The Ultimate Guide to Entertainment Expenses
With the festive season upon us, we thought we would create a comprehensive guide to equip you with the knowledge you need when it comes to deductions for presents and parties.
The good news is, if you provide entertainment for your team, clients or any other business contact, some of your business entertainment expenses are tax deductible.
Let’s take an in-depth look at what can be claimed.
What qualifies as a fully deductible expense?
The cost of a meal while travelling on business is fully deductible provided there are no business contacts present.
The cost of food and drink at a conference or business course, which continues for four hours or more, is fully deductible.
A tax-free meal allowance paid by an employer to an employee working overtime is fully deductible.
The cost of a light meal provided to employees in an area reserved for senior management is fully deductible when the meal is provided during the course of the employees’ normal duties.
Morning and afternoon teas provided on business premises, that are not provided in an area reserved for senior staff, are fully deductible unless provided at a party, reception, celebration meal or similar social function.
Entertainment provided by a business as part of a function open to the public, or at trade displays to advertise the business, are fully deductible.
For example: The costs of providing drinks and nibbles at a trade display open to the public.
Entertainment enjoyed outside New Zealand is fully deductible.
The cost of sponsoring entertainment is fully deductible where the sponsorship is principally for promotion or advertising to the public.
Providing entertainment in the ordinary course of your business is fully deductible.
For example: the cost incurred by a restaurant in providing meals to patrons.
The cost of providing samples for advertising or promotional purposes is fully deductible.
Entertainment provided to members of the public for charitable purposes is fully deductible.
For example: A business donates food to a Christmas party in a children’s hospital.
The cost of providing entertainment to a person to review your business for a paper, magazine, book or other medium, is fully deductible.
50% Deductible entertainment expenses
The following types of entertainment are limited to a 50% deduction:
Goods and Services Tax (GST)
Where you are registered for GST, you can claim the full GST portion on entertainment expenses that are fully deductible. If the entertainment expenses are only 50% deductible, you need to make an adjustment once a year for the 50% non-deductible portion.
The GST adjustment is 15% of the non-deductible entertainment expenses, exclusive of GST. This needs to be returned in the GST return for the period your income tax return is filed or due to be filed (whichever is the earlier).
Generally, entertainment expenses that come under the 50% deductibility rules are not subject to FBT. However, if employees (including shareholder-employees) can enjoy an entertainment benefit:
and the benefit is enjoyed outside their employment duties, this benefit will be subject to the FBT rules (and is usually fully deductible).
Entertainment expenses that are not deductible
There are some entertainment expenses that are not deductible. Where the expense is not related to generating income for your business, it will not be deductible. For instance, it would not be deductible if you take your family (who don’t work with you in your business) out for dinner to thank them for being patient while you worked long hours and pay for this using the business credit card.
Those everyday expenses – the context is important
Sometimes it can be surprisingly difficult to work out whether an expense is deductible or not. You need to look at the context. It can be particularly confusing with food and drink.
|A self-employed person out on a job all day (e.g. courier or gardener) buys lunch
This is considered to be a private expense and isn’t deductible
|The same person has to travel to another town for a job
They buy lunch which they eat on their own, in a break from the job
|The same person has to travel to another town for a job
They buy lunch which they eat with a business contact as a guest
Bottom line: don’t try to claim the lunch-time pie on the go during a normal working day.
Coffee is another example. With coffee being round $5 a pop now, it adds up really fast. Allowing for annual leave and public holidays, one a day is still more than $1,100 a year! But, depending on who is buying the coffee, for whom and where it’s drunk, it may or may not be deductible:
|A business owner buys coffee for staff working on a building site
While the worksite is not their usual business address, it counts as current business premises (being a temporary workplace).
|A business owner buys coffee and takes it to the client’s premises to drink with them (buying one for him or herself as well of course)
Food and drink provided away from your business premises is only 50% deductible.
|A self-employed person or a shareholder employee buys coffee for morning and afternoon tea and drinks it at work
This is considered to be a private expense and isn’t deductible.
Good records are important
To support your claims for business entertainment expenses, you should keep invoices/receipts, attaching a note recording the purpose of the expense, who was present and their relationship to your business.
We have created a handy fact-sheet that you can use as a reference.
Fact sheet: Entertainment expenses table
|50% deductible||100% deductible|
|1.||Friday night drinks for team members or clients in the office||✓|
|2.||Friday night drinks for team members or clients in the pub.||✓|
|3.||Hire of a launch to entertain clients.||✓|
|4.||Restaurants providing food and drinks to team members at a social function in their restaurant.||✓|
|5.||Sponsoring local sports teams and receiving tickets to their corporate box in return. 50% of the value of the tickets would be deducted from the total sponsorship.||✓|
|6.||Sponsoring a sports team with a meal for the team at their grounds after each game.||✓|
|7.||The staff Christmas party on or off the business premises.||✓|
|8.||Taking a client out to dinner whether in your hometown or while out of town on business in New Zealand.||✓|
|9.||A weekend away for the team at holiday accommodation in New Zealand. Includes any food and drink provided.||✓|
|10.||Dinner for a Sales Rep while out of town selling and no client present.||✓|
|11.||Donating food to a Christmas party in a children’s hospital.||✓|
|12.||Providing entertainment, including food and drink at your promotional stand for the local Christmas Festival open to the public.||✓|
|13.||Employee’s salary package includes a taxable allowance for entertaining clients.||✓|
|14.||Golf club subscription for a business owner paid by the Company. *||✓|
|15.||Gym membership for a team member paid by the employer. *||✓|
|16.||Dinner for a journalist while reviewing your business for their column.||✓|
|17.||Morning and afternoon tea for your team. **||✓|
|18.||Sandwiches provided at a lunchtime meeting of supervisors.||✓|
|19.||Sponsoring a local sports team.||✓|
|20.||Taking a client out to dinner while you are outside New Zealand on business.||✓|
|21.||Holding the team Christmas party in Fiji.||✓|
* Note that:
** Note that
We acknowledge that the rules are complex. If you are still unsure, specifically on big ticket items, please ask for our advice.