After Christmas Eve Santa, the elves and the reindeer return to the North Pole absolutely exhausted. Santa is proud of the team effort and would like to reward them by taking them to Hawaii for some sunshine. Santa would pay for all of the expenses – food, accommodation and airfares to and from Hawaii. Is the cost of such an overseas trip deductible?
Yes, the cost is fully deductible to the company. Santa will have an FBT liability for the benefit
provided to the employees. None of the expenditure is subject to the entertainment rules because the holiday will be enjoyed outside New Zealand.
After chatting to his accountant, Santa is having second thoughts about Hawaii. It really is quite expensive, and it turns out some of the elves have prior convictions that might prevent entry into the United States. What about a domestic trip instead? The team could travel to the Elf-tin Hotel and have a few days of pampering there. Are there any tax issues associated with this?
Yes. Some of expenses will be only 50% deductible as they are subject to the entertainment regime. For example, expenditure on food and beverages (including any portion of the accommodation costs which are food and beverages) would be subject to entertainment tax and only 50 % deductible. No FBT is payable if the expenditure is subject to the entertainment regime. Accommodation at the Elf-tin hotel would be 100% deductible, but would be subject to FBT.
References: CCH New Zealand, Income Tax Act 2007, ss CX 2, CX 29, DA 1, DD1, DD 7, DD 2..