Taking clients out for coffee or hosting a team social event is great for business, but navigating the tax rules around those entertainment expenses can be a headache. Knowing exactly what is and isn't tax-deductible is crucial for your bottom line. We've put together this guide to break down exactly what you can claim, the GST and FBT implications you need to watch out for, and the records you need to keep.
What’s classified as an entertainment expense?
Anything you’ve paid for that is for your employees or customers entertainment is considered an entertainment expense. That can mean food and drinks, social events, corporate boxes, trips, Christmas functions and more.
Within this, there are specific rules applied to different categories of entertainment expenses. For example, some expenses are fully deductible with no FBT implications, but some are not. There are situations where entertainment expenses are 100% deductible but still liable for FBT.
What can you claim?
The general rule for business expenses is that you can claim anything that helps you to generate business income. If it’s purely personal, you can’t claim it. But there are some curly bits in the entertainment area as there is often a blurred line between personal and business.
100% claimable
- Food and drink you provide at a conference for others (specific rules apply - refer to the IRD guide at the end of this section)
- Meals an employee buys while travelling on business (unless it’s a meal with an existing or potential business contract, then it’s only 50% claimable)
- Morning and afternoon tea for your team
- Entertainment you supply to the general public for charitable purposes e.g. donating food to a Christmas party at a children’s hospital.
- Entertainment enjoyed or consumed outside NZ (the waters around NZ are considered part of New Zealand).
50% claimable
If there’s a personal element related to the entertainment expense, then the cost is likely to be 50% deductible. Examples include:
- Staff christmas parties
- Entertainment at sports events e.g. a corporate box
- Cost of renting a boat for entertaining customers or employees
- Business use of a holiday home
- Food and drink at your office for a social event e.g. a party or function
- Off-site food and drink such as taking a client, supplier, or employees to lunch
- Gifts of food and drink that benefit your business and are enjoyed privately by the person who receives them e.g. giving a client a bottle of wine or a supermarket gift card
- ‘Supporting expenses’ for entertainment such as the hire of wine glasses and wait staff for a work party.
- Annual company trip and accommodation
For a more exhaustive list of examples, visit the IRD’s Entertainment Expenses page.
GST on entertainment expenses
You can only claim GST on deductible entertainment expenses. This means where the expense is 100% deductible you can claim the full portion of GST. Meanwhile, for 50% deductible expenses you can only claim GST on the deductible porition. In this scenario, you’ll usually just claim the full amount during the year and your accountant will make an annual adjustment when they prepare year-end accounts to payback the GST on the non-deductible position.
FBT on entertainment expenses
Fringe Benefit Tax on entertainment expenses is not very common, but it could happen. An entertainment expense could be 100% deductible and liable for FBT if they are received by employees because of the work they do. For example, rewards for good performance, such as a restaurant gift voucher or a weekend away are considered an entertainment expense and would attract Fringe Benefit Tax.
Record keeping
In order to make an entertainment expense claim you need to keep invoices or receipts. As required by the IRD, you also need to keep records of the following information:
- The date entertainment expenses were incurred
- The names of the people entertained
- The business they represent
- The positions they hold
- The reasons for the entertainment
Keeping these records will help your accountant accurately calculate the entertainment expenses you’re eligible to claim against your taxes. It also helps with identifying which expenses are 100% deductible and which are only 50% deductible.
To wrap up, making the most of entertainment expense claims comes down to good habits and understanding the IRD’s rules. Make it a standard process to snap photos of your receipts and log the ‘who, what and why’ immediately after each entertainment-related event and when in doubt, reach out to your accountant if you’re unsure on the deductibility of a particular expense.
