Tax implications of giving rewards at Christmas
The holiday season is an opportunity to reward your employees for their hard work and clients for their loyalty; however, it is essential to know of the tax implications involved.
Whether you are considering throwing a work Christmas party, giving gifts or holiday bonuses, knowing the tax implications for each will guide you towards an option that can benefit all parties.
Christmas parties
Employers plan a Christmas work party to boost morale and show appreciation for their staff’s work. You can tax deduct 50% of the expenses, including food and drink, if you hold your party at work, an entertainment venue, a boat or corporate box at a recreational event.
Accommodation in a holiday home, timeshare apartment or similar would also qualify for a 50% tax deduction so long as the accommodation is not incidental to business activities or employment duties.
Fringe Benefits Tax (FBT) will not typically apply where it is a business-related entertainment expense which is only 50% deductible.
Gift Giving
When rewarding your staff or clients with gifts refer to the IRD guidelines to minimise tax implications. To avoid nasty FBT spend under $300 per employee per quarter on gifts and ensure that the total value of all benefits does not exceed $22,500 for the year.
FBT will be payable if the employer provides the 50% deductible entertainment and the employee can choose where to enjoy the benefit, or the benefit is enjoyed outside of New Zealand.
If you were to give a voucher to an employee you would have to pay FBT as the employee can spend the voucher how they like. If you are considering giving gifts to clients food and drink items in a hamper are 50% tax deductible while non-food and drink gifts like movie tickets, books or gift vouchers are fully tax deductible.
Holiday bonuses
Holiday bonuses are given to recognise an employee’s performance. However, the tax implications involved may reduce the effectiveness of your reward.
A holiday bonus is a one-off annual payment
made in addition to an employee’s salary.
Earlier this year the IRD allowed employers
to choose how they can calculate tax that
is paid on a lump sum to an employee
before they take their leave. Employers can
tax this payment as extra pay or as if they
are paying the lump sum to the employee
in their regular pay cycle. Refer to the IRD to
calculate the PAYE sums.
Your employees
may also ask you to have lump sums like
holiday bonuses taxed at a higher rate. They may elect this option if they have
another job or untaxed income like rent.