Adding up the costs and benefits of festive season spend
Yes, it really is December. And as the song says, 'tis the season to be jolly. Traditionally, this is the month that a lot of evenings fill up with functions.
For businesses, it's a chance to express gratitude to staff, customers and suppliers for their loyalty and contribution over the year. Whether it's a few drinks and nibbles or a full roast, questions also start getting asked about the deductibility of the associated costs.
The starting point is that expenses relating to earning income or running a business are generally deductible - unless there's another tax rule that says otherwise. A particular set of rules that affect deductibility are those dealing with entertainment expenses.
They were introduced in the early 1990s as part of Ruth Richardson's "mother of all budgets". The rationale is that entertainment, even where it is part of carrying on a business and "greasing the wheels" of commerce, inherently has an element of personal benefit.
The broad effect is that only half of certain types of entertainment costs can be claimed for tax. The main types of expenses that are subject to the 50 per cent rule are expenditure on:
Corporate boxes or other exclusive areas at cultural, sporting or recreational events or off-site, including the cost of entry and the cost of related food and drink. So that includes the roped-off marquee at the races last month.
Holiday homes and pleasure craft including incidental food and drink.
Food and drink provided off-site. A prime example is dinner at a restaurant.
Food and drink provided on-site at a celebration meal, party or reception, or in an area reserved for senior employees only. This doesn't apply to "light refreshments" such as a morning tea.
Because these are tax rules, there are exceptions (even though the entertainment tax is itself an exception to the general rule for deductibility). The main types of entertainment expenses that are not subject to the 50 per cent limitation include:
Food or drink while travelling on business - unless it's with an existing or potential business contact or at some sort of party. Hence the joke about seeing someone you know while at an out-of-town restaurant and explaining that while you'd like to invite them to join you, would they mind sitting at the next table for tax reasons.
Food and drink while attending a conference or training course that is at least four hours long.
Food and drink that is part of promoting the business, provided the general public have as much opportunity to partake as customers, employees and other associates.
Expenditure where the fringe benefit tax rules apply. The FBT regime will take precedence if the employee can choose when to enjoy the benefit of the entertainment. An example is giving a dinner voucher to an employee as a special thank you.
Entertainment outside New Zealand. (A point in favour of having this year's Christmas party in Rarotonga?)
The GST rules generally follow those for income tax. The correct action is to claim all of the eligible GST in respect of entertainment costs in the relevant GST period as they arise. An output adjustment should then be made in the GST period that covers the date the relevant income tax return is filed.