With the silly season just around the corner, now is an ideal time to brush up your knowledge on entertainment expenses, and how much is deductible.
Some entertainment expenses are only 50 per cent deductible due to having a significant private element. A private element means the entertainment expense isn’t completely business related.
Inland Revenue issued an operational position on 15 September 2016, declaring that gifts of food and drink are entertainment expenses and only 50 per cent deductible. Inland Revenue refer to this in their Business tax update in October 2016 and this came into effect on 1 September 2016.
If you send your clients or suppliers thank you gifts at Christmas and they contain items of food or drink, these are 50 per cent deductible, while other items in the gift basket can be 100 per cent deductible.
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 per cent 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 per cent 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).
50 per cent deductible
• Food and drink at work for staff, clients at a social event.
• Food and drink for staff or clients away from your business premises.
• Gifts of food and drink for staff or clients.
• Corporate boxes or sporting events for clients or staff.
• Taking a client out for dinner.
• Staff Christmas party on or off the business premises.
100 per cent Deductible
• Food and drink while travelling on business and not with clients.
• Food and drink provided at a conference or course that lasts for four consecutive hours or more.
• Providing morning and afternoon tea for your staff.
• Donating food to a children’s hospital for a Christmas party.
• Entertainment enjoyed or consumed outside New Zealand including waters around New Zealand for business purposes.
Inland Revenue has a detailed guide (Entertainment Expenses IR268) to help businesses understand the rules for claiming business entertainment expenses.
If you are ever unsure on the deductibility of entertainment expenses, please don’t hesitate to contact Diprose Miller.
