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15 Sep 2016

Commissioner’s operational position on deducting expenditure on gifts of food and drink

This operational position clarifies the deduction of expenditure on gifts of food and drink. Applies on or after 1 Sep 2016.

In Agents Answers Issue 193 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 Business Tax Update Issue 26 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 Business Tax Update Issue 27 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 Agents Answers Issue 193 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.  


Bob is a real estate agent.  Each time he arranges the sale of a house, Bob delivers a bottle of champagne to the owner.  He also sends a gift basket by courier to the purchaser.  The gift basket contains a bottle of wine, some cheese and various household items such as tea towels and soaps. 

Bob will only be able to deduct 50% of the cost of the bottle of champagne.  This is because he is providing entertainment in the form of drink and doing so off his business premises. 

For the gift basket, Bob can deduct the full cost of the tea towels and soap, because an appropriate apportionment should be made for items that are not food and drink.  However, he can only deduct 50% of the cost of the wine and cheese (or, if the cost is not separately identifiable, an amount appropriately apportioned as the cost of the wine and cheese).

Operational position

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.