Understanding Entertainment Expenses in NZ

Introduction to Entertainment Expenses

As a business owner in New Zealand, understanding entertainment expenses is crucial for both your financial planning and tax compliance. These expenses not only boost staff morale and strengthen client relationships but can also provide significant tax benefits when handled correctly.

However, many business owners find themselves confused about what qualifies as an entertainment expense and what portion they can claim. This comprehensive guide will clarify the rules around entertainment expenses in New Zealand, helping you maximize deductions while staying compliant with IRD regulations.

What Qualifies as an Entertainment Expense?

Entertainment expenses encompass a wide range of costs related to providing hospitality or leisure activities. These typically include:

• Food and beverages
• Drinks
• Light meals
• Sandwiches
• Wine
• Bottle (e.g., a bottle of wine as a gift)
• Celebration meal
• Social events and parties
• Event
• Function
• Reception
• Conference
• Board meeting
• Corporate boxes at sporting events
• Travel and accommodation for recreational purposes
• Client dinners and lunches
• Staff functions and celebrations
• Pub gatherings

Entertainment expenses can also include light meals and drinks provided on business premises, and events open to the public or involving suppliers, existing or potential business contacts, or services provided to staff may have different deductibility rules.

It’s important to understand that different categories of entertainment expenses are treated differently for tax purposes. Some are fully deductible, others only partially, and some may trigger Fringe Benefit Tax (FBT) implications.

The 50% vs. 100% Deduction Rule

One of the most confusing aspects of entertainment expenses is determining what percentage you can claim. As a general rule, only 50% of most business entertainment expenses are deductible, unless specific requirements are met that allow for a full (100%) deduction. These requirements are set by the IRD and help distinguish between personal and business expenses.

4.1 50% deductible expenses

Most entertainment expenses are only 50% deductible. This includes meals and drinks with clients at a restaurant, drinks at a pub, wine or a bottle given as a gift to a client, and costs for a reception or function held off your business premises.

4.2 100% deductible expenses

Some entertainment expenses are fully deductible (100%) if they meet certain criteria. Examples include light meals or sandwiches provided at a board meeting on your business premises, food and drink provided at a conference or training course, and expenses for events open to the public that promote your business.

50% Deductible Entertainment Expenses

The following expenses are generally only 50% deductible:

• Corporate box rentals
• Boat charters for entertaining clients or employees
• Food and drink gifts to clients
• Wine or bottles given as gifts
• Drinks at a pub with clients or staff
• Office parties and social functions
• Receptions and functions held off business premises
• Restaurant meals with clients, suppliers, or employees
• Company trips and associated accommodation

The 50% limitation typically applies when there’s a personal element to the expense. For example, a Christmas party is enjoyable for both business purposes and personal enjoyment, hence the 50% limitation.

100% Deductible Entertainment Expenses

These expenses can be claimed in full:

• Light meals or sandwiches provided at a board meeting on business premises
• Food and drink at a conference
• Events open to the public that promote your business
• Food and beverages provided at conferences for attendees
• Meals purchased by employees while traveling for business
• Morning and afternoon tea supplies for your team
• Promotional items with your business branding (excluding those given to employees)

The Special Case of Gifts

Gift-giving requires special attention when it comes to tax deductions:

• Employee gifts: You can claim 100% of the cost as long as no single employee receives gifts valued at more than $300 per quarter. However, if the gift involves food or beverages, only 50% is deductible.
• Client gifts: Similar rules apply, but without the $300 quarterly limit. Non-food/beverage gifts are 100% deductible, while food and beverage gifts are 50% deductible.
• Gift vouchers: If you provide vouchers, remember that GST cannot be claimed on the purchase price. The 50% rule applies if the vouchers relate to food or beverages.

For instance, a bottle of wine given to a client or supplier is only 50% deductible.

Learn more: Christmas Tax Rules for NZ Businesses: Staff Parties, Gifts and Client Entertainment Explained

GST Considerations for Entertainment Expenses

Understanding GST implications is essential for proper tax planning:

• You cannot claim GST on non-deductible entertainment expenses
• For 50% deductible expenses, you can claim 50% of the GST amount
• For 100% deductible expenses, you can claim the full GST amount

For example, if you spend $150 on books as gifts for employees during a quarter, you can claim the full GST amount of $22.50 because:

1. The gifts don’t involve food or beverages
2. The value doesn’t exceed the $300 per quarter threshold

Fringe Benefit Tax (FBT) Implications

Although entertainment expenses and FBT don’t often intersect, there are situations where entertainment expenses may trigger FBT obligations. In particular, if entertainment expenses are considered services or benefits provided to employees, the employer may be liable for FBT:

• Rewards for good performance (such as restaurant vouchers or weekend getaways)
• Entertainment benefits that are provided regularly and are considered part of an employee’s remuneration

Even if an expense is 100% deductible, it might still be subject to FBT if it’s considered a benefit or service provided to employees because of their employment.

Learn more about FBT in our article: Fringe Benefit Tax Explained: What You Need to Know

Essential Record-Keeping for Entertainment Expenses

Maintaining thorough records is not just good business practice—it’s required by the IRD. For entertainment expenses, you should keep:

• Date the expense was incurred
• Names of individuals entertained
• The businesses they represent
• Their positions within those businesses
• Reasons for the entertainment

Be sure to include detail in your records, such as specifying the nature of the expense (e.g., ‘coffee with client’), to make your documentation clear and specific.

Note: These records help you accurately calculate deductible amounts and provide necessary documentation should the IRD request verification of your claims.

Common Entertainment Expense Mistakes to Avoid

When dealing with entertainment expenses, business owners often make these mistakes:

1. Claiming 100% of all entertainment expenses
2. Not keeping sufficient documentation
3. Failing to distinguish between business and private components of an expense, which can lead to incorrect claims and non-compliance.
4. Overlooking potential FBT implications
5. Incorrectly applying GST rules to entertainment expenses

Each entertainment expense matter should be considered individually to ensure compliance with tax regulations.

How Business Like NZ Ltd Can Help

At Business Like NZ Ltd, we understand the complexities of business taxation in New Zealand. Our team of accounting professionals specializes in helping businesses navigate tax regulations to maximize legitimate deductions while ensuring compliance.

We can assist with:

• Reviewing your entertainment expenses to identify all claimable business expenses and potential deductions
• Setting up effective systems for tracking and categorizing entertainment expenses
• Providing guidance on FBT and GST implications
• Representing you in case of IRD inquiries or audits
• Developing tax-efficient strategies for client and employee entertainment

Conclusion

In summary, understanding the rules around entertainment expenses is essential for maximizing deductions and supporting your business income. Entertainment expenses are a valuable part of building relationships with clients and maintaining employee morale. With proper understanding of the tax rules, you can ensure these expenses benefit both your business relationships and your bottom line.

Remember, the key to maximizing entertainment expense deductions is maintaining detailed records and understanding which expenses qualify for 50% or 100% deductibility. Only meal expenses that are directly related to earning business income are deductible, and it’s important to distinguish between personal and business-related meal expenses. When in doubt, consult with a professional accountant who can provide guidance specific to your situation.

Ready to optimize your approach to entertainment expenses? Contact Business Like NZ Ltd today for expert assistance tailored to your business needs.

FAQs About Entertainment Expenses

Can I claim coffee meetings with clients as a business expense? Yes, but typically only 50% is deductible as this falls under the category of off-site food and beverages. The requirements for deductibility include specifying the type of meal or drink provided, and ensuring the expense is directly related to earning income.

Are staff Christmas parties fully deductible entertainment expenses? No, staff Christmas parties are generally 50% deductible as they have both business and personal enjoyment elements.

What about team-building activities? Team-building activities may be 100% deductible if they have a clear business purpose and focus on professional development, but social elements may limit deductibility to 50%. However, meal expenses incurred while travelling for business or during a celebration meal may be deductible if they meet IRD requirements.

Do I need to keep receipts for all entertainment expenses? Yes, IRD requires detailed records including receipts and information about who was entertained and why.

Can I claim entertainment expenses if I’m a sole trader? Yes, the same rules apply to sole traders as to other business structures, but be especially careful to distinguish between business and personal expenses.

What are some examples of deductible entertainment expenses? Examples include a celebration meal with staff after achieving a business milestone, a drink provided at a client meeting, or meals while travelling for business. These expenses may be deductible if they meet IRD requirements and are directly related to earning income.