Serika Sterling | Gift-giving, Xmas parties have tax implications

At this time of year, most of us get that warm, fuzzy feeling that is accompanied by an increased urge to be charitable.

You decorate the office, throw Christmas parties, and endow homeless shelters and children's and old-age homes with gifts.

However, while you may be busy playing Santa, the tax authorities most certainly are not. Tax rules do not change during the Christmas season.

The applicability of taxes still follows the golden rules: Deductible expenses are those incurred in earning the company's income; input GCT credits must be claimed based on the provisions of the General Consumption Tax Act and regulations; and where items are taken from the business' inventory to be used as gifts or for parties, the output GCT must be accounted for on the cost of the item.

Here is a quick reminder of the tax implications of certain Christmas costs, starting with the parties.

Christmas parties are a great way to show appreciation to both customers and staff alike. However, whether the party is held for staff or for customers will require different tax treatment in some cases.

For income tax purposes, expenses incurred for a Christmas party, whether for staff or clients, are deductible.

However, as it relates to GCT, the legislation is not so generous. The amount of input GCT that you can claim will be dependent on who is in attendance. That is, staff only, clients only, or both. A portion of input GCT is claimable if the party was attended exclusively by clients. Where staff parties are concerned, the situation becomes more complicated and there are certain circumstances where you may not be able to claim any input GCT at all.

Furthermore, the "entertainment" of the Christmas party could be seen as a benefit to staff members. Consequently, a value would need to be attached to each staff member's 'entertainment' and the applicable payroll taxes and statutory contributions be deducted accordingly. This process can get quite onerous as you may need to drill down into who attended and how many cocktail patties and how much liquor was consumed by each staff member.

Bonuses, gift vouchers, and/or non-monetary gifts such as jewellery, appliances, ham or wine are the most common gifts that are given to employees during the festive season.

While we all look forward to these every year, there are payroll implications, which we cannot afford to overlook. Payroll taxes and statutory contributions will be applicable to all the forms of gifts mentioned above since they are considered benefits to employees.

Monetary gifts will be assessable at face value and non-monetary gifts will be assessed at a reasonable value if the actual cost cannot be ascertained and both will be taxed accordingly.

On the employer's side of the transaction, expenses incurred in providing these gifts to employees will be deductible for income tax purposes.

However, once again, input GCT incurred in acquiring the gifts is generally not recoverable as a credit or refund.

As for customers and clients, who doesn't look forward to customer appreciation day? At this time of year, several items may be on offer, including sorrel, cake, and, if you are lucky, a little token. In addition, some businesses give bigger gifts directly to their most valuable clients.

In this area, there is great news for Santa's helpers. In all cases, the expenses incurred are deductible for income tax purposes and the input GCT, in certain instances, may be recovered as a credit or refund. So break out the sorrel, cakes, and gifts for your customers.

Most organisations have corporate social responsibility ingrained in their mission all year long. However, the Christmas period is usually associated with more extensive charitable contributions.

Similar to gift-giving throughout the year, donations made are only deductible for income tax purposes if they are given to an approved charitable organisation. Even better, since 2013, you are also allowed a tax deduction for donations made in kind such as food, clothes, or property in the same way as for cash donations.

It's important to note, however, that there are limitations on how many donations you are allowed to claim as a deduction for income tax purposes and how 'gifts of kind' should be valued.

As always, to minimise or eliminate the tax burden, you should contact a tax professional to provide you with the appropriate guidance for your specific circumstances. You want to ensure that you are taking your fair share of deductions and taking advantage of the opportunities for giving in this holiday season.

 

Serika Sterling is a certified public accountant and managing director of Senior Accounting Services.

ststerling@sasjm.com

 

UPDATE: This has been updated to clarify claims related to input GCT.