Private ruling: Business deductions
Date of advice: 1 November 2017
Published: March 2018
Ruling period: 30 June 2016 | 30 June 2017 | 30 June 2018 | 30 June 2019 | 30 June 2020
Date scheme commenced: 1 July 2015

Ruling: Q1: Is the provision of meals for potential clients and business contacts regarded as deductable advertising expenses? | A1: No. | Q2: Is the provision of meals for potential clients and business contacts regarded as entertainment? | A2: Yes.

Relevant facts and circumstances: You operate a private company. Your company brings international students to Australia to study. In order to obtain clients, you meet with potential clients as well as visiting international scholars, teachers, travel agents and friends at restaurants where most of the time you will pay for the lunch and drinks provided as well as small gifts. You have applied for a private ruling requesting special consideration that these expenses be considered as marketing and not entertainment expenses.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 32-5 | Income Tax Assessment Act 1997 Section 32-10 | Income Tax Assessment Act 1997 Section 32-20 | Income Tax Assessment Act 1997 Section 32-45

Reasons for decision: Summary: 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. Section 32-5 of the ITAA 1997 provides a general prohibition on the deductibility of entertainment expenses under section 8-1 of the ITAA 1997. Entertainment is defined in section 32-10 of the ITAA 1997 and includes entertainment by way of food, drink or recreation. As highlighted in subsection 32-12(2) you are taken to provide entertainment even if business discussions or transactions occur. Business lunches are an example of entertainment. Section 32-5 of the ITAA 1997 does not stop you deducting certain losses or outgoings incurred for promotion and advertising expenses. Item 4.3 of the table in section 32-45 states that section 32-5 does not apply to a loss or outgoing incurred in providing entertainment to promote or advertise to the public a business or its goods or services. However, the 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. That is, the exception applies only if the entertainment is available on a non-discriminatory basis to the public at large. In your situation the meals, drinks and small gifts provided are for potential clients and business contacts and not the public at large. Therefore this exception and the other exceptions outlined in section 32-45 of the ITAA 1997 do not apply. In your case, in order to build and maintain client loyalty and attract referrals, you treated clients to meals, drinks and small gifts. You state this has proven an effective method of improving your business. You are considered to be providing entertainment to your business contacts as well as existing and prospective clients by way of meals, drinks and small gifts. Therefore, section 32-5 applies to the extent that you incurred a loss or outgoing in respect of providing entertainment and not an advertising expense. It is acknowledged that you are providing the meals, drinks and small gifts to help improve your business, however such expenses are specifically denied under Division 32 of the ITAA 1997. The legislation provides no discretion to allow any deduction in your circumstances. | Detailed Reasoning - Additional information: It is noted that you asked for the private ruling to apply for the 2015-16 financial year and onwards. The Commissioner does not rule for indefinite or extended periods as there may be changes to the facts of the arrangement or the law in question. Also, a public ruling may issue which affects the private ruling. Therefore, we have only ruled for the 2015-16 to 2019-20 financial years.