Edited version of your private ruling

Authorisation Number: 1012536998695

Ruling

Subject: Deductions - entertainment - meal and drink expenses - gift expenses

Issue 1

Question:

Are you entitled to claim deductions for the cost of meal and drink expenses incurred in relation to existing and potential clients under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

No.

Issue 2

Question

Are you entitled to claim a deduction for the cost of gifts provided to clients under section 8-1 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Income year ending 30 June 2013.

The scheme commences on:

1 July 2012.

Relevant facts and circumstances

You are a sole trader and are engaged as a consultant for Company A for whom you promote the sale of their products and services.

Your relationship with Company A is that of principal and independent contractor.

You are paid a set rate of commission of the total booking and service fees charged, and commissions received from suppliers by Company A at the time of the booking, for sales of products and services promoted by you.

You provide meals and/or drinks at meetings with potential and existing clients with the sole purpose of promoting travel services and products. These presentations are mostly conducted in venues near where the client is located, such as local restaurants or cafés. You do not book a room as the number of clients attending the presentations usually consisted of only one or two key people from a corporation, or up to four individual clients at a time.

The meetings range in duration, with meeting times varying during the day. Most meetings occur within business hours and a smaller number outside of business hours.

The meetings are usually the main source of generating your commission. However, if the meeting does not result in an immediate sale, a sale can occur later on as a result of the meeting.

Your clients are not required to provide the meeting venues, but are invited to attend the presentation with the incentive of having a coffee or a meal while the presentation is occurring.

The food and drink provided at the meetings are those provided at the relevant venues, costing on average $X per person per meal sitting.

Alcohol is provided on occasion, as not all clients wish to consume alcohol and prefer to consume soft drink. On the occasion where alcohol is consumed, the average consumed would be one to two standard glasses.

You provide gifts to your clients at the end of closing deals as an incentive for them to use your services again.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Division 32

Income Tax Assessment Act 1997 Section 32-5

Income Tax Assessment Act 1997 Section 32-10

Income Tax Assessment Act 1997 Subdivision 32-B

Income Tax Assessment Act 1997 Section 32-20

Income Tax Assessment Act 1997 Section 32-45

Reasons for decision

Issue 1

Detailed reasoning

Section 8-1 of the ITAA 1997 provides a deduction from your assessable income can be claimed for any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income; or it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

However, paragraph 8-1(2)(d) of the ITAA 1997 states that you cannot deduct a loss or outgoing under this section to the extent that a provision of this Act prevents you from deducting it.

Section 32-5 of the ITAA 1997 denies a deduction under section 8-1 of the ITAA 1997 to the extent that you incur a loss or outgoing in respect of providing entertainment.

Subsection 32-10(1) of the ITAA 1997 defines entertainment as entertainment by way of food, drink or recreation, or accommodation or travel to do with providing entertainment by way of food, drink or recreation.

Subsection 32-10(2) of the ITAA 1997 states further that you are taken to provide entertainment even if business discussions or transactions occur. Examples of what entertainment entails include business lunches or social functions. On the other hand, examples of what is not entertainment include theatre attendance by a critic or a restaurant meal of a food writer.

Taxation Ruling TR 97/17 Income tax and fringe benefits tax: entertainment by way of food or drink (TR 97/17) outlines the Commissioner's view of what is entertainment as it relates to the provision of food or drink for the purposes of applying the relevant provisions of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) and the ITAA 1997.

Paragraph 10 of TR 97/17 states that meal entertainment arises when the food or drink provided has the character of entertainment. The meal may be substantial, may be consumed as part of a social gathering, or may be consumed with other forms of entertainment.

Paragraph 18 states:

In most cases the mere provision of food or drink satisfies the entertainment test. It is only a narrow category of cases where the mere provision of food and drink does not amount to entertainment for the purposes of Division 32 of the ITAA 1997.

Taxation Determination TD 94/55 Income tax: when does providing an item of property constitute the provision of entertainment within the meaning of subsection 32-10(1) of the Income Tax Assessment Act 1997? (TD 94/55) discusses when providing an item of property constitutes the provision of entertainment, and gives the following example:

Example 2

Costs incurred in providing glasses of champagne, hot meals, theatre tickets, holiday accommodation, hired entertainers, and hired sporting equipment, have a dynamic and immediate character. Consumption can usually occur immediately. These items of property do not last beyond initial consumption (or are to be returned at the end of the hire period).

Hence, these items of property would generally constitute provision of entertainment.

Application to your situation

In your case, in order to promote the products and services provided by Company A, you invite existing and potential clients to meetings where the products and services are promoted through a presentation by yourself. You provided coffee and meals and drinks at the meetings, depending on the venue, as an incentive for the participants to attend the presentations and to maintain your rapport with existing and potential clients.

You are viewed as providing entertainment to your existing and prospective clients by way of food and/or drink. Therefore, section 32-5 of the ITAA 1997 applies to deny a deduction for meal and drink expenses under section 8-1 of the ITAA 1997 to the extent that you incurred a loss or outgoing in respect of providing entertainment.

Exception to section 32-5 of the ITAA 1997

Subdivision 32-B of the ITAA 1997 details the exceptions to section 32-5 of the ITAA 1997. One of the exceptions is section 32-45 of the ITAA 1997, which states that section 32-5 of the ITAA 1997 does not stop you deducting expenses of providing entertainment to promote or advertise to the public a business, or its goods and services.

Under Item 4.2 in section 32-45 of ITAA 1997 a deduction is allowed for the costs of providing or exhibiting the entities products or services provided the costs are incurred to promote those products or services to the public. Even though an event may involve entertainment, the direct costs incurred in promoting the product or services are generally deductible. The costs associated with the entertainment, for example food and drinks, are not deductible unless the entertainment is available to all of the public.

Item 4.3 in section 32-45 of ITAA 1997 allows a deduction for providing entertainment to promote or advertise to the public a business or its goods and services. This exception does not apply if some people have a greater opportunity to get the benefits of the entertainment than ordinary members of the public have.

An example of the kind of promotional activity contemplated by item 4.3 would be a show put on by a shopping mall to attract and entertain shoppers. It is wider than the exemption under item 4.2, because it is not limited to the actual costs of providing or exhibiting a taxpayer's goods or services. It extends to costs associated with the promotion of a taxpayer's or another's goods or services as long as there is unrestricted public access to the entertainment. Therefore, expenditure on drinks provided in connection with a fashion show in a department store would be deductible if there was public access to the show and the drinks.

Application to your situation

The design and delivery of the meetings is directed at you promoting the product and services of Company A in an effort to generate future commissions.

The entertainment provided by you however is invitation only and is open only to selected existing and potential clients. The entertainment is not made freely available to the public.

As outlined above, the exception to section 32-5 of the ITAA 1997 will not apply under items 4.2 and 4.3 to costs associated with the entertainment unless the entertainment is available to all of the public, or when some people have a greater opportunity to receive the benefits of the entertainment than other members of the public do.

The exception therefore does not apply in your situation given that the entertainment is provided only to those parties who have been invited. You therefore can not claim a deduction for any costs incurred in relation to the purchase of food and/or drinks for your existing and potential clients.

Issue 2

Detailed reasoning

Generally, a deduction is allowable for the cost of gifts or greeting cards bought for work-related purposes taxpayers who are entitled to earn commission. However, a deduction is not allowable if the expenditure results in the provision of entertainment, under section 32-5 of the ITAA 1997.

The Commissioner has issued a number of occupational rulings in relation to the deductibility of certain work related expenses. The principles outlined in these rulings can be applied to other occupations where a ruling has not been providing for. There is no specific ruling covering travel industry consultants working on a commission basis.

Taxation Ruling TR 98/6 Income tax: real estate industry employees - allowances, reimbursements and work-related deductions (TR 98/6) discusses whether deductions are allowable , or are specifically excluded from being deductible under a number of subsections including subsection 8-1(2) and section 32-5 of the ITAA 1997.

TR 98/6 provides the following paragraphs in relation to gifts and greeting cards:

115. A deduction is allowable for the cost of gifts or greeting cards bought for work-related purposes by salespersons, or property managers, who are entitled to earn commission.

116. Although the expenditure will not immediately result in the derivation of assessable income, there is a prospect that it may produce greater assessable income in later years of income (see FC of T v. Finn (1961) 106 CLR 60 at 68; (1961) 12 ATD 348 at 351). However, 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. Also, a deduction is not allowable for gifts that satisfy the definition of entertainment provided by way of food, drink or recreation.

117. A deduction is not allowable for the costs of greeting cards and gifts to real estate employees who are not entitled to earn income from commission. The connection of such expenditure to increased income is too remote.

TD 94/55 gives the following example:

Example 1

Costs incurred in the giving of items of property, such as bottled spirits, groceries, games, TV sets, VCRs, computers, crockery, swimming pools, gardening equipment, etc; have an enduring character, and only an indirect nexus to any immediate entertainment. Consumption is usually delayed. The items of property usually require further steps before they can be consumed, and consumption can occur over a long period.

Hence, these items of property do not generally constitute provision of entertainment.

Application to your situation

In your case, you work as a consultant for Company A on a commission only basis. You purchase items to give to your clients at the end of closing deals. These gifts are designed as an incentive for your clients to use your services again, encouraging repeat business. The gifts are provided to your clients to enjoy at their own leisure.

Although the gifts are given to your clients after the cessation of your services, there is a prospect that the expenditure may produce future commissions for you in the future. It can be regarded that you voluntarily incurred the expenditure in the practical conduct of your business and that you had no other purpose for giving the gifts other than to promote future commissions.

It is viewed that the expenses you incurred in relation to the gifts you gave to your clients was in the nature of promotion of your services. Therefore, you are entitled to a deduction for gifts purchased for clients to the extent the gifts are for commission producing purposes and are not of a private nature or entertainment.