Entertaining Expenses?

Some business entertainment expenses can be claimed in full while others are only 50% deductible. GST and FBT implications also kick in. Business owners certainly have a lot to consider when it comes to entertainment costs, says chartered accountant Phil Gore.

The tax treatment of the main types of business entertainment expenses are summarized below:

Entertainment expenses 50% deductible include:

• Corporate boxes, marquees or tents and similar exclusive areas (whether permanent or temporary) at sporting, cultural, or other recreational activities. This includes tickets or other rights of entry.
• Accommodation in a holiday home, time-share apartment, or similar.
• Yachts and other pleasure-craft.
• Food and drink provided or consumed incidentally at any of the above locations, away from the business premises (e.g., a business lunch at a restaurant), at a social function on or off the business premises (e.g., a wrap party, cast and crew screening, or Friday night ‘shout’ at the pub), or in an area of the business premises restricted to certain employees (e.g., a boardroom or executive dining room).
• Incidental expenses incurred in relation to the above activities. In the case of a wrap party, these expenses could include venue hire, employing waiting staff, hiring crockery, glassware, or utensils, and music expenses.
• Gifts of food and drink provided to clients, suppliers, financiers, and other ‘business contacts’ will generally be 50% deductible if those gifts are provided or consumed off your business premises.

Entertainment expenses 100% deductible include:

• Food and drink consumed while travelling on business provided there are no clients, suppliers, financiers, or other ‘business contacts’ present.
• Food and drink consumed at a conference or seminar, which continues for four hours or more (excluding meal breaks) unless the event is principally for entertainment purposes.
• A reasonable amount of food and drink provided as morning or afternoon tea on the business premises.
• Entertainment enjoyed outside New Zealand, e.g., the cost of entertaining business contacts at an overseas restaurant.
• Entertainment provided to the public for charitable purposes, e.g., a fundraising dinner for a registered charity.
• Entertainment that is subject to FBT. Gifts of food and drink provided to employees and some cast and crew members may be subject to FBT if the individuals can choose when they consume these gifts.
• DVD rentals, cinema tickets (unless for an event subject to the 50% deductibility rule), Sky TV, gym membership fees, and similar expenses incurred primarily for business purposes.

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Private expenditure

Entertainment expenses that are incurred primarily for private purposes will generally be either non-deductible or subject to FBT.

**GST **

If you are registered for GST, you should calculate the non-deductible portion of your entertainment expenses based on the GST-exclusive cost of those expenses. You can claim the full amount of the entertainment expenses you incur during the year in your GST returns. However, you must make a GST adjustment after the end of each year in relation to the non-deductible portion of most entertainment expenses. You should calculate this GST adjustment by multiplying your total non-deductible entertainment expenses by 3/23. You should include the adjustment in box 9 of your GST return for the period covering the date on which you file your income tax return and the date your income tax return is required to be filed, whichever is the earlier. Please note this GST adjustment is not deductible for income tax purposes.

Keeping records

You need to keep records, such as invoices or receipts, to support your entertainment expenses. It's recommended you also record brief details of the persons entertained and the reason for the entertainment on each receipt/tax invoice.

While the entertainment tax rules are relatively straightforward to apply in most situations, uncertainty can arise. It is recommended you contact us if you have any queries.

Phil Gore_ is a chartered accountant with Pieter Holl and Associates Ltd, a chartered accountancy firm providing tax advice and business advisory and compliance services to the film industry. Phil can be contacted at phil.gore@phaal.co.nz or (09) 925 7635._