NEWS

Employers sometimes provide gift cards or vouchers to employees as a benefit. And businesses may provide gift cards or vouchers to clients as gifts. In each case, there is a range of tax treatments, depending on the circumstances and type of card.

Gift cards provided to employees

Gift vouchers or gift cards, even though they are for a specified monetary value, have usually fallen within the category of non-cash benefits and been treated as a fringe benefit. However, as the types of available gift cards have proliferated, their tax treatment has been refined.

Inland Revenue now distinguishes between so-called ‘open loop cards’, prepaid cards co-branded with a credit card, for example Prezzy cards, and ‘closed loop cards’, prepaid cards only accepted by certain merchants, for example, Mitre 10 gift cards.

 

The Commissioner considers open loop cards equivalent to money:

• When employers provide open loop cards to non-shareholder employees, the value of the cards is considered as employment income and subject to PAYE. Gross up the face value of the open loop card given to an employee and return PAYE on that amount. Employers are allowed a deduction on the amount treated as income.
• When employers give the cards to shareholder-employees, the value of the cards is considered income (but the tax treatment depends on whether the shareholder-employee has elected to have income treated as PAYE income). Shareholder-employees of smaller companies (close companies or companies with 25 or fewer shareholders that are not look-through companies) may choose, provided certain circumstances are met regarding other income received from the company, to have all amounts of income they receive as not being subject to PAYE. Where employing companies provide open loop cards to shareholders who are not shareholder employees, they are not allowed a deduction for these amounts because the cards are treated as dividends.

 

Inland Revenue have acknowledged that many employers have been treating open loop cards as being subject to fringe benefit tax, rather than PAYE and have explicitly stated they will not apply resources to correct previous tax positions taken by employers. In addition, proposed amendments to the law (which are expected to be accepted) may allow open loop cards to be treated as fringe benefits. We expect these changes to be enacted before 31 March 2026 and have retrospective effect. We’ll keep you posted.

 

Closed loop cards provided to:

• non-shareholder employees are considered a fringe benefit, with a value of the face value of the cards. The $300 per person per quarter limit applies
• shareholder-employees are an unclassified fringe benefit (as above) unless employers choose to have the cards treated as dividends
• shareholders are treated as dividends

 

Gifts cards provided to clients

Gift cards or vouchers provided to clients which are not limited to food and drink, i.e. ‘Prezzy cards’ or general merchandise stores, are 100% deductible. Gift cards that are considered closed loop cards, from merchants selling only food and drink, such as liquor store gift cards, may only be 50% deductible, coming under the entertainment expenses rules.

So far, it’s unclear whether Inland Revenue’s statements on gift cards in OP 25/02 and QB 25/07 will be applied more generally to gifts from businesses to their clients but the distinction between open loop and closed loop cards and proposed treatment is helpful clarification. The specific application is to gift cards and products provided by trade suppliers to trade customers (business to business) as trade rebates, promotions, or rewards for trade customers buying goods or services from the trade

suppliers, and knock-on situations where the trade customer then passes on the gift cards to their employees (as outlined above).

Where trade suppliers give gifts cards to trade customers, the gift cards are income of the trade customers equal to the amount of the face value of the cards.

Trade suppliers are allowed a deduction for the expense incurred on the gift cards.

 

Our recommendation

If you give gift cards to employees or intend to give them as client gifts, please talk through the tax aspects with us.

The current situation is subject to change, particularly regarding the tax treatment of gift cards provided to employees. We’ll keep you informed.

 

Disclaimer

This information is intended to provide general advice only. We recommend you discuss your specific situation with your Accountant.