Gift Cards: What Businesses Need to Know About Tax Rules
As the festive season approaches, many businesses are planning ways to thank their employees and clients. Gift cards have long been a popular choice — simple, flexible, and appreciated. But before you stock up on Prezzy cards or similar, it’s important to understand the tax implications.
Open Loop vs Closed Loop Gift Cards
Earlier in the year the IRD released a “Questions we’ve been asked” (QWBA) where it gave the view that not all gift cards are treated the same under tax law. The following distinction was made by the IRD:
- Open Loop Cards
These are cards like Prezzy, Visa, or Mastercard gift cards that can be used almost anywhere. Inland Revenue generally views these as cash equivalents, which means they are treated as employment income rather than a fringe benefit. This typically requires PAYE to be withheld and processed through payroll.
- Closed Loop Cards
These are store-specific cards (e.g., Mitre 10, supermarket vouchers, petrol cards). These are generally treated as fringe benefits, subject to the rules in the Fringe Benefit Tax (FBT) legislation. The de minimis exemption for unclassified benefits applies — currently $300 per employee per quarter.
What Does “De Minimis” Mean?
In plain language, the de minimis exemption is a rule that says if the total value of certain small, irregular benefits (like gift cards, flowers, or event tickets) given to an employee is $300 or less in a quarter, you don’t have to pay FBT on them.
This is designed to keep things simple for occasional, low-value perks. If you go over the limit, FBT applies to the full amount — not just the excess.
Why the Confusion?
Many businesses have treated all gift cards as falling under the FBT regime, often relying on the de minimis exemption to avoid tax on small, occasional gifts. The guidance provided by the IRD earlier in the year however, put this treatment in doubt.
FBT Reform and legislative change
The government has been reviewing the treatment of gift cards as part of broader FBT reform in recent months. This review along with further consultation done by the IRD on the QWBA has now resulted in a bill being submitted to parliament. The bill now clarifies that open loop cards will now fall under the FBT regime. While the bill has not yet passed it is expected to pass prior to 31 March 2026 and the IRD has confirmed that as this will retrospectively come into effect from 1 April 2025 it will not review positions taken during this period.
What does this all mean?
Long story short, gift cards whether they be ‘Open Loop’ or ‘Closed Loop’ will fall under the FBT regime and provided the de minimis exemption is utilised no FBT will be payable on the gift card.
Final Thoughts
Gift cards remain a great way to show appreciation, but tax compliance matters. If in doubt, please contact us to ensure your festive generosity doesn’t lead to unexpected tax costs.
