Tax eats into Christmas treats

A bit extra in the pay packet used to be common. Photo / Janna Dixon

Small business are the only New Zealand employers still regularly giving Christmas bonuses to their staff, it has been revealed.

But those end-of-year sweeteners can come with a tax sting.

A bit extra in the pay packet come Christmas used to be common but businesses are now more likely to tie bonuses and financial incentives to targets and performance goals, and distribute them in line with the company's financial year rather than the calendar year.

Beverly Main, chief executive of the Human Resources Institute of New Zealand, said most large companies bundled bonuses into an employee's remuneration package, determined as part of performance reviews. "It's lined up with their financial cycle rather than Christmas."

It was mostly small businesses that would be giving staff a treat this month. Main said employers should remember that money was not the most important factor in job enjoyment.

But Diane Stewart, who manages a small team at H&H Marine and Engineering Services, said her own experience as an employee prompted her to do something for her staff at Christmas. "I always felt pretty special in being recognised for being a dedicated, loyal and hardworking person when my boss gave me vouchers."

She said in her first year in charge of H&H she put on a Christmas party and a ham for staff. "That cost us a lot of money, the booze-up $1500 and half the clients never turned up, with the $150 ham on top. Way out of our budget."

Stewart said they told staff this year they would not put on a party but wanted to recognise them for their input. Her accountant had warned that giving a cash bonus would incur tax because cash bonuses are generally dealt with under the secondary tax rate - and can sometimes push an employee into a higher tax bracket, or incur extra costs through things such as child support obligations.

But non-cash gifts are treated as unclassified fringe benefits, for which employers have a tax exemption, provided they do not spend more than $300 per employee per quarter.

Stewart said: "I figured: Why give it to the Government? Let the staff have the full value of the gift. As vouchers are so easy to buy now for just about everything imaginable, they were thrilled."

Institute of Chartered Accountants tax director Craig Macalister said Christmas bonuses had become less common but a lot of SMEs gave staff a ham or bottle of wine at Christmas. "In most cases you won't exceed the fringe benefit tax threshold. It's only if you are getting close to it that you will need to sit down and work it out, which can be tricky."

Bell Gully advises that only Christmas gifts of "personal appreciation", not made by virtue of the employment relationship, are exempt from any tax - and that's a hard test to meet.