Entertainment Expenses: The 50% Rule
Why you can only claim half the GST on client dinners, Friday night drinks, and corporate events.
Business entertainment is a tricky area. The IRD recognizes that taking a client to lunch has a business purpose, but it also has a private benefit (you have to eat anyway!).
To balance this, New Zealand tax law generally limits the deductibility of entertainment expenses to 50%.
The 50% Adjustment
If you spend $230 (incl GST) on a client lunch:
1. You claim the full GST ($30) in your return.
2. Once a year, you pay back 50% of it ($15) as a debit adjustment in Box 9 of the GST return covering the earlier of your income tax return due date or filing date.
Alternatively, many small businesses just claim 50% upfront to save the hassle.
What is 50% Deductible?
| Expense Type | Deductibility |
|---|---|
| Friday Night Drinks (Staff social) | 50% |
| Client Business Lunch (Restaurant) | 50% |
| Corporate Box (Rugby/Events) | 50% |
| Christmas Party (On or off site) | 50% |
| Gifts of Food/Drink (Wine/Chocolates) | 50% |
What is 100% Deductible?
There are exceptions where you can claim the full amount.
- ✓ Morning Tea: Light refreshments (tea, coffee, biscuits) provided on business premises.
- ✓ Traveling on Business: Food consumed while traveling for work (unless entertaining a client).
- ✓ Conferences: Food provided as part of a conference ticket (lasting >4 hours).
- ✓ Advertising: Sponsorship of an event where you get branding (not just a private box).
- ✓ Staff Cafeteria: Food provided at a cafeteria open to all staff (if not subsidized).
Create two chart of account codes:
1. Entertainment (Deductible) - for morning tea/travel.
2. Entertainment (Non-Deductible 50%) - for client meals/parties.
This makes the end-of-year adjustment automatic.
Private Use & FBT
If you provide entertainment to employees (e.g., a staff Christmas party), it might also trigger Fringe Benefit Tax (FBT) if it's considered a "benefit". However, usually, if you elect to pay the 50% non-deductible GST/Income Tax adjustment, you don't also have to pay FBT on the same expense.
Key Takeaway
Always keep receipts. Annotate them with "Client Lunch - [Client Name]" or "Staff Party". Without this proof, the IRD may deny the entire claim.