The Xmas Grinch - tax rules for Christmas gifts given by New Zealand businesses
The season of giving shouldn't come with a tax hangover, but the "Christmas Grinch" in the tax code often says otherwise. Navigating the maze of FBT vs. PAYE for employee gifts—and understanding why that gift basket for a client might only be 50% deductible—is crucial for avoiding unwanted compliance costs. We break down the current thresholds, the IRD's stance on vouchers, and why a common-sense review of these rules might be the best gift of all for business owners.
Employee gifts
‘Tis the season for a friendly reminder that the tax rules for gifts to employees do not share the Christmas spirit. The cost of the gifts will generally be deductible to the employer, but in most cases, there will be a requirement to pay FBT or include the gift in the payroll and pay PAYE on it.
PAYE will apply to gifts of money, whereas FBT applies to gifts of anything other than money.
For non-cash gifts to employees, there is a low value threshold for FBT of $300 in any quarter and/or $1,200 per employee in a year. However, this is also capped at $22,500 per employer (which includes associated employers in some cases), so most larger employers do not qualify for this exemption.
Under current published IRD policy whether vouchers given to employees are subject to FBT or PAYE depends on whether the voucher is an “open-loop” voucher like a Prezzy Card or a store specific voucher. An open-loop card like a Prezzy Card is seen as being substitutable for money because it can be spent anywhere, so therefore these are subject to PAYE, and this also means the low value threshold above is not relevant. Other store specific vouchers are subject to FBT but may be exempt if they are under the low value threshold.
Customer gifts
Generally giving customers gifts is 100% deductible as an ordinary cost of doing business. However, there is one catch…
Many years ago, the IRD published a position that giving someone a gift of food or drink (that was not enjoyed on premises) is subject to the entertainment expenditure rules and is only 50% deductible. This conclusion has never sat well with the rationale of the entertainment expenditure rules, but it is firmly IRD policy at present.
Some Christmas cheer?
The FBT rules are currently under review with an aim to simplify them and bring them back to the original objective of taxing salary sacrifices. Hopefully, by next Christmas commonsense will have prevailed and small gifts of appreciation should not have adverse tax consequences.
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