Entertainment is a legitimate deductible expense, however it does have some rules ...
Some examples to illustrate ...
- Dinner for a sales rep while out of town on business is 100% deductible, but ...
- if they are dining within their local area it is a personal expense (ie not deductible).
- If there is a client at either dinner however, it's 50% deductible.
- Morning and afternoon tea for your employees is 100% deductible, but ...
- Friday night drinks for your employees is only 50% deductible.
- Taking your family out for lunch is a personal expense.
- Sponsoring a local sports team is 100% deductible, but ...
- providing a meal to the same team after the game is only 50% deductible.
- A golf club sub paid by the company is 100% deductible.
- Taking your well-deserving employees to Fiji for the end-of-year Christmas function (yes please!) is 100% deductible, but ...
- hiring a launch for a Christmas function to entertain your clients is only 50% deductible.
As you can see, the rules surrounding entertainment expenses are complex and make for some odd results. It doesn't take much to go from fully deductible, to half or even nil. To help you make sense of it all, here are some general ...
Rules of thumb:
- Directly in line with business (eg food for employees on the job) - 100% deductible
- Promotion to the public (eg sponsorships or donations given in the name of the company) - 100% deductible
- Employees' memberships (eg gym memberships) - 100% deductible (note: watch out for FBT!)
- Offshore (eg meals for clients or employees while overseas) - 100% deductible
- Employee enjoyment (eg Friday drinks, either in or outside of the office) - 50% deductible
- Client entertainment (eg dinner with the client, or an event for your clients to meet) - 50% deductible
What should I do when it's 50% deductible?
Inland Revenue recognise it can be a nuisance running calculations each GST period, so they allow you to claim all of your entertainment, even the whole amount of 50% deductible expenses, as they happen. You then make an adjustment once a year.
Your accountant will usually work out the adjustment for you when they do your year-end financials.
If you are doing it yourself, you need to make the adjustment in the same period you file your year-end income tax returns:
- Tally your whole GST-inclusive entertainment expenses for the year
- Multiply by 20 and divide by 23 to get the GST-exclusive amount
- Divide this by two, as the adjustment is for 50%
- Multiply this by 3 and divide by 23. This amount goes into box 9 of your GST return and will have the effect of increasing the GST amount you need to pay
The FBT line
If employees (including shareholder-employees) are able to choose when they enjoy the entertainment, it is subject to Fringe Benefit Tax. For instance, giving an employee a bottle of wine to open at a work function is classified as entertainment; give the same employee the same bottle of wine to take home, it becomes a gift and therefore subject to FBT.
Any other entertainment not tied to employment duties will also be subject to FBT.
Fringe Benefit Tax is a tax on the value of things, and is almost always more costly in time and money than the benefit's actual worth.
Keeping good records
You should always keep your receipts and invoices for entertainment expense claims. Over the course of a financial year it is also easy to lose track of what the circumstances were behind each invoice, so best practice is to add a note documenting details such as what the purpose was, who was present, and what their relationship is to your business.
If you have a lot of entertainment expenses you may find it more convenient to group your receipts by type, eg 'workers dinner', 'business dinner - no client', 'business dinner - with client', etc.
Most accounting software programs also allow you to add notes to your transactions, which will assist your accountant when coding.
In the business world, 'entertainment' is a bit of an oxymoron because it's not always fun and games. Talk to us before your entertainment expenses become like the headache that follows a work Christmas function! We are only a phone call or e-mail away.
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