EVEN CHRISTMAS IS TAXED
With Christmas fast approaching and Christmas functions starting to commence, it is timely to consider the tax implications associated with Christmas gifts and parties provided by employers to their staff.
There are two specific tax regimes that can apply, being the Fringe Benefit Tax (FBT) regime and the Entertainment Tax Regime (ETR).
With respect to Christmas gifts, they are likely to be treated as unclassified benefits for FBT purposes. Unclassified benefits will not be subject to FBT provided certain de minimis thresholds are not breached. The thresholds are partly dependent on whether the employer is a quarterly or yearly FBT payer. If the employer is not currently registered for FBT, then the quarterly thresholds would apply.
For a quarterly filer, the value of the benefits provided during that quarter must not exceed $300 per employee, and the total non-classified benefits provided to all employees in that quarter and the previous three quarters must not exceed $22,500. For an annual filer, the annual threshold per employee is $1,200. The threshold for all employees remains unchanged.
It is important to remember that employers must be under both the “per employee” and “total” thresholds in order for FBT not to apply. If either of the thresholds are exceeded, FBT will apply to all unclassified benefits provided during the period, not just the excess. If the gift is subject to FBT, the expenditure would be fully deductible to the employer for income tax purposes.
In the unlikely event that the Christmas gifts are not captured by the FBT regime, the ETR may apply to restrict the tax deductibility of the gift. The ETR limits the deductibility of some types of expenditure to 50% of the cost.
Christmas parties are generally subject to the ETR and are only 50% deductible. This treatment applies regardless of whether the party is provided on or off premises. This treatment may differ if employees can choose when to have the party or the party is held outside New Zealand. GST registered employers should also remember to make a GST adjustment for Christmas gifts and party expenses that are only 50% deductible.
How it affects you
The tax treatment of Christmas gifts and parties is not as straight-forward as it may seem, with overlapping tax regimes potentially applying. If you are in any doubt as to what deductions you are allowed or your obligations, we suggest you contact your tax advisor.
TAXATION OF NON-RESIDENT CONTRACTORS
Payments made to non-resident contractors are subject to Non-Resident Contractors Tax (NRCT) at a rate of 15%.
There are, however, a variety of exemptions from NRCT that remove the obligation to deduct. The first exemption is if the non-resident contractor earns $15,000 or less in a 12 month period. This exemption applies to all contract payments for all contract activities undertaken by a non-resident in a 12 month period.
The second exemption is if the contractor is present in New Zealand for 92 days or less in any 12 month period, and are eligible for full relief under a Double Tax Agreement (DTA). The final exemption is where the non-resident contractor obtains a certificate of exemption from the Inland Revenue Department (IRD) that excuses the deduction of NRCT. This will generally occur where the contractor can prove they have relief from New Zealand tax under a DTA.
These exemptions are fraught with danger and, except where a certificate of exemption is held, it is often recommended that the payer deduct NRCT and leave it to the contractor to obtain a refund of that tax if they are entitled to one by meeting the relevant criteria.
Where the non-resident contracting activities are undertaken by a company, and that company sends employees to New Zealand, the contracting company may be required to withhold PAYE from the payments made to its employees. Generally, a 92 day exemption applies whereby, provided that the employee is present in New Zealand for 92 days or less in a tax year, and the services are performed on behalf of a non-resident, and the employment income will be taxed in a similar way in the employees home country, no obligation to withhold PAYE would arise. This rule is extended to 183 days if the non-resident employee is resident in a country with which New Zealand has a DTA.
If NRCT is not required to be withheld, the non-resident contractor is not required to file a New Zealand income tax return. Where NRCT is withheld, the NRCT payment is treated as an interim tax paid on behalf of the non-resident contractor and a tax return must be filed to ascertain the final New Zealand tax liability for the non-resident contractor.
How it affects you
If you are engaging non-resident contractors, you need to be certain of your tax obligations prior to making payments to them. If you are unsure of your obligations, we suggest that you obtain tax advice to ensure you do not have any nasty surprises in the future.
POINTS OF INTEREST…
In a recent “Questions we’ve been asked”, the IRD have confirmed that interest will continue to be deductible when a Loss Attributing Qualifying Company (LAQC) becomes a Look Through Company (LTC) (subject to any limitations put on deductions under the LTC rules should an owner of an LTC have insufficient owners basis). Interest deductions will also be allowed when a shareholder sells property to an LTC which the LTC uses to derive income.
From 1 April 2012, a borrower under the Student Loans Regime must be treated as being in New Zealand for 183 days in order to become a New Zealand based borrower and to qualify for an interest free loan and have New Zealand based repayment obligations.
TO THE POINT…
“Everything is changing. People are taking their comedians seriously and the politicians as a joke.”
- Will Rogers