Here’s to a merry tax deductible festive season

They’re part of doing business — so what do you say, Jacinda?

The silly season is upon us. It’s that time of the year when businesses thank their clients, customers and/or staff with a party. In my view, this expenditure is a completely normal business expense. It’s all part of being a good supplier and employer, and also generates goodwill. It shows them they’re appreciated.

Unfortunately the Government doesn’t share this spirit of goodwill. And it has legislated that this ordinary business expenditure is not fully tax deductible. This begs the question; why is this legitimate entertainment provided by taxpayers not fully deductible? Why is the tax deduction generally limited to 50 per cent?

Promoting your business by entertaining customers to increase a business’s revenue and profitability just makes good business sense. It’s not private expenditure. And, private expenditure would not be tax deductible anyway.

There’s also a significant compliance cost to the taxpayer who has to analyse the type of entertainment expenditure it has incurred. They must decide what is fully tax deductible, and what is not. Often there is uncertainty whether expenditure is fully tax deductible.

In a number of cases, businesses throw their hands in the air and say,

Businesses should be able to legitimately claim expenditure that is tax deductible to them without effort. After all businesses are unpaid tax collectors for the Government

“I have better things to do than put resources into analysing expenditure. So I will treat all expenditure as not being fully deductible.”

This is not satisfactory, in my view, as businesses should be able to legitimately claim expenditure that is tax deductible to them without effort. After all, businesses are unpaid tax collectors for the Government for taxes such as PAYE and GST.

A simple solution could be allowing entertainment expenditure under a reasonable threshold to be tax deductible. This would likely reduce compliance costs to most businesses not close to this threshold.

This principle applies already with legal fees, where legislation provides that legal fees of up to $10,000 a year or under are tax deductible in full, and do not need to be analysed as to whether they are deductible and not deductible expenditure.

For entertainment, a similar threshold could apply of $10,000, or say 1/10 of 1 per cent (0.001 per cent) of turnover, whichever is greater.

So, a business with a turnover of $20 million could claim up to $20,000 of entertainment expenditure for tax purposes, without detailed analysis.

Smaller businesses will not have major entertainment expenditure and a threshold of $10,000 in most cases would mean they can eliminate the compliance cost of analysing entertainment expenditure altogether, and focus on getting on with growing their business.

So Jacinda, what do you say? How about an early Christmas present for business?