'Tis the season of giving, and for kiwi business owners, this often translates to gifts for employees and clients. While the act itself is common practice, it's essential to be aware of the tax implications to avoid any unexpected surprises. In this blog, we'll break down some of the basics to help you better understand the tax rules around gift giving.
Fringe Benefit Tax
Generally, gifts provided to employees are tax deductible. Depending on the gift however, Inland Revenue (IRD) may consider this a form of income to the employee and require fringe benefit tax (FBT) to be paid by the employer.
The FBT rate is either 49.25% or 63.93% depending on the following:
- whether the employee receiving the benefit is also a shareholder;
- whether FBT returns are filed quarterly or annually;
- and for those who file annually, whether the flat rate option of 63.93% is applied or the alternate rate which is calculated based on the type of benefits provided.
As always if you’re unsure of which rate to use it’s best to seek help from an accounting professional.
The good news is there is a tax-free threshold of $300 per employee per quarter. Gifts below this threshold are exempt. The total exemption employers can claim is $22,500 each year. There are also several items that are exempt from FBT requirements, including uniforms and certain transport costs for work purposes so it’s important to keep clear records of what the gift is, the date purchased and the value.
Goods & Services Tax (GST)
GST can be claimed on most gifts purchased, including fringe benefits, when GST has been paid on the item purchased. Gift vouchers however don’t include GST so ensure that you are not claiming GST on the purchase of vouchers. The reason for this treatment is that the Goods and Services Tax Act 1985 treats this particular fringe benefit as having a nil value to the employer/business owner to avoid GST being charged twice (to the employer and again to the employee).
Entertainment Expenses
When it comes to tax deductions for gifts, a general guideline is that if the gifts include food or drink, including vouchers for food or drink, only 50% of the expense can be claimed because of the tax rules regarding entertainment expenses. If you're distributing gift baskets or hampers containing a mix of items, where some are food or drink while others aren't, the food or drink components are 50% deductible, while the other gift items are fully deductible at 100%.
Practical Tips
Record Keeping
Whether giving gifts to employees or clients, maintaining accurate records is the gift that keeps on giving when it comes to tax compliance! Keep track of the date, recipient, and the cost of all gifts as well as the purpose. Accurate records not only facilitate compliance but can be crucial in the event of an audit.
Planning
It pays to plan what types of gifts you are going to give to either employees or clients and when. Consciously keeping the value of gifts given to each employee below the $300 quarterly threshold for example will allow you to remain out of the FBT regime. Also, if you decided to focus on gifts that don’t include food, drink or other items considered “entertainment” by IRD you will receive a 100% tax deduction on those items rather than 50%.
The act of giving can have tax implications that shouldn't be overlooked. By staying informed and maintaining clear records, business owners can navigate the complexities of gift-giving and meet tax obligations. When in doubt, seek advice from a tax professional as it’s better to get it right first time than make adjustments down the track.
If you’re uncertain about your obligations, feel free to get in touch for personalised support.
