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Tax Talk: Gifts of wine and food – Inland Revenue policy change

Tax Talk: Gifts of wine and food – Inland Revenue policy change

With Christmas just around the corner and client, employee or supplier gifts on the to-do list of most businesses, it is important to consider the recent change in IRD policy on the tax deductibility of such gifts.

The deductibility of expenditure on certain items of entertainment is limited to 50%, known as the non-deductible entertainment rule.  Generally, the rule applies to expenditure on food and drink that is consumed off business premises.  The context of the restriction in the Income Tax Act 2007 appears to imply a connection with a social event, such as a dinner or party (hence the use of the word entertainment).

In the past, Inland Revenue have allowed a full deduction for amounts spent on providing Christmas gifts to clients and suppliers, or prospective clients and suppliers.  These typically might include bottles of wine, boxes of chocolate, or food hampers, as a thank you for the year’s business or service. Inland Revenue considered such cost fully deductible for income tax provided that these weren’t given out or consumed at a party, reception, celebration meal or other similar social function.

However, Inland Revenue have recently changed their interpretation and, in the August 2016 Agent’s Answers (and the updated Entertainment expenses booklet-IR268), the Commissioner states that gifts of food or drink will be subject to the non-deductible entertainment rule.  Accordingly, only 50% of the expenditure spent on Christmas gifts of food or drink given to clients or suppliers would be deductible.  There is also the flow-on requirement to make the GST adjustment for non-deductible entertainment in most cases.  There is no reason provided for the change in policy.

Where gifts of food or drink provided also contain non-food/beverage items, the costs must be apportioned. E.g. a Christmas hamper with wine and a book.

Given the probable non-material amounts of expenditure on Christmas food or drink gifts where a deduction has been claimed in the past, the Commissioner has stated (in operational statement OP 16/03) that Inland Revenue will not be applying resources to investigate such claims prior to September 2016.  However, over-claimed deductions going forward would likely be disallowed and Inland Revenue’s new policy applied.

Comments

The previous interpretation appeared to us to be the more correct as it coincided with the idea that there needed to be a social event for the restriction to apply (hence: entertainment), and also aligned with the fact that, for employees, the FBT rules apply to gifts where the employee chooses when to consume them (such as gifts of food and wine).

However, given Inland Revenue’s stated updated policy, unless you have an appetite for a dispute with Inland Revenue, the safest approach is to apply the 50% deductibility rules to client gifts of wine, chocolates and other food and drink.

If you have any queries in relation to this or other items of entertainment expenditure, please contact your usual Staples Rodway advisor.

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