Private ruling: Business - deductions - entertainment
Published: September 2013
Ruling period: 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
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to claim entertainment expenses in respect of your business? | A1: No

Relevant facts and circumstances: You operate a business. In order to build and maintain client relationships, you occasionally treat your clients to a meal or a social function. You do not advertise your business using radio or television as these methods have proven unsuccessful. Entertaining your clients however has led to the growth of your business.

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) provides a deduction from your assessable income 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) 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 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. In your case, in order to build and maintain client loyalty and attract referrals, you treated clients to meals and/or social functions. You state this has proven an effective method of improving your business. You are considered to be providing entertainment to your existing and prospective clients by way of food, drink and social functions. Therefore, section 32-5 applies to deny a deduction under section 8-1 to the extent that you incurred a loss or outgoing in respect of providing entertainment. | Detailed Reasoning - Exceptions to section 32-5: Subdivision 32-B of the ITAA 1997 details the exceptions to section 32-5 of the ITAA 1997. Section 32-20 of the ITAA 1997 states that you may deduct entertainment expenses to the extent that the entertainment is subject to Fringe Benefits Tax. As you have not provided a fringe benefit to any employees, this exception does not apply. Section 32-45 of the ITAA 1997 states that section 32-5 does not stop you deducting expenses of providing entertainment to promote or advertise to the public a business or its goods and 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. The reference to "some people'' could include clients, customers, suppliers, employees and any other associates of the taxpayer, journalists, dignitaries or any other special class of person. 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. 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. The exception therefore does not apply as some people have a greater opportunity to get the benefits of the entertainment than ordinary members of the public. As neither of the exceptions to section 32-5 of the ITAA 1997 apply you cannot claim a deduction for entertainment expenses.