In a recently released tax dedication, the ATO considered whether a deduction is available whenever a business provides gift to an ongoing or former client. The answer yes is, provided the gift is given with a view to generating future income for the business. So if you give a former client a decent-quality wine in the expectation that the client provides you some additional business in future, you can claim a tax deduction for the expense 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 provider in anticipation of better credit terms or a more impressive discount on buys, that clearly meets the ATO’s reason for producing assessable income (through reducing costs). But there are a few catches to be aware of. Gifts can’t get for personal reasons – so if the client you’re providing the gift to is also a member of family, say, no tax deduction is available.
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A deduction is also unavailable if the gift is a ‘capital’ item – which rules out gifts of items such as vehicles or computers, if your business is sufficiently large to make gifts of items like those. Be careful extremely, too, if the gift was created to a public official – either in Australia or overseas.
This could constitute a bribe, and bribes are not tax-deductible specifically. Another certain area where caution is required is if what you are providing is not a gift, but some form of entertainment or hospitality. If your business pays for your clients’ food, recreation or drink in the context of meetings, business lunches, dinners or social functions, that costs 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 expenditure aren’t.
Buy your client a bottle of wine and you will state a deduction. Take a customer out to a pub for a wine, and no deduction there’s. Who said taxes was logical ever? And if that isn’t confusing enough, consider this conundrum: easily buy a client a present voucher to encourage them to do more business with me in future, that’s deductible. But imagine if the gift voucher is perfect for a restaurant and the client uses the voucher to consider me out for dinner? Is a gift or the provision of entertainment? Under the current rules, it could be argued in any event.
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