBT in the first instance, as these benefits can be enjoyed at the employee’s discretion. Similarly, gift baskets containing food and drink, which typically fall within the entertainment regime, would also be subject to FBT for the same reason.
Note that any benefit subject to FBT may qualify for an FBT exemption, such as the de minimis exemption. The de minimis exemption excludes all unclassified benefits from FBT provided that:
- The total value of all unclassified benefits provided to all employees is less than $22,500 in the previous 12 months (this amount includes all benefits provided to all employees of associated employers); and
- No employee has received more than $300 of benefits in an individual FBT quarter (or $1,200 for annual filers).
“Unclassified benefits” are any benefits provided that are not specifically excluded from or provided for in the FBT regime. Common examples of unclassified benefits include vouchers, Christmas gifts, flowers, free or discounted goods or services, non-work related travel, sports team fees, and use of an employer’s assets for private purposes.
Staff cash bonuses
Cash bonuses paid by an employer to an employee are taxable under the PAYE regime because it 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. A cash bonus should be taxed at the ‘extra pay’ rate.
Using a company vehicle for personal travel
If we’re in luck with the weather, some employees may be using their company vehicles as their means of transport during the summer holidays. Employers need to remember that FBT will arise whenever a company vehicle is available for an employee to use privately. If an employee pays for their own petrol, provided evidence is provided to the employer, these costs may be deducted from the taxable value of the fringe benefit and reduce the amount of FBT payable.
Providing gifts to clients and customers
An odd quirk of the entertainment regime is that Inland Revenue considers that it applies to the provision of any food and drink, not just to food and drink consumed at a function. Inland Revenue made this position clear with an operational position specifying that if a business provided a customer with a gift basket containing wine, cheese, tea towels and soap the tax outcome would be that the tea towel and soap were fully deductible but the wine and cheese was only 50% deductible.
Merry Christmas and happy New Year from us!
Hopefully, this clarifies some of the common areas of misunderstanding or confusion between the different employment tax regimes. If you have any queries about the issues raised, as always, please contact your usual Deloitte advisor.
The Tax Alert team wishes everyone Merry Christmas and a Happy New Year, and hopes you all enjoy this well-deserved break.
We’ll be back with our next issue of Tax Alert in early February 2024.
December 2023 - Tax Alerts
