With the festive season approaching, you may be starting to think about gifts and showing appreciation to your clients and employees. Gifts and parties are a common end of year business ritual, but it’s important to understand the tax implications to ensure compliance and maximise your tax deductions. Make sure that you keep all tax invoices and receipts and a detailed record of who was entertained/who the gift was for and what the reason was.
Here’s a detailed guide on tax-deductible holiday gifting and party expenses in New Zealand.
Holiday Parties: Food and Drink Deductibility
Hosting a Christmas party for your team is a common way to celebrate the season, but the tax treatment of party expenses depends on where and how the event is hosted.
Basically, where food and drink is provided or consumed on your premises, at a local restaurant or hotel the 50% rule applies. There is however a couple of exceptions.
1. On Business Premises
If your party is held at your business location or off-site, only 50% of food and drink costs are deductible. This applies whether the celebration includes staff or invited guests.
However, light refreshments—such as tea, coffee, and snacks provided during the normal workday—are 100% deductible if held on the business premises.
Example: If ABC Ltd spends $1,000 on an on-site Christmas party for employees, it can claim $500 as a deductible expense.
2. Off-Site Events
When hosting a party off-site, such as at a restaurant, 50% of the total food and drink cost is deductible, similar to other entertainment expenses. The expense needs to have a business nexus eg Staff, customers, suppliers etc.
Example: A business hosts an off-site holiday dinner with a $2,000 bill, claiming $1,000 as a deductible expense.
Summary Table of Deductible Party Expenses:
Holiday Gift Deductibility
The IRD categorises business gifts into two primary types, each with different deductibility rules:
1. Entertainment Gifts (50% Deductible)
Entertainment gifts provide leisure or enjoyment and include items like event tickets or meal vouchers. Only half of the cost is deductible.
Example: If you give a $200 concert ticket to a client, the deductible amount is $100.
2. Non-Entertainment Gifts (100% Deductible)
Non-entertainment gifts, such as hampers, branded merchandise, or flowers, are fully deductible when used for business purposes and are reasonably priced. Note, that the IRD has ruled that if the hamper has any food or drink in it, then it is classified as entertainment rules and only 50% can be claimed.
Example: A $150 gift basket for a top client is fully deductible (unless it contains food/drink)
Gift Deductibility Overview:
Examples of Common Holiday Gift Scenarios
Here are some common holiday gifting scenarios to illustrate deductible amounts:
Scenario 1: A business sends a $150 gift basket to a client.
Deductible Amount: $150 (100% deductible as a non-entertainment gift (as long as it doesn’t include food/drink).
Scenario 2: The business invites a client to a $500 dinner.
Deductible Amount: $250 (50% deductible as entertainment).
Scenario 3: The business provides branded calendars to clients.
Deductible Amount: Fully deductible as a promotional, non-entertainment gift.
Tracking Holiday Deductions
To ensure you are tax compliant this season, remember to:
Categorise Each Expense: If you use Xero, label gifts and party expenses as entertainment or non-entertainment.
Maintain Correct Records: Keep receipts of all expenditure, record recipient details, and note the business purpose.
Set a Budget for Gifts and Events: Planning expenses helps ensure your deductions stay within IRD guidelines.
GST Considerations: If you’re GST-registered, claim GST only on the deductible portion. For entertainment expenses, only half the GST is recoverable.
Holiday Gift Expense Chart
Final Tips for your Holiday Season
By referring back to these guidelines and examples, you can celebrate the festive season while remaining within tax rules. Proper planning and careful record-keeping will ensure that your gifts and holiday party expenses are deducted correctly, giving you peace of mind and letting you focus on spreading holiday cheer.
For specific tax guidance, feel free to consult with our accounting team. Contact us here.
You can find more information and detail about entertainment expenses here on the IRD website - https://www.ird.govt.nz/income-tax/income-tax-for-businesses-and-organisations/types-of-business-expenses/entertainment-expenses
Happy Holidays and Happy Gifting!
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