Its Christmas time. The season for office parties, generosity and spending way too much on presents. To make the post-holiday season hangover a little less shocking, here are a few of our key tips on parties, presents and bonuses that you need to be aware of. The IRD is never too far away from any act of employer generosity with their entertainment, FBT or PAYE rules.
Paying a Christmas Bonus
One of the easiest ways to reward your employees, no matter the time of year, is with a discretionary cash bonus. Cash bonuses are taxable as earnings from employment and so are subject to all the same deductions as the employees normal payroll.
It’s important that you make your employees aware of this and that they shouldn’t expect the total gross to show up in their bank accounts. Tax can take a sizeable chunk out of a cash bonus. For example, a $1,000 cash bonus could be liable for up to $390 of income tax, $120 of Student Loan repayments, and $30 of Kiwisaver. Very quickly, that $1,000 bonus has become a $460 net payment to the employee.
Giving Christmas Gifts to Your Team & Customers
If you’re looking to get your team a gift to say thanks for another year of great work, this could be liable for Fringe Benefit Tax (FBT). As the gift is directly related to their employment it is essentially just like a bonus payment, just not in cash. However, there is an exemption. The de minimis exemption allows for FBT-free tax-free employee gifts in certain circumstances.
To be FBT-free, the total value of the gift to each employee must be less than $300 (if gifts or other fringe benefits are given throughout the year) or $1,200 (if gifts or other fringe benefits are given just once a year). However, this exemption is limited further. The total taxable value for all employees can not exceed $22,500 a year.
A great way to support other local businesses is to buy vouchers as gifts. The purchase of the vouchers will not be subject to GST (as vouchers aren’t a good yet, just a credit to buy a good in future). However, just like if you bought the tangible gifts in stead of a voucher, the total gross value of the vouchers will be liable for FBT. The same deminimus exemption rules above may apply.
Gifts including food and drink for clients, customers or suppliers are generally things that will fall under the entertainment rules. This means that they are likely to be only 50% deductible.
However, there is a possibility that they could be 100% deductible. There is a school of thought that if the gift basket is sent to the client direct from the company putting it together for you, then there is simply no opportunity for you to gain any personal benefit or enjoyment from it. That opportunity for personal benefit or enjoyment is the thing that triggers the entertainment rules. So if that is the case, then outsourced gift baskets are not an entertainment expense and are fully deductible.
Gifts not involving food and drink would be fully deductible.
The Work Christmas Party
The staff Christmas party is an entertainment expense and subject to the entertainment deduction rules. This means that only 50% of the cost is deductible as a business expense. The balance is a non-deductible expense.
Things like the venue, food and drink, band, etc. are all part of the entertainment package and subject to the deduction limitation.
‘Treat Yourself On Us’ Expenses
With a lot more staff working remotely now, a lot of businesses are doing things a bit differently. Instead of one big Christmas party, employees are being invited to simply take themselves out for dinner and then caim it back as an expense claim to the company. This type of expense is known as ‘expenditure on account of employee’. In this instance, the business is able to claim 100% of the expense. However, there’s a catch for the employee and payroll.
This ‘treat yourself’ option doesn’t escape the IRD as a sneaky way to avoid the entertainment rules. Instead, this is captured by PAYE. Once the employee has submitted the expense claim, payroll will need to add the total cost of their dinner as a taxable benefit to their next pay. The dinner is a benefit in money or money’s worth from the employer and so is therefore declarable as taxable income to the employee and subject to PAYE being deducted from the gross value of it. Other deductions like child support, kiwisaver, and student loan deductions are also calculated on the amount.
Key Christmas Taxes to be Aware of
Entertainment Tax Rules
The entertainment tax rules cover benefits that have a mix of personal and business benefit. These generally include anything recreational outside of the business premises, typically involve food and drink, and tend to be outside of the normal duties of employment.
Fringe Benefit Tax (FBT)
Fringe benefit tax covers non-cash benefits provided to employees that they can enjoy at their leisure and that are unrelated to their employment. The purpose of FBT is to ensure that employees can’t be paid in perks and avoid tax in doing so. Whether you’re paid in cash as a wage or paid in grocery, rent and power credits, you’re still liable for tax thanks to FBT.
Pay As You Earn (PAYE)
PAYE covers anything that is a cash-paid form of income from employment. This includes regular earnings like salary and wages as well as less frequent things like bonus payments, reimbursements, and allowances.
The Road Trip Tax
One thing that a lot of businesses overlook is the use of their company vehicles over the summer season. As soon as a vehicle is available for use privately by an employee, the vehicle is liable for FBT. So if your team have access to their vehicles over the summer season and use them for trips to the beach or the road trip to grnadma’s for Christmas, you may be liable for FBT on that vehicle. Best to make sure now, before everyone clocks off and drives off into holiday mode.
We wish you a safe and happy holiday season! If you need support throughout the holiday season, the MBP Business Support Team are still around to help. Our team are online every business day throughout the holiday season (Wednesday to Friday) from 10am to 2pm. To reach out, email [email protected].