Deductibility of business travel and entertainment expenses

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Many businesses within the wine industry require employees and management to travel both internationally and domestically as part of their roles.  A question that is often asked of accountants is to what extent can expenses incurred when travelling on ‘business’ be deductible.

Here we cover off the deductibility for international, domestic travel and entertainment expenses.

International travel

When the sole purpose of a person’s international travel is for business then typically any expenditure incurred is deductible to the business. To support a deduction, the business should obtain from the person copies of invoices and receipts relating to the expenditure incurred. In addition, it is often good to also keep on file an itinerary of what was done on the trip and when.

A trip overseas on business may relate to a conference, trade show, senior management meeting etc, where there is often an expectation that the person travelling is accompanied by their spouse or partner. The spouse or partner is also expected to attend various functions in a support role.

In recent years Inland Revenue has had a change of view on when a spouse or partner’s (companion) travel expenses are deductible.

Historically, common practice has been to treat a portion of a companion’s travel expenses in relation to a business trip as a tax deductible expense.

The Commissioner no longer concurs with this position. Inland Revenue’s view is that in most cases, the travel expenses of a companion will not be tax deductible. This is on the basis that the expenditure is likely to be private or domestic in nature. Therefore, there has been a clear shift away from the historically accepted position.

Where the companion travels with the person primarily for the purpose of attending social functions, Inland Revenue has stated that the deductibility test will not be satisfied. As such the companion’s travel expenses will not be deductible for tax purposes.

There are limited circumstances in which a companion’s travel expenses may be tax deductible as a business related expense.

Based on the Inland Revenue’s examples this will however apply to very few cases.

The companion must have a certain level of skill or expertise in the taxpayer’s income-earning activity in order for the travel expenditure to be deductible.

This will be a significant change for some businesses where there is regular overseas business travel.

At the end of the day it will be a question of fact as to whether all or some of the expenditure is deductible. Where a trip is extended for private purposes, you would need to undertake some pro rata calculation to ascertain what amount is deductible.

If you have recently travelled overseas on business or are looking to travel overseas on business, care should be taken when determining what portion of expenditure will be deductible for tax.

 

Domestic travel and entertainment expenses

Where expenditure is incurred while travelling on business domestically, often the deduction may be limited to 50 percent if the type of expenditure falls under the entertainment tax regime.

Expenditure on entertainment encompasses expenditure on:

  • A corporate box, marquee, tents or similar exclusive area, permanent or temporary, at a sporting, cultural or other recreational event occurring off the business premises (including tickets and rights of entry)
  • Holiday accommodation, including incidental food and drink, with the exception of accommodation costs that are merely incidental to business activities or employment duties
  • Pleasure craft
  • Food and drink provided off business premises, or
  • Food and drink, except light refreshments such as a morning tea, which are provided on premises in an area restricted to senior employees or at a party or similar social function

These rules are therefore fairly wide, particularly in relation to food and drink.

Any such expenditure incurred while travelling overseas on business falls outside of the entertainment tax regime and is not therefore limited by the 50 percent deduction rule.

Prepared by Mark Knofflock, Moore Stephens Markhams Hawkes Bay Ltd, for HB Wine Magazine.

Autumn 2016

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