At this time of year, I see a lot of businesses buying bottles of wine or slabs of beer as gifts for their clients.
The question on every bookkeepers mind is can they claim the GST component of this purchase and is it tax deductible?
For those businesses NOT registered for Fringe Benefits Tax
Different scenarios require different laws to be applied.
There are two possible scenarios under which alcohol might be purchased (never to be opened or consumed by the owner or his staff) its purchased to be gifted or kept for himself.
- Gift to Client
- Gift to Employee
- Bought for his her own use
1. Making a Gift of alcohol to a client – example1: (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.
Making a Gift of alcohol to a client – example2: (not deductible)
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.
Why the difference in the 2 scenarios? Why is Sally allowed a deduction and Bernard not allowed a deduction? The difference is in the details –
My Opinon: Bernard is related to his client (his brother) The ATO will see this moreso as a private or domestic transaction rather than a business one given the cost of the sale/cost of the gift. Thats two things against it being deductible. If his brother was a bigger client (at arms length as they say) the ATO would look more favourably on the gift as being a business gift and it would probably be deductible.
My Opinion: If the client who bought a statue for $200 wasnt his brother and Bernard gifted the $170 bottle of champagne to him Bernard could rely on the fact that the ruling allows the deduction if it is anticipation of future business – the cost/price would not matter.
My Opinion: Any business can gift whatever it likes to its clients no matter the cost if the relationship is a business relationship AND the gift is in furtherance of future business. The fact that its alcohol does not matter, the cost of the item does not matter (they are surrounding circumstances only). The ATO will take all surrounding circumstances into account in making its determinations as it needs to. If the transaction is on face value bona fide and at arms length it will be deductible. If the taxpayer tries to cover up the fact that they are related to the client getting the gift, the ruling won’t stand.
Refer Taxation Determination TD 2016/14
Further (part of this ruling)
This Appendix is provided as information to help you understand how the Commissioner’s view has been reached. It does not form part of the binding public ruling.
- 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).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).
- 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.
- 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).
© AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA
for discussion about 1. Making Gift to an Employee or 2. Buying yourself a bottle of wine with the business’es money, see the next blog.