Usually yes. And the identical carton, opened at your Christmas do, usually is not. Same beer, same client, same money, completely different tax outcome. Here is where the line actually sits, with the ATO’s own ruling and examples.
The short answer
A gift you give a client is deductible if you gave it to win future work. The ATO said so directly in a determination called TD 2016/14, and the wording is worth having:
Yes, a taxpayer who carries on a business is entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 for an outgoing incurred on a gift made to a former or current client if the gift is characterised as being made for the purpose of producing future assessable income.
Note what it does not say. It does not set a dollar limit. It does not require the client to actually give you more work. It does not say the gift has to have your logo on it. What it turns on is why you gave it.
The trap is in the next part of the same determination, and it is the reason two identical bottles get treated differently. We will come to that.
The ATO’s own two examples
The determination contains exactly two examples, and they are useful because they are so ordinary.
Sally, who gets the deduction
Sally runs a renovation business. She gives a bottle of champagne to a client whose renovation finished in the previous twelve months. She expects it will either bring more work or make the client more likely to refer someone. The ATO’s reasoning notes that although Sally got on well with her client, the gift was not made for personal reasons.
Deductible.
Bernard, who does not
Bernard sells garden statues. He sells one to his brother for $200, then gives his brother a bottle of champagne worth $170. Everyone else only gets a gift if they spent more than $2,500 with him that year.
Not deductible. The gift was made for personal reasons and is private or domestic in character. The $170 gift on a $200 sale, when everyone else has to spend $2,500, gives it away.
Bernard is the more useful example for most trade businesses, because the mistake it describes is one people make without noticing. If your mate who happens to be a customer gets a case at Christmas and your actual biggest customer does not, you have told the ATO what the gift was really for.
The entertainment trap, which is where the money goes
TD 2016/14 says the deduction is subject to no other provision getting in the way, and lists what can. One of them matters enormously here:
where the gift is the provision of entertainment (section 32-5 of the ITAA 1997)
Entertainment expenses are not deductible. And the law defines entertainment, in section 32-10, as entertainment by way of food, drink or recreation.
So the question becomes: is handing someone a bottle the provision of entertainment, or is it just giving them something?
The picture at the top of this page is the expensive version. Drinks and a share plate put on for a client are entertainment, so the deduction and the GST credit both go, however clearly it was a business occasion.
The practical line the profession works to is consumption. A bottle handed over for the client to take home and open whenever they like is a gift of property. The same bottle opened and drunk at your function, with you there, is entertainment. Nothing about the bottle changed. What changed is whether you provided an occasion or provided an object.
That distinction is not spelled out in one neat sentence anywhere, which is exactly why it catches people. What the ATO does give you is a set of factors, in a ruling called TR 97/17, for deciding whether food or drink amounts to entertainment. There are four:
- Why is it being provided. Refreshment is not entertainment. A social occasion where the point is enjoyment is.
- What is being provided. Morning tea and light meals are generally not entertainment. The more elaborate it gets, the more it looks like entertainment.
- When is it being provided. During work time or travel, less likely. At a social function, still entertainment even if it is during work hours.
- Where is it being provided. On your own premises, less likely. In a restaurant, function room, hotel or cafe, more likely.
The ruling adds that no single factor decides it, but why and what are the more important two.
The same $200, four ways
You are a plumber. Your best builder client put $180,000 of work your way this year. Here is $200 spent four different ways.
| What you do | Deductible | GST credit |
|---|---|---|
| Drop a $200 carton at his yard in December | Yes | Yes |
| Send a $200 hamper to his office | Yes | Yes |
| Take him to lunch and spend $200 | No | No |
| Put on drinks at your shed and he drinks $200 worth | No | No |
Same client, same money, same intention, and half of it is gone. The two that work are the two where he took something away with him.
The GST follows the deduction. Where the cost is entertainment and cannot be deducted, you cannot claim the GST credit on it either. So the lunch costs you the deduction and the GST, which is why the real gap between the two columns is wider than it first looks.
What about your own staff?
Different rules, because your staff are employees and your clients are not. Clients cannot generate fringe benefits tax. Employees can.
The one that matters at Christmas is the minor benefits exemption. A benefit under $300 that is infrequent and irregular is generally exempt from fringe benefits tax. So a $150 hamper for each of your four blokes is usually fine. A $400 one is not, and the whole amount is caught, not just the bit over $300.
The threshold applies per benefit per person, so a gift and a Christmas party can be looked at separately even though they happen the same week. That is more generous than most people assume, and it is worth planning around rather than finding out afterwards.
Where it gets awkward: gifts to your staff that are entertainment, like taking everyone to the races, are treated differently again from gifts they take home. If you are spending real money on your team at Christmas, that is a ten minute conversation worth having in November, not April.
Buying local, while you are at it
None of the tax rules care where you bought it, but plenty of our clients would rather the money stayed in the region than went to a national chain, and a local gift lands better anyway because the person opening it recognises the name.
She Deserves is one worth knowing about. Personalised sparkling bottled with Cofield at Rutherglen, so it is genuinely from around here rather than badged that way. The label is the point: you can put your own message on it, which turns a bottle into something the recipient keeps rather than recycles.
Worth saying plainly, because it is the whole subject of this article: a bottle you hand over is a gift and generally deductible. The same bottle opened at your Christmas do is entertainment and is not. Buying a nicer one does not change that, and neither does buying it locally.
How to keep the deduction
None of this is hard, but it is all easier to do now than to reconstruct later.
Write down who and why
A line on the invoice or in the description saying which client it went to. Sally’s deduction rests entirely on the purpose, and the purpose is invisible on a receipt from Dan Murphy’s.
Keep it commercial
Give to the clients who earn it, on a basis you could explain to somebody. Bernard came unstuck because his brother got a better gift than his real clients.
Hand it over, do not open it
The single most valuable habit in this whole article. A gift they take away is a gift. A gift you open together is a party.
Code it properly
Have a client gifts account, separate from entertainment. If both land in the same place, your accountant either treats it all as entertainment or spends billable time separating it.
Questions we get asked
Is there a dollar limit on a client gift?
No limit is stated. But size is evidence: a $2,000 gift to a client who spends $3,000 a year with you invites the question Bernard failed. Keep it proportionate to the relationship and you keep the argument simple.
Does it have to be branded?
No. Branding helps show it was promotional rather than personal, which is useful evidence, but the determination does not require it.
What about gift cards?
A gift card the client spends later is not you providing food or drink, so the entertainment problem does not arise in the same way. The purpose test still applies exactly as it does to a bottle.
I gave a client a carton and we had a couple out of it on site.
Then you have muddied it, and the answer depends on how the whole thing looks. This is the sort of thing worth a phone call rather than a guess, because the difference is the entire deduction.
What if the client is also a mate?
Very common in trades, and it does not automatically kill the deduction. Sally got on well with her client and still got hers. What matters is whether you would have given the gift if they were not a client, and whether other clients get treated the same way.
Planning what to spend this Christmas?
Sorting the client list, the staff and the party before you spend is a short conversation. Sorting it in April, from a pile of receipts, is not.
Level 1, 561 Olive Street, Albury NSW 2640. Registered Tax Agent 20651000.
Where this comes from
The ruling on gifts to clients is Taxation Determination TD 2016/14, issued 27 July 2016, and both examples above are taken from it. Entertainment is dealt with in sections 32-5 and 32-10 of the Income Tax Assessment Act 1997, and the four factors are from Taxation Ruling TR 97/17. The fringe benefits tax minor benefits exemption is in section 58P of the Fringe Benefits Tax Assessment Act 1986.
Bottle photograph supplied by and used with the permission of She Deserves.
This is general information, not advice about your situation. Your own facts change the answer, and the line between a gift and entertainment is decided on all the circumstances rather than on one rule.
