Alcohol and Entertainment in the Farming industry

It’s common for farmers and their employees to sit down with a cold beer or a drink at the end of the day or week and chew the fat. It’s when they can have a casual debrief and plan for the following day. This is normally done outside the farmhouse due to everyone still being in dirty work clothes. Its on the deck, at the workshop or in the garage. Essentially, it will be close to the beer fridge. After the problems of the world are solved, upcoming work is planned, jobs allocated, and everyone goes on their way.

When processing a client’s GST or annual accounts, the treatment of alcohol can be problematic. It could be a business or private expense. All clients are different, and how they choose to entertain varies. It’s a fact specific bit of coding, but we need to be careful about ringing clients to query every alcohol purchase they make as this isn’t a good look. We can’t just assume that every alcohol purchase from the local bottle store is business related.

However, if it’s a genuine business-related expense, we should be claiming it. But how do we tell this as we do not know when the alcohol is being consumed, by whom, and in what circumstance. All we can see from the invoice is that a box of beer was purchased.

In an ideal situation, our clients would be noting on their receipt whether the purchase is business or private, and narrating who or what the entertainment relates to.

An incorrect assumption that we sometimes hear is that farmers do not do any business related entertaining, so therefore any alcohol purchases must be personal. This assumption is based on farmers not having clients, staff or suppliers to wine and dine in the same manner as a tradesman, retailer, or professional services firm. This is not the case, and farmers can and do provide entertainment to business stakeholders just like any other business.

For a farming employer, the treatment of alcohol purchases is straight forward. Alcohol is purchased for consumption by the employer and their staff for team building and morale building. The key focus is on the business benefit rather than the employer’s personal benefit.

While the farmer is enjoying the beer he is having with his staff, the benefit for the business is keeping the staff happy and motivated. A couple of beers with the team on a Friday night boosts morale much more than giving staff the cash equivalent.

The business case becomes harder when we look at a farming couple or individual with no employees. The alcohol will be deductible when supplied to shearers, contractors, stock agents, fencers or other external individuals or groups. But how do we treat the few beers or wine that are consumed by a couple at the end of the day after a hard day’s work? Is this business or personal?

The challenge here is that we don’t know when the alcohol is being consumed or what is being discussed. Some clients will sit down and discuss the farming issues while others may be sitting down to just enjoy a quiet drink with dinner.

All clients are different, and we can’t make assumptions or rules that apply to all. We are not going to know this information from a receipt or bank statement. There is a much more personal benefit from this as compared to an employer supplying alcohol to the team. Here we need to be discussing the alcohol and its deductibility with the client manager or director, and with the client.

Income Tax

For the ‘shout’ to be deductible, the expenditure must meet the tests in Section DA of the Income Tax Act 2007. The first test to consider is the General Permission test of section DA1 (1)(b) … incurred by them in the course of carrying on a business for the purpose of deriving… the assessable, excluded income or a combination of the pair.

The expenditure must then not be excluded by the section DA2 General Limitations. The key one here is the Private Limitation DA2(2) … A person is denied a deduction for an amount of expenditure or loss to the extent to which it is of a private or domestic nature.

As a general approach, a couple of boxes of beer would pass both tests. However, the weekly alcohol purchase at the supermarket or bottle store may struggle with the private limitation test. We need to know what the alcohol is being purchased for.

Entertainment Expenses

After passing the above tests, we need to consider the entertainment expense rules. These are detailed in the Entertainment Expense Guide IR268.

The guide explores three kinds of entertainment expenditure:

*100% tax deductible, not liable for Fringe Benefit Tax (FBT)

*50% deductible, not liable for FBT

*100% deductible, liable for FBT

Generally, any farmer’s shouting of alcohol will be considered as 50% deductible – not liable for FBT. This is because the spending is not completely business related. It includes an entertainment element, as it’s away from work or out of usual working hours, so it has a 'significant private element'.

The expense will be 50% deductible even if you think the private element was more or less than 50%. Under this category, there are various types of business expenses where deductibility is limited to 50%. This includes the cost of the activity or events, as well as any food or drink consumed there. These are:

1. Corporate boxes, marquees, tents

2. Holiday accommodation

3. Recreational boats such as yachts or launches

4. Food and drink at work

5. Offsite food and drink

6. Gifts or food and drink

The last three categories are most relevant to farming clients and require further exploration of the Inland Revenue’s Entertainment guide.

Food and drink at work

You can deduct only 50% of the cost of food and drink you provide at your business premises – the farm (other than light refreshments):

• at a social event, e.g. celebration meal, party reception, or

• in an area restricted to senior employees, such as an executive dining room.

This rule applies whether the entertainment is provided to employees or to others from outside the business.

The IRD’s guide does not define what is meant by a social event, party or reception. It seems to suggest that this is a bigger event, so maybe an end of job "drinks shout" is not regarded as a social event.

However, a bigger event such as an end of season dinner or barbeque may be considered as "entertainment" and be 50% deductible.

Offsite food and drink

Food and drink provided away from your business premises is only 50% deductible.

Based on this, taking the staff and contractors to the local pub or restaurant for a few drinks, would be50% because the food and beverages are consumed off the business premises.

Gifts of food and drink

Gifts of food and drink that will provide a private benefit to the recipient and a business benefit to the taxpayer are only 50% deductible. This generally wouldn’t apply to farmers providing a shout, as the drinks are consumed at the time.

This category of food and drinks is targeted at gifts able to be taken away and consumed by the recipient at a time and place of their choosing.

Fringe Benefits

Under the Fringe Benefit Tax legislation, food and drink is classed as an "other" benefit and, is exempted from fringe benefit tax if it is consumed on the business premises.

If the drinks turn into a larger event that is more of a social event or party, or the drinks are held offsite, then the 50% deductibility provision will apply. There the entertainment rules will override the fringe benefit tax, meaning there is no FBT implications.

GST

The GST deductions follow the same rules as for income tax. If the drinks shout meets the business deductibility test and is not caught by the private limitation, then the GST can be claimed.

If the income tax deduction is limited to 50% by the entertainment rules, then the GST claim will also be restricted to 50%