As the end of the year draws near it is likely you are considering what to buy for clients, customers and suppliers as suitable end of year gifts.
Alternatively, you may consider hosting a function to thank them for their business and loyalty. Unfortunately not all of what you spend on such gifts or entertainment will be tax deductible to your business.
The entertainment expenditure rules limit tax deductions for money spent on gifts such as chocolates, cakes or wine to give to customers, clients or suppliers to half the deduction available for other types of business expenditure. This is because expenditure on food and drink provided away from your business premises (which includes these types of gifts) is unfortunately only 50% tax deductible.
A business-related entertainment expense could be 50% or 100% tax deductible. If you buy your clients gifts which are not food and drink- think branded coffee cups, clothing, plants, or keyrings – the cost of these items should be fully tax deductible. Where items of food and drink are part of a parcel of items supplied as a gift you will need to apportion the expense your business incurs between the fully deductible and 50% deductible items.
Private entertainment expenses are not tax deductible in your business so it is important to differentiate between your business-related and private entertainment expenditure. Common business-related entertainment expenses are:
- those relating to entertaining current or potential clients, customers and suppliers; and
- those relating to holding an end of year or team building party or activity for your employees.
So, the end of year staff Christmas party will qualify as business-related expenditure as will a function to thank your clients, customers and suppliers for their business.
The next consideration is how much of what you spend is tax deductible. Generally entertainment that is provided away from your business premises and outside normal working hours is considered to have a private element and will therefore only be 50% deductible. Therefore, if you are hiring a marquee and engaging caterers to host a function offsite, those costs will be subject to the 50% restriction. If you host clients, customers and suppliers at a sports function in a corporate box, those costs will be 50% deductible. Also, if you charter a boat and take your team out for an end of year function the costs of that outing will be 50% deductible.
What if you host a social event at your work place, such as your end of year staff party or a function to entertain clients and suppliers?
You can only deduct 50% of the costs of food and drink supplied at that function, however the costs of engaging an entertainer may be fully deductible, provided that is the main purpose of the event and not just supportive of the event such as background music.
What about Fringe Benefit Tax on gifts or benefits provided to your employees?
Business-related entertainment benefits provided to employees by way of an end of year party are not subject to fringe benefit tax (“FBT”) however a voucher given to an employee for a meal out with her/his family as an end of year gift would likely be subject to FBT as well as being only 50% tax deductible to your business. This boils down to the fact the employee can use the benefit at a time of their choice.
GST is a little tricky – if you are GST registered, expenses claimed for tax must be GST exclusive. Your business is deemed to make a supply of the 50% non-deductible portion and will need to account for GST on that deemed supply in the GST return that covers the date on which you filed your business tax return. Oddly, the rules require that the GST portion of that deemed supply is calculated as if the expense disallowed is GST inclusive. So, you adjust for the GST fraction (3/23rds) of the disallowed expense. In the following year you will need to add this GST back as non-deductible when preparing and filing your income tax return.
As always, it is important to keep records of your expenditure to enable an accurate calculation of fully deductible vs 50% deductible expenditure and support your claim for a tax deduction.
There are instances where business-related entertainment costs appear to be only 50% deductible but specific rules may mean you may be entitled to a full tax deduction.
Please contact us if you would like more clarification around how these rules may apply to your business.
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