IRD Commissioner’s operational position on deducting expenditure on gifts of food and drink.
In August 2016, Inland Revenue published an item on deducting expenditure on gifts of food and drink. The item stated that the entertainment expenditure rules in subpart DD of the Income Tax Act 2007 limit deductions, to half the deduction that would normally be available, for spending on things like chocolates or bottles of wine provided as gifts to customers, clients or suppliers.
It has been pointed out that this seems to be different from the position outlined in December 2011 where it was stated, "You can generally claim 100% of the costs of gifts, such as food, wine or event tickets, as an expense".
Two months later in February 2012, there was an attempt to explain the rules in more detail by noting among other things that, "A food and wine gift basket is fully deductible as long as it’s not provided or consumed as outlined below."
There followed a description of "entertainment expenditure" for which limited deductions are available. This included "food and drink provided or consumed... away from the taxpayer's business premises eg a business lunch at a restaurant".
Arguably this did not make the position clear either and the Commissioner understands that some taxpayers and tax agents have treated this type of expenditure as fully deductible while others have limited their deductions to 50%.
The Commissioner considers that the August 2016 item sets out the correct position:
In terms of section DD 1(1), the gifts are of food and drink that will provide a private benefit to the recipient and a business benefit to the taxpayer. It is not a requirement of subpart DD that there be a private benefit to the taxpayer. If provided off a taxpayer's business premises, such gifts will be within section DD 2(5) and the taxpayer will only be allowed a 50% deduction for expenditure on them.
The Commissioner will be applying this interpretation for tax positions taken on or after 1 September 2016. The Commissioner will not be applying resources to identify deductions incorrectly claimed before 1 September 2016. This is because the amounts of deductions that may have been over-claimed are likely to be relatively small for any particular taxpayer.
However, over-claimed deductions identified in the course of investigation or audit activity will be disallowed and the correct view of the law applied. Proven reliance on the BTU statement will be relevant to the question of interest on unpaid tax and shortfall penalties.