Deductions: gifts to clients

Is the taxpayer, who is carrying on a renovation business, entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for a gift made to a client after the provision of their services to that client have ceased?

Yes. The taxpayer, who is carrying on a renovation business, is entitled to a deduction under section 8-1 of the ITAA 1997 for a gift made to a client after the provision of their services to that client have ceased.

The taxpayer operates a renovation business that involves the provision of their services to clients.

On a date (for example a festive occasion) after the provision of services to a client have ceased, the taxpayer gifts a celebratory bottle of champagne to the client. The gift is provided within 12 months of the provision of the services to the client.

The taxpayer expects the gift will either generate future business from the client or motivate them to refer the taxpayer's services to others. The taxpayer had no other reason for providing the gift.

The expenditure is not deductible as a gift or contribution under Division 30 of the ITAA 1997.

Section 8-1 of the ITAA 1997 allows a deduction for all losses or outgoings to the extent that they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for that purpose. However where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income they will not be deductible. In addition, losses or outgoings will be not deductible under section 8-1 of the ITAA 1997 where another provision prevents it (paragraph 8-1(2)(d) of the ITAA 1997).

Losses or outgoings are incurred in gaining or producing assessable income where they are 'incidental and relevant to that end' ( Ronpibon Tin NL and Tongkah Compound NL .v Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236 (the Ronpibon Case )). Where a taxpayer is carrying on a business for the purpose of gaining or producing assessable income, the commercial and practical implications of the term 'necessarily incurred' imply that voluntary expenditure incurred for business needs may be deductible. It is the taxpayer who decides whether the expenditure 'is dictated by the business ends to which it is directed' ( Federal Commissioner of Taxation v. Snowden & Willson Pty Ltd (1958) 99 CLR 431; (1958) 11 ATD 463; (1958) 7 AITR 308 ( Snowden & Willson's Case )). This was further supported in Magna Alloys & Research Pty Ltd v. Federal Commissioner of Taxation (1980) ATC 4542; (1980) 11 ATR 276 when the Court stated For practical purposes and within the limits of reasonable human conduct, it is for the man who is carrying on the business to be the judge of what outgoings are necessarily incurred

In this case, the taxpayer provided a gift on the expectation that the gift would either generate future business from the client or motivate them to refer the taxpayer's services to others. The taxpayer had no other purpose in providing the gift. Therefore, it is considered that the expenditure on the gift was in the nature of business promotion.

Although the gift is provided to a client up to 12 months after the cessation of the services, there is a prospect that the expenditure may produce assessable income in the future ( Ronpibon Case ). Further, the taxpayer's expenditure can be regarded as necessarily incurred because it is dictated by 'the business ends to which it is directed'. In other words, the taxpayer has decided to voluntarily incur the expenditure in the practical conduct or administration of their business ( Snowden & Willson's Case ).

Consequently, the expenditure is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

Therefore, the taxpayer, who is carrying on a renovation business that involves providing services to clients, is entitled to a deduction under section 8-1 of the ITAA 1997 for a gift made to a client after the provision of services to that particular client have ceased. Note : As the gift does not constitute the provision of entertainment (Taxation Determination TD 94/55), the expenditure is not excluded from deductibility by section 32-5 of the ITAA 1997.