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Quick Reference Guide

Chapter 7 - Entertainment Tax

7.1 - Overview  (ITA Subpart DD)

Entertainment expenditure must be for business purposes to be deductible and special rules exist to clarify what may be claimed for tax. The rules are slightly different for GST. There is a working party looking at simplifying the regime but in the meantime, the current rules apply.

Certain specified types of entertainment expenses are only 50% tax-deductible. Here, the 50% non-deductible portion represents the private benefit deemed to be derived by the employees. All other business-related entertainment expenses are fully deductible, unless the expense is principally for the purposes of entertainment. For those who are GST-registered, the tax deduction is worked out on the GST-exclusive amount.

Where the benefit is enjoyed free of restrictions and outside of employment duties, then it may be subject to FBT rather than entertainment tax rules. Such expenditure and the FBT are tax-deductible expenses.

7.2 - Application

 7.2.1 - Deductible Entertainment (ITA s DD 4 - DD 8))

Entertainment expenditure is fully tax deductible if it relates to:

  • food and beverages consumed while travelling on business, unless:

    • the travel is principally for entertainment; or

    • a potential or existing client is at the meal or function; or

    • the entertainment is consumed at a social or similar function

  • food and drink consumed at a conference, educational course or similar event which lasts at least 4 hours (excl the meal).

  • food and beverages provided where the employee works overtime

  • food and beverages provided as morning or afternoon tea

  • entertainment incidental to a trade display or a function open to the public

  • entertainment enjoyed or consumed outside New Zealand

  • sponsorship of an event for the purposes of advertising or promotion of your business or products where the public have a greater opportunity to enjoy the entertainment

  • entertainment provided at market value by a taxpayer whose business involves provision of entertainment

  • samples for advertising/promotions unless provided to an employee

  • entertainment provided to the public for charitable purposes

  • entertainment provided to a person who is reviewing the entertainment for a paper, magazine, etc

  • entertainment subject to FBT or income tax

There are certain conditions that apply to the above exclusions, which limit the scope of the exclusions.

Example

If you travel from Christchurch to Dunedin, but eat with a client in Dunedin, then the airfare is 100% deductible but the meal is only 50% deductible.

7.2.2 - Partially Deductible  Entertainment Expenditure  (ITA ss DD 1, DD 2)

The entertainment tax rules identify expenditure that is 50% deductible, namely:

•      corporate boxes (or similar exclusive areas) at cultural and recreational events

•      holiday accommodation

•      yachts and pleasure craft

•      food and beverages, if they are provided or consumed:

  • at one of the above; or

  • off the business premises of the employer; or

  • on the business premises of the employer at a:

  • party or social function

  • an exclusive area of the work place restricted for certain employees, such as a boardroom

C7 Table 1-Entertainment Expenditure Checklist.PNG

7.2.3 - GST and Entertainment Tax

Throughout the year, you claim your allowable entertainment expenditure on your GST return. If you claim 100% when you are only entitled to 50%, make a one-off adjustment at year end when you adjust GST on your private usage of assets. See 20.3.17.

7.2.4 - FBT and Entertainment Tax

Entertainment provided to employees will not be subject to the entertainment tax rules, but will instead be subject to the FBT regime if:

  • the employee may choose when the entertainment will be enjoyed or if the benefit is enjoyed outside New Zealand; and

  • the employee does not consume or enjoy the benefit in the course of, or as a necessary consequence of, employment

Example

One of your employees has gone way beyond the call of duty, working long hours to save a critical project and bring it in on deadline.

As a reward, you offer to provide an expenses-paid weekend out of town for the employee and her partner to be taken any time within the next four months. The cost of the weekend including GST will be treated as a fringe benefit. (See Chapter 19).

7.2.5 - Licensed Premises Operators

A Public Binding Ruling issued by the IRD states special offers of food or beverages by licensed premises operators to the general public (e.g. happy hours, free drinks at specified times, two meals for the price of one, etc.) are 100% deductible entertainment.

 
C7 Image 1- Man drinking coffee.PNG
 

7.3 - Practical Hints

7.3.1 - Meals to Reward Employees

Using a combination of exemptions contained in the entertainment and FBT rules, an employer can provide moderate entertainment benefits to an employee while obtaining full income tax deductions and not being required to pay FBT.

Example

As a reward for good performance, an employer may provide an employee with a meal voucher or say bottle of wine. If the entertainment benefit can be enjoyed at the employee’s discretion, it will not constitute entertainment expenditure, but will be treated as a fringe benefit. However, if the amount of “other fringe benefits” (see FBT Chapter 19) does not exceed $300 per quarter for that employee and the total value of “other fringe benefits” provided to all other employees does not exceed $22,500 per annum, an FBT exemption will be available.

7.3.2 - Record Keeping

In a tax audit, Inland Revenue may only accept a taxpayer’s application of entertainment tax exclusions if adequate records have been kept to support the application of the exclusion.

Example

Food and beverages consumed by an employee on business travel should be supported by actual invoices together with annotations to those invoices including reasons for the business trip and persons entertained.

If you do not keep documentation, Inland Revenue may deny a full deduction for expenditure.

7.3.3 - GST Adjustment - Non-Deductible

The GST output tax arising on the deemed supply of the entertainment is non-deductible for income tax purposes. Remember to add back the GST adjustment to your income in your tax return

Jump to chapter...
Chapter 1 - New Zealand Tax Framework

New Zealand taxation is imposed by the Income Tax Act 2007 (ITA). The basis for calculating tax is summarised in the following flowchart from the Core Provisions set out in Part B of the Act. This overview provides the context for details discussed in this quick reference guide.

Chapter 2 – Tax Planning

Tax rates have come down in the past several years, but rates still vary for different taxpayers such as individuals, companies and trusts. There are also special rules that apply to certain taxpayers and not to others. While this is so, opportunities will exist to structure your affairs to benefit from the different rules and tax rates.

Chapter 3 – Tax Residence and Source of Income

“Tax residence” and “source of income” are central to determining liability for taxation in New Zealand. Residence determines the jurisdiction and source relates to where income is earned or deemed to be earned.

Chapter 4 – Assessable Income

Not every gain received by you or your business is taxable. The Income Tax Act only imposes tax on taxable income.

Chapter 5 – Deductible Expenditure

The questions of what expenditure is deductible and when, are of prime importance in determining your tax liability. For most expenditure, the question of deductibility is straight forward. However, there are exceptions. This chapter looks at what you may deduct and when.

Chapter 6 - Depreciation

Expenditure on capital assets cannot be deducted immediately. The value of the asset depreciates over time and the cost is spread over its useful life. Costs are there- by matched against any income that the asset generates and the tax deduction occurs each year on a more gradual basis until the asset is fully depreciated.

Chapter 7 - Entertainment Tax

Entertainment expenditure must be for business purposes to be deductible and special rules exist to clarify what may be claimed for tax. The rules are slightly different for GST. There is a working party looking at simplifying the regime but in the meantime, the current rules apply.

Chapter 8 - Trading Stock (or Inventory)

Trading stock purchases are a regular and significant revenue expense for many businesses. However unlike many other revenue expenses, a tax deduction for trading stock is only allowed at the time the stock is sold.

Chapter 9 – Real Estate Transactions

This chapter distinguishes between taxable and non-taxable property transactions.

Chapter 10 - Financial Arrangements

The Financial Arrangements or Accrual Rules are a detailed set of rules relating to the tax treatment of debts and debt instruments and transactions including debt related aspects.

Chapter   11 - Business Structures

Your business structure can have a huge impact on taxation and the legal framework under which your business operates. Here, we compare the different business structures available to you. These are discussed in greater depth in following chapters.

Chapter 12 - Companies

Companies are a popular structure for doing business because they allow a degree of protection and flexibility. Companies offer business people the advantages of limited liability and may provide a beneficial structure for tax purposes.

Chapter 13 – Partnerships and Trusts

A partnership is formed by a contract between parties, to carry on business or commercial activities in common, with a view to making a profit.

A trust is a legal promise by a trustee or trustees to hold and administer property, sold or gifted by a settlor, for the benefit of identified beneficiaries.

Chapter 14 – Farming

Primary production in New Zealand forms a major part of our GDP. Not surprisingly there are specific tax provisions relating to this form of enterprise. Agricultural production is unique since it is the only form of production involving “natural increase”. As a result, special accounting and tax rules are required.

Chapter 15 – Forestry

A number of events in the forest life cycle give rise to taxable forestry income. Clearly, this includes the net proceeds of sales, including felled timber and thinnings etc. In addition, sales or transfers of forestry or cutting rights are also taxable. The forestry regime also contains special rules for deduction of forestry expenditure.

Chapter 16 – PIE and Offshore Investments

Being a small country, much of our investment is off shore. Although this accounts for a relatively small portion of New Zealand’s tax revenue, overseas investment is governed by quite a complex regime and affects a large percentage of the population either directly or indirectly.

Chapter 17 – Provisional Tax

Provisional tax is a means of paying tax on income, that is not fully taxed at source via PAYE or other withholding payments.

Chapter 18 – Withholding Taxes

In this chapter, we consider withholding tax obligations in respect of interest, dividends and royalties paid. We also look at Non- Resident Contractors Tax. Chapter 26 “Employment Responsibilities” discusses withholding tax obligations when you pay New Zealand resident contractors, including commission agents, builders etc.

Chapter 19 – Fringe Benefit Tax

Fringe benefit tax (FBT) was introduced to tax non-cash benefits provided to employees or associates of employees. These rules also apply to non-cash benefits provided to shareholder employees and their associates.

Chapter 20 – Goods and Services Tax

The application of GST to the majority of New Zealand business transactions is straightforward. GST can however give rise to difficult issues, especially in the area of “non standard” transactions. This would include the sale and purchase of real estate, financial services based transactions, GST on fringe benefits provided and GST adjustments for entertainment tax.

Chapter 21 – Accident Compensation

Accidents and injuries in New Zealand are covered by a publicly funded insurance scheme administered by the Accident Compensation Corporation (ACC).

Chapter 22 – Year-End Tax Planning

Year-end tax planning is an important part of managing your tax expense. Year-end tax planning should be undertaken prior to year end. For 31 March balance date businesses, this review should be conducted in February.

Chapter 23 – Tax Administration

Unless these matters are handled by a bookkeeper or dealt with efficiently, a considerable amount of your otherwise productive business time will be expended in complying with your basic tax obligations.

Chapter 24 – Penalties, Binding Rulings & Disputes Resolutions

Failure to meet tax obligations may result in civil penalties, criminal penalties (discussed below) or both. Further, the penalties are not deductible for taxation purposes!

Chapter   25  –  Business Legislation

The business laws addressed in this chapter have a huge bearing on how you can and can’t do business in New Zealand. In the documentation that you keep for running your business, it is well worth noting relevant legal matters and how you plan to ensure compliance.

Chapter 26 – Employment Responsibilities

This section summarises key points to help you fulfil your obligations as a good employer, reduce day-to-day problems and comply with the law.

Appendix – Tax Facts – A Brief Summary

Editor | FBA
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