Tax Determination 2016/14, effectively replaces ATO ID 2004/427 (now withdrawn), and confirms that a taxpayer carrying on business is generally entitled to a deduction for an outgoing incurred on a gift made to a former or current client, if the gift is characterised as being made for the purpose of producing future assessable income.
However, the outgoing will not be deductible to the extent it:
- is of a capital nature;
- relates to the gaining of exempt or non-assessable non-exempt income; or
- some provision of the income tax legislation prevents it from being deductible (e.g., the gift constitutes the provision of entertainment that is not deductible).
The determination also highlights that a deduction will be denied where expenditure on gifts is more accurately described as being ‘private’ in nature (for example, where a gift is provided to a relative outside a business’ usual practice of providing client gifts).
Sally is carrying on a renovation business. Sally gifts a bottle of champagne to a client who had a renovation completed within the preceding 12 months. Sally expects the gift will either generate future business from the client or make them more inclined to refer others to her business. Although Sally got on well with her client, the gift was not made for personal reasons and is not of a private or domestic character. The outgoing Sally incurred for the champagne is not of a capital nature.
Sally is entitled to a deduction under section 8-1 of the ITAA 1997.
George is carrying on a business of selling garden statues. George sells a statue to his brother for $200. Subsequently, George gifts a bottle of champagne to his brother worth $170. Apart from his transaction, George provides gifts only to clients that had spent over $2,500 over the last year. The gift has been made for personal reasons, and is of a private or domestic character.
George is not entitled to a deduction under sections 8-1 or 40-880 of the ITAA 1997.
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