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Edited version of your private ruling
Authorisation Number: 1012402489090
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Ruling
Subject: Gift vouchers
Question
Are you entitled to a deduction for the cost of gift vouchers purchased to give to clients?
Answer
Yes.
This ruling applies for the following periods
Year ended 30 June 2013
Year ended 30 June 2014
Year ended 30 June 2015
Year ended 30 June 2016
Year ended 30 June 2017
The scheme commenced on
1 July 2012
Relevant facts
You wish to purchase gift vouchers to give to clients of your business.
The purpose of the gift vouchers is to be an incentive for clients to refer more people to the business.
You will only give the vouchers to clients that you have completed business with and have received an income from. They may be new or ongoing clients.
You will purchase gift vouchers from local businesses. The vouchers are valued at $X to $Y.
The voucher amounts will be based on the income received from the client. The gift voucher will be approximately 5-10% of the income received.
You estimate that approximately Z vouchers will be purchased each year.
You are hoping for at least one referral from each client.
The vouchers will be from businesses.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Division 32
Reasons for Decision
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income, or a provision prevents the deduction.
A number of significant court decisions have determined that for an expense to be an allowable deduction:
· it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v. FC of T; (1958) 100 CLR 478,
· there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. FC of T, (1949) 78 CLR 47), and
· it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore Co (WA) Pty Ltd v. FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184).
A business is entitled to a deduction for gift vouchers given to clients if the requirements under section 8-1 of the ITAA 1997 are met.
In this case, the gift vouchers are given in the hope of receiving more clients and to increase the income derived by the business. It is considered that the costs of the gift vouchers are in the nature of a business promotion and the expenditure is likely to produce assessable income for the business.
The costs of providing gift vouchers to clients of the business have the necessary connection with the assessable income of the business and are therefore an allowable deduction.
Other information
Please note that under Division 32 of the ITAA 1997 you cannot deduct the costs of providing entertainment. Taxation Ruling TR 97/17 provides further details in relation to the allowable expenses when providing entertainment by way of food or drink.
The prohibition on entertainment expense deductions does not apply where the expense is incurred to promote or advertise to the public your business or its goods or services and you provide it to an individual under a contract to supply the goods or services in the ordinary course of your business (item 4.1 section 32-45 of the ITAA 1997).
In your situation it is considered that the provision of gift would not be denied under Division 32 of the ITAA 1997.
However, please note where vouchers are purchased from restaurants or cafes, a deduction may be denied under Division 32 of the ITAA 1997.
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