Preamble
Yes, a taxpayer who carries on a business is entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) 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.
The outgoing is not deductible where it is of a capital nature, relates to the gaining of exempt or non-assessable non-exempt income, or some other provision of the income tax law prevents it from being deductible.
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.
Bernard is carrying on a business of selling garden statues. Bernard sells a statue to his brother for $200. Subsequently, Bernard gifts a bottle of champagne to his brother worth $170. Apart from his transaction, Bernard 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.
Bernard is not entitled to a deduction under sections 8-1 or 40-880 of the ITAA 1997.
This Determination applies to years of income commencing both before and after its date of issue. However, this Determination will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of this Determination (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10).
Appendix 1 - Explanation
Section 8-1 of the ITAA 1997 allows a deduction for 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 to the extent that the losses or outgoings are of a capital, private or domestic nature, or relate to gaining or producing exempt income or non-assessable non-exempt income, they will not be deductible. In addition, losses or outgoings will be not deductible under section 8-1 of the ITAA 1997 to the extent that another provision prevents a taxpayer from deducting them.
Losses or outgoings are incurred in gaining or producing assessable income where they are 'incidental and relevant to that end' (Ronpibon). [1] Where a taxpayer is carrying on a business for the purpose of gaining or producing assessable income, 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' (Snowden & Willson). [2]
If a taxpayer provides a gift that is characterised as being made for the purpose of producing future assessable income, the outgoing incurred on the gift will be incidental and relevant to gaining or producing assessable income. The taxpayer's outgoing is 'dictated by the business ends to which it is directed' and is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.
Section 40-880 (about unrecognised business-related expenditure) does not provide relief for expenditure of a private or domestic nature. [3]
Deductibility under section 8-1 of the ITAA 1997 is subject to there being no other provision in the tax law that affects the deduction. These situations include: • where the gift is a bribe to a foreign official (section 26-52 of the ITAA 1997) or a public official (section 26-53 of the ITAA 1997) • where the gift is the provision of entertainment (section 32-5 of the ITAA 1997) • where the gift is within the prepayment rules (Subdivision H or Division 3 of Part III of the Income Tax Assessment Act 1936).