Gifts And Hospitality: A Tax Minefield

In a recently released tax dedication, the ATO considered whether a deduction is available when a business gives a gift to an ongoing or former client. The answer is yes, provided the gift is given with a view to producing future income for the business. If you give a former client a decent-quality wine in the expectation that your client will bring you some additional business in the future, a tax can be claimed by you deduction for the price of the wine. Though not stated by the ATO explicitly, the same rules presumably apply to gifts to suppliers.

For example, if you give a wine to a supplier in expectation of better credit terms or a bigger discount on purchases, that clearly satisfies the ATO’s purpose of producing assessable income (through lowering costs). But there are many catches to understand. Gifts can’t get for personal reasons – so if the customer you’re providing the gift to is also a relative, say, no tax deduction is available.

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A deduction is also unavailable if the present is a ‘capital’ item – which guidelines out presents of items such as cars or computers, if your business is sufficiently nice to make presents of items like those. Be extremely careful, too, if the present was created to a public official – either in Australia or overseas.

This could constitute a bribe, and bribes are not tax-deductible specifically. Another area where caution is necessary is if what you are providing is not a gift, however, many forms of entertainment or hospitality. If your business will pay for your clients’ food, recreation, or drink in the context of meetings, business lunches, dinners, or social functions, that expenditure will be thought to be the provision of entertainment – and such expenses aren’t tax-deductible. So gifts are tax-deductible, but capital items and entertainment expenditures aren’t.

Buy your client a wine and you will claim a deduction. Have a client out to a pub for a bottle of wine, and there’s no deduction. Who said tax was reasonable ever? And if that isn’t confusing enough, think about this conundrum: if I buy a client a present voucher to cause them to become do more business with me in the future, that’s deductible. But what if the gift voucher is perfect for a restaurant and the client uses the voucher to take me out for supper? Is that a present or the provision of entertainment? Under the current rules, it could be argued either way.

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