The Income Tax Act regards entertainment costs as having a private element in addition to being a business cost. Under the Income Tax Act, the following types of entertainment costs are only 50% deductible for income tax and GST purposes:
- Food and drink at work for staff, and clients at a social event
- Food and drink for staff or clients away from your business premises
- Gifts of food and drink for staff or clients
- Corporate boxes or sporting events for clients or staff
- Taking a client out for dinner
- Staff party on or off the business premises
Please note that if you are a charity or not required to file income tax returns the entertainment costs will be 100% claimable for GST purposes.
The following types of entertainment are not caught by the rules in the Income Tax Act and are still 100% claimable for income tax and GST purposes:
- Food and drink while travelling on business and not with clients
- Food and drink provided at a conference or course that lasts for four consecutive hours or more
- Providing morning and afternoon tea for your staff
- Donating food to a children’s hospital for a party
- Entertainment enjoyed or consumed outside New Zealand including the waters around New Zealand for business purposes
Please note that where you provide a gift of food, drink and non-food/drink items only the food and drink will be regarded as an entertainment expense subject to the 50% deductible rule. For example if you provide a good client with a basket containing a bottle of wine, cheese, cheese board and cheese knife, only the wine and cheese will be subject to the entertainment tax rules, while the cheese board and cheese knife will be 100% deductible.
The Inland Revenue has a detailed guide (Entertainment Expenses IR268) to help businesses understand the rules for claiming business entertainment expenses. This guide can be downloaded from the Inland Revenue Departments website www.ird.govt.nz.
If you are ever unsure on the deductibility of entertainment expenses or how to treat them in your accounting system, please don’t hesitate to contact us.