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Ruling

Subject: Coffee and gift expenses

Question

Are you entitled to a deduction for the cost of purchasing coffees or gifts for staff?

Answer

No.

This ruling applies for the following periods

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commenced on

1 July 2011

Relevant facts

You are an employee manager.

You are paid an hourly rate for the hours you work plus commission for reaching various targets.

For the sales staff that you are in charge of, you set them a personal target and offer them an incentive of a coffee or a gift card. The incentive is designed to encourage them to achieve higher sales and therefore higher commission for you.

There is no reimbursement from your employer.

For the 2011-12 income year you spent money on coffees purchased from local vendors and consumed in store. You also spent money on coffees purchased and consumed at local coffee shops and money on gift cards.

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 of the ITAA 1997 prevents it.

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).

Taxation Ruling TR 98/6 discusses the deductibility of expenses for real estate salespersons. As highlighted in TR 98/6, certain expenses are an allowable deduction where real estate salespersons earn commission only income. Commission only real estate salespersons perform their work activities under significantly different circumstances to most employees, with considerable flexibility in how they perform their duties.

Although you are not in the real estate industry, some of the principles discussed in TR 98/6 are relevant in your circumstances.

TR 98/6 states that a deduction is allowable for the cost of gifts or greeting cards given to clients and bought for work-related purposes by salespersons who are entitled to earn commission.

However, a deduction is not allowable if the expenditure results in the provision of entertainment. Entertainment is defined under section 32-10 of the ITAA 1997 to mean:

(a) entertainment by way of food, drink or recreation; or

(b) accommodation or travel to do with providing entertainment by way of food, drink or recreation.

You are taken to provide entertainment even if business discussions or transactions occur.

Also a deduction is not allowable for cards or gifts provided to friends, relatives or associates unless the connection between the outgoing and the production of income can be clearly established.

The Commissioner accepts that persons deriving income on a commission basis would provide gifts to clients as a thank you for their business and in the hope of receiving more clients and to increase their income derived. It is considered that the costs of providing gift vouchers to clients generally has the necessary connection with the assessable income and are therefore an allowable deduction.

A distinction has been drawn in TR 98/6 between commission only agents and salespeople who receive remuneration by a retainer and commission. Where an agent receives retainer plus commission, only part of their income is directly related to the amount of success that they enjoy. At law, this puts those employees in the same position as an employee who is remunerated solely by salary or wage. Expenses paid to other people by employees are regarded as private in nature and not incurred in gaining or producing their assessable income.

In the case of an agent remunerated by commission only, clearly their income is directly and wholly related to the degree of success that they enjoy. Also, a commission only agent is generally not required to adhere to any detailed set of duties set by their employer. Equally clearly then, any expense incurred that increases that success rate can only be incurred in gaining or producing the assessable income and must be an allowable deduction.

Expenditure on giving gifts to fellow employees is not deductible, even though the expenditure had a causal connection with the earning of income. The expenditure is inherently of a private or domestic nature and therefore no deduction is allowable under section 8-1 of the ITAA 1997.

It is acknowledged that you earn some commission income, however, you are an employee for taxation purposes and your income from your work comes from your employer only. Your expenses for gifts are not to clients.

In your case, the payments to purchase gifts for your staff are not a cost of performing your work as a manager but are a voluntary payment not directly incurred in the derivation of your income. The connection between such costs and the production of your assessable income is not sufficient.

Therefore, the cost of coffees or gifts is not deductible under section 8-1 of the ITAA 1997. Furthermore, as coffee is regarded as an entertainment expense, these expenses are specifically disallowed under section 32-5 of the ITAA 1997.

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