Tax tip - tax deductions for client gifting

Written on the 20 December 2016

With Christmas just around the corner, it's important to know the rules about tax deductible gifts.

Giving a gift to a current or former client for the purpose of producing future assessable income, will generally entitle you to a deduction for the cost of that gift (Tax Determination 2016/14).

However, a gift is not tax deductible if it is of capital nature or disallowed under any other provision of the tax law.

Treating a client to 'entertainment' is also generally not deductible. Nor is it deductible to give gifts of a private nature, such as gifting to a relative who is outside of your business' usual practice of providing gifts to clients.

This is how it works:

Nicholas runs a restaurant that offers 'function packages' ranging from basic for $2,000, to platinum for $10,000 plus. He decides to give a gift to the clients who have purchased packages during the year to encourage them to use his business again in the future, or recommend his packages to others.

The value of the gift varies according to how much the customer has spent in his business during the year:

Basic $2,000 packages a $25 bottle of wine

$2,000 and $5,000 packages a $50 bottle of wine

$5,000 - $10,000 packages a $100 bottle of champagne; and

Packages of $10,000 and over a $200 bottle of Scotch

Nicholas will be entitled to a deduction for all the gifts because he expects they will either generate future business from his customers or result in referrals to new customers. The gifts are not given for personal reasons, are not capital in nature and are in line with his usual practice of providing gifts to clients.

Nicholas' nephew hired the restaurant for his birthday celebrations and was given a $5,000 package for the cost of a basic $2,000 package. Nicholas decided to gift his nephew a $200 bottle of scotch.

In this case, Nicholas will not be entitled to a deduction because the gift to his nephew is of a private and domestic nature and not in line with his usual practice of providing gifts to clients. (Had Nicholas gifted his nephew a $25 bottle of wine, the relevant deduction may have applied.

Source:  SBDC e-news