As the year draws to a close, many of us are considering Christmas gifts for our teams, bonuses and year-end staff celebrations to thank our teams and our clients for their support throughout the year. While the office Christmas party and gift giving bring fun and laughter, they can also bring confusion when it comes to understanding the tax implications for both employers and employees.
Gift cards, including Prezzy cards, are a popular way to reward employees at Christmas. From 16 April 2025, employers can choose whether to treat these under the FBT rules or deduct PAYE. If using the FBT rules, include the gift card with any other unclassified benefits provided to the employee and keep the less-than-$300-per-employee-per-quarter exemption in mind. Alternatively, add the value of the gift card to the employee’s wages or salary and deduct PAYE as usual. If the gift card is provided instead of salary or wages, rather than as a genuine Christmas gift, PAYE must be deducted.
Cash bonuses are also taxable earnings and must be processed through payroll, with PAYE deducted in the usual manner. While this may reduce the amount employees receive in hand, it ensures compliance with Inland Revenue requirements.
For client gifts, the tax treatment depends on the nature of the gift. Gifts that do not contain food or drink are generally fully deductible. However, gifts such as wine, chocolates, hampers and other food or beverage items are typically subject to the entertainment expenditure rules, meaning only 50% of the cost is deductible.
The same entertainment rules generally apply to Christmas parties and end of year staff functions. Where food, drinks and entertainment are provided at a social event, businesses can usually claim a deduction for only 50% of the expenditure.
Before purchasing gifts or planning Christmas celebrations, it is worth considering whether PAYE, FBT or the entertainment expenditure rules apply. A little planning now can help avoid unexpected tax costs later.
By Matt O’Carroll, Accountant