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Entertainment, staff allowances – what can you do and what creates problems?

October 5, 2022

Entertainment and other employee related expenses could be either fully deductible, only 50 percent deductible as entertainment, subject to FBT or PAYE depending on the circumstances. It helps if you know which is which.

XYZ Ltd is a limited liability company involved in the building industry. It is seldom practical to return to the company base for morning and afternoon tea so the directors buy coffee and snacks (light refreshments) for their staff when they are out on the job. The cost is 100 percent tax deductible. 

They have also decided to reimburse their workers for the cost of their lunches. The cost would only be 100% tax-deductible if it were a meal while travelling on business. Otherwise, it forms part of wages and would be taxable (see below). The employer also needs to be careful, if paying a regular allowance to cover morning teas and/or lunches, that the payments are not just for tax avoidance. They have to be for reimbursement.

Due to the high price of petrol, a director offers to reimburse one of his staff $20 per week as a contribution to the cost of getting to work. Since this is a cost which she would have incurred out of her tax-paid income, it should be treated as part of her wages The value of the petrol needs to be adjusted upwards for tax before being added to her taxable income. It should be treated as an extra emolument. 

Another director has decided as there are two office staff it would be fair to give the other person petrol vouchers of an equivalent amount. So long as the petrol vouchers cannot be redeemed for cash, this is a fringe benefit and is subject to fringe benefit tax payable by the company. However, there is a $300 threshold per quarter for each employee for unclassified benefits like this. Provided the value of the petrol vouchers is equal to or less than $300, no fringe benefit tax has to be paid, assuming the company does not exceed the total exemption for a business, which is $22,500. 

One of the staff is leaving so the directors decide to buy him an expensive box of chocolates from a supermarket. This is an entertainment cost and 50 percent tax deductible. However, just before they do this they discover if they were to provide a gift voucher, the cost would be 100 percent tax deductible, so they give a gift voucher instead. The $300 limit for fringe benefit tax purposes applies. 

The owner of a construction company (an ordinary company for tax purposes) visits a building site to meet the client. Both of them are away from home on business. The owner invites the client to lunch to discuss the project. Both meals are 50% tax-deductible because this is an ordinary entertainment expense. However, if the owner were to dine alone the meal would be 100% tax-deductible to the company because this is an expense incurred while travelling on business. If the client were a self-employed person, the cost of the meal when dining alone would not be tax deductible because it is deemed a personal cost.  

If you incur entertainment expenses overseas, instead of them being 50% tax-deductible they are 100% tax-deductible. Entertainment expenses are only tax deductible so long as they are completely business-related. In other words, the purpose of the meal together is to discuss business. 

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