Just before Christmas, IRD shared its view on how these incentives should be taxed. To keep this article straightforward, we’re assuming you’re running a regular limited liability company. The same rules apply to sole traders, partnerships, and Look-through companies, except fringe benefits do not apply to the owners – these rewards are simply taxable income.
Trading trusts are a bit different since they don’t have working owners. Instead, employees (including beneficiaries or settlors) get incomes subject to PAYE.
Gift cards
If you’re given a gift card that can be used almost anywhere (an open- loop card), it’s treated like cash because of its flexibility to be used anywhere.
Taxable Income
If you give the card to an employee, it’s like giving them a bonus.
You’ll need to deduct PAYE on the “grossed-up” amount. For example, if the card is worth $200, you’d calculate how much you’d need to pay to give $200 after PAYE deductions and include this in your PAYE return.
If the card can be used only in specific places (a closed-loop card), the rules are different. It’s considered a fringe benefit, so the $300 per person per quarter limit applies.
If you’re a shareholder-employee and keep the card, it’s treated as an unclassified fringe benefit.
Products from suppliers
If you get a spending reward like a barbecue, it’s taxable income based on how much you could sell it for. If you use it in your business, it becomes a business asset. At the moment Inland Revenue is saying you cannot claim depreciation. We are hoping this policy will change. The department is also saying if you use the rewards to reduce your debt to the supplier, you don’t get a deduction for the cost. Again, we hope this will be changed.
If you give it to an employee, it’s an unclassified fringe benefit and follows the same rules as closed-loop cards.
GST
Rewards include GST, so you’ll need to pay GST on them.
For the supplier
Businesses giving out these rewards can usually treat the cost as tax- deductible.
Points
Some suppliers offer points instead of gifts. IRD hasn’t clarified how to treat these, but it’s likely the income applies only once the points are redeemed for a gift.
