In a recently released tax determination, the ATO considered whether a deduction is available when a business gives a gift to a current or former client. The answer is yes, 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 bottle of wine in the expectation that the client will bring you some additional business in future, you can claim a tax deduction for the cost of the wine.
Though not explicitly stated by the ATO, the same rules presumably apply to gifts to suppliers.
For example, if you give a bottle of wine to a supplier in anticipation of better credit terms or a bigger discount on purchases, that clearly meets the ATO’s purpose of producing assessable income (through reducing costs).
But there are a few catches to be aware of.
Gifts can’t be given for personal reasons – so if the customer you’re giving the gift to is also a relative, say, no tax deduction is available.
A deduction is also unavailable if the gift is a 'capital' item – which rules out gifts of items such as cars or computers, if your business is sufficiently generous to make gifts of items like those.
Be extremely careful, too, if the gift is made to a public official – either in Australia or overseas. This could constitute a bribe, and bribes are specifically not tax-deductible.
Another 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, drink or recreation in the context of meetings, business lunches, dinners or social functions, that expenditure will be regarded as the provision of entertainment – and such expenses are not tax-deductible.
So gifts are tax-deductible, but capital items and entertainment expenditure are not.
Buy your client a bottle of wine and you can claim a deduction. Take a client out to a bar for a bottle of wine, and there’s no deduction. Who ever said tax was logical?
And if that isn’t confusing enough, consider this conundrum: if I buy a client a gift voucher to encourage them to do more business with me in future, that’s deductible. But what if the gift voucher is for a restaurant and the client uses the voucher to take me out for dinner?
Is that a gift or the provision of entertainment? Under the current rules, it could be argued either way.
As more and more business is done out of the office – in bars, coffee shops and restaurants – perhaps the time has come to review the blanket prohibition on so-called 'entertainment expenses'.
After all, if the ATO accepts that a gift can be for the purpose of generating future income, how can a business lunch logically be treated any differently?
Maybe change will come, but in the meantime, remember to play by the rules and take advice if you’re not certain.
And perhaps buy your accountant a bottle of wine to say thank you!
Mark Chapman is the director of tax communications at H&R Block, and a former senior director of the ATO.