A gift can have different tax outcomes depending on the recipient

 

Gifts provided to employees or their associates will typically constitute a property fringe benefit and therefore are subject to FBT unless the minor benefit exemption applies (any item valued at $300 or less is exempt from FBT).

And while gifts provided to clients are outside of the FBT rules, they may be deductible as a business expense (and deductibility may still apply even if the gift is a “minor benefit” under the FBT rules). Tax determination TD 2016/14 provides guidance on whether an outgoing incurred by a business taxpayer for a gift provided to a former or current client is deductible under the general deduction provisions.

The ATO confirms that such outgoings are generally deductible under s8-1 ITAA97 as they are being made for the purposes of producing future assessable income. However, the outgoing is not deductible where it is of a capital nature, relates to the gaining of exempt or non-assessable non-exempt income, or some other provision of the income tax law prevents it from being deductible.

The determination contains the following examples:

Example 1
Julia is carrying on a renovation business. She gifts a bottle of champagne to a client who had a renovation completed within the preceding 12 months.

Julia expects the gift will either generate future business from the client or make them more inclined to refer others to her business. Although Julia 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 she incurred for the champagne is not of a capital nature. Julia is entitled to a deduction under section 8-1 of the ITAA 1997.

Example 2
David is carrying on a business of selling garden statues. David sells a statue to his brother for $200. Subsequently, David gifts a bottle of champagne to his brother worth $170. Apart from this transaction, he provides gifts only to clients who have spent over $2,500 over the last year.

The gift has been made for personal reasons, and is of a private or domestic character. David is not entitled to a deduction under sections 8-1 or 40-880 of the ITAA 1997.

Note that a deduction would not be denied to the business where the gift provided constitutes “entertainment” under Division 32 ITAA97 (which could trigger FBT if provided to employees). Entertainment is defined as: (i) entertainment by way of food, drink or recreation (such as golf days), or (ii) accommodation or travel to do with providing entertainment by way of food, drink or recreation (such as taxi travel to a venue). TD 94/55 lists property that constitutes the provision of entertainment within the meaning of subsection 32-10(1) of the ITAA97.

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