Entertainment expenses can be a valuable way to strengthen relationships, boost team morale, and reward employees.
However, for small business owners in New Zealand, navigating the Inland Revenue's (IR) rules around these expenses — especially when it comes to staff gifting and the potential implications of Fringe Benefit Tax (FBT) — can be challenging. Missteps can lead to unnecessary tax liabilities, reducing the benefits of well-intentioned business gestures.
Understanding Entertainment Expenses
Entertainment expenses generally cover costs related to client hospitality, staff functions, and gifts. These can be either fully deductible, 50% deductible, or potentially liable for FBT, depending on the nature of the expense. Knowing where your expenses fall can help you maximize deductions while remaining compliant.
It's also crucial to understand that entertainment expenses aren't solely about staff. They can include client entertainment, supplier meetings, and networking events. While these costs can help expand business relationships, incorrect classification can lead to compliance issues and overclaiming of GST (resulting in later return adjustments being needed).
Tips for Effective Entertainment Expense Management
📊 Differentiate Between Fully Deductible and 50% Deductible Expenses:
✅ Fully deductible: Light refreshments during business meetings, gifts under the FBT quarterly threshold, out-of-office staff training. Examples are staff morning tea shouts or refreshments provided at courses or training days.
⚖️ 50% deductible: Restaurant meals, corporate boxes, staff parties held offsite. Basically anything that involves alcohol. Note that lavish or excessive entertainment can raise scrutiny, so maintain a balance that aligns with business objectives.
🎁 Take Advantage of Staff Gifting
💸 Cash bonuses or vouchers that can be exchanged for cash are considered part of the employee’s income and liable for PAYE. When possible, opt for tangible gifts that are memorable and tax-effective.
💡 Non-cash gifts like gift baskets or vouchers under $300 per quarter per employee are generally exempt from FBT. These thoughtful gestures can boost morale without adding tax complications.
🛍️ Consider seasonal gifting, like holiday hampers or end-of-year vouchers. These can be timed to fall under the quarterly limits, maximizing impact while minimizing tax exposure.
🏛️ Plan Staff Functions Carefully
🏢 Holding staff functions on your business premises can reduce FBT liabilities. Food and drink provided on-site are typically 50% deductible but do not attract FBT. Casual morning teas or celebratory lunches can enhance team culture without tax penalties.
🚧 Offsite events can incur FBT if benefits exceed the $300 exemption per employee per quarter. If planning a large event, consider splitting it across quarters to remain under the threshold.
🗂️ Document Everything
📑 Keep detailed records of all entertainment expenses, including receipts, attendee lists, and the business purpose of each expense. Accurate record-keeping will ensure you can substantiate deductions during audits and avoid costly penalties.
📁 Separate expenses clearly in your accounting system. Create distinct categories and set up different general ledger codes for staff entertainment, client entertainment, and mixed-use expenses to streamline tracking and reporting.
📉 Review the Annual FBT Thresholds
🔎 Monitor the total value of staff benefits throughout the year to avoid unintentionally exceeding the exemption. Regular reviews can help identify overspending trends and adjust strategies accordingly.
🛡️ Consult with our team or your accountant if you're unsure whether your entertainment expenses could incur FBT. Early intervention can save costs and stress.
Clear as mud?
Navigating entertainment expenses requires a solid understanding of tax obligations. By applying these strategies, small business owners can effectively reward staff, strengthen business relationships, and maximize tax deductions while minimizing exposure to Fringe Benefit Tax.
Engaging with a professional bookkeeper can help you make the most of your entertainment budget while staying compliant.
For more detailed guidance tailored to your business, reach out to our expert team today!
