Staff Christmas Party and Gifts: Does FBT Apply?

A staff Christmas party is generally not subject to fringe benefit tax (FBT), but it is only 50% deductible for income tax. Gifts, vouchers and hampers are different: they can be fringe benefits, and FBT applies once they pass Inland Revenue’s per-employee or all-employee limits. Cash bonuses are not fringe benefits at all, because they go through payroll with PAYE.

The party: no FBT, but only half is deductible

Food and drink at a staff party is a form of entertainment. The Income Tax Act sets two separate questions, and they have different answers.

Does FBT apply? Entertainment you provide to employees is a fringe benefit only if all of these hold (ITA s CX 29):

• the employee does not receive or use it in the course of their employment, and
• it is not a necessary consequence of their employment duties, and
• the employee can choose when to enjoy it, or it is enjoyed outside New Zealand.

A party on a set date fails the last test: staff cannot choose when to attend. IRD’s own example is drinks at a weekly staff get-together, with no FBT because staff can enjoy them only at a time the employer arranges. A function at a restaurant or venue works the same way.

How much can you deduct? Food and drink for a party, celebration meal or similar social function on your premises is entertainment, and so is food and drink you provide off your premises (ITA s DD 2). Only 50% of the cost is deductible. IRD’s guide gives the exact case: a company holds its Christmas party at work and can claim 50% of the costs. Light refreshments such as a morning tea are 100% deductible.

If you are registered for GST, you can usually claim the full GST on entertainment in your return, then make an annual adjustment in your GST return for the expenses that are only 50% deductible (IRD guide IR268). Tell your accountant which costs were party costs so the adjustment is right.

Gifts, vouchers and hampers

Anything that is not cash is potentially a fringe benefit. Free gifts and prizes are “unclassified benefits”, and IRD treats gift cards and vouchers alongside them for the limits.

A food and drink hamper. Staff take it home and enjoy it when they choose, so it does not get the “set time” protection the party has. It is generally tested as an unclassified benefit against the limits below.

A restaurant voucher. IRD’s entertainment page describes a restaurant gift voucher given as a reward for good performance as 100% deductible and liable for FBT. Vouchers are gift cards, so they also count toward the limits below.

A retailer-specific gift card (valid only at the retailer on the card) is under the FBT rules. A general-use card (can be used at many retailers) is under the PAYE rules, which means its grossed-up value is added to the employee’s pay. Since 16 April 2025 you can choose to apply either the FBT or the PAYE rules to all gift cards and vouchers.

A cash bonus is not a fringe benefit. FBT covers non-cash benefits, and IRD says you do not pay FBT on cash such as salary and wages. Run a cash bonus through payroll, where PAYE applies as for other pay. Our bonus tax guide covers how.

The limits that decide whether FBT is payable

You pay FBT on unclassified benefits and gift cards only when the GST-inclusive value is more than:

For quarterly returns the $22,500 limit is tested over the last four quarters including the current one. Benefits from associated persons and group companies count toward it. For a gift card, the value is the amount loaded on the card.

These limits are cliffs, not allowances. If the value is more than a limit, you pay FBT on the full amount of the benefits, not only the part above it.

Worked example: $295 versus $310

A quarterly filer gives one employee a gift in December. It is that employee’s only unclassified benefit in the October to December quarter.

Only $10 more than the limit adds $198.18 of FBT, because the whole $310 becomes taxable. Other benefits the same employee received in that quarter, such as a staff discount or a paid-for subscription, count toward the $300, so the gift might already be over. The single rate is shown. The alternate rate can be lower for employees on lower pay, as the FBT guide explains, and you can test your own figures in the FBT calculator.

What to do as a small employer

1. Decide the gift budget by the limit. Keep each person’s total unclassified benefits and gift cards in the quarter at or under $300 (or $1,200 if you file an annual return), counting anything else you gave them.
2. Keep the party separate. Record party costs on their own so you can claim 50% for income tax and make the GST adjustment.
3. Choose cash when you want a bigger thank-you. A bonus through payroll is taxed as pay and avoids the cliff.
4. Pick one rule for gift cards. Retailer cards follow FBT and general-use cards follow PAYE by default. You can choose FBT or PAYE for all gift cards, so decide once and apply it to every card.
5. Check your return period. If FBT is payable, the October to December quarter is due 20 January. Annual-return filers pay by 31 May.
6. Keep records even when no FBT is payable.

Common mistakes

• Treating a voucher or hamper like the party. The party escapes FBT because of the set time. Something staff use whenever they like does not.
• Forgetting the cliff. A gift a little over $300 turns the full value into FBT.
• Counting only the Christmas gift. Other benefits in the same quarter and all-employee totals count.
• Claiming 100% of the party cost. Party food and drink is 50% deductible.
• Assuming a general-use gift card is exempt. It is paid under the PAYE rules unless you choose otherwise.

FBT is paid by the employer, and it does not appear on the employee’s payslip. For how the rest of the system works, see Fringe Benefit Tax explained. This is general information, not advice for your situation. Confirm unusual cases with a tax adviser or Inland Revenue.