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Gift tax deductions - essential expense, essential knowledge!

A question that we often get asked by our small business clients concerns gifts made by businesses to their clients/customers as well as potential clients/customers. The short answer is yes, you can claim these gifts as a tax deductible expense provided that they are infrequent expenses and each gift does not exceed $300.00 in value.

In essence, Australian income tax law allows for a tax deduction to be made where the outgoing is necessarily incurred in carrying on a business. How do you define an essential expense? Well that one is up for debate but a previous ATO interpretive decision (ATO ID 2004/427) noted that it is for the man (or woman) carrying on the business to be the judge of what outgoings are necessarily incurred.

The provision of a small gift is normally done based on the assumption that the gift will lead the client to either generate future business from the same client or to motivate the client to refer the taxpayer to other clients. Therefore a small infrequent gift as a thank you to a client can be justified as being an essential part of being in business as it is an essential way of generating further business income.

Be careful and note that providing the client with a $300.00 gift voucher for a restaurant is a deductible gift that the client can use at their leisure. However, taking that same client out and paying for dinner at a restaurant will be treated as entertainment of that client and therefore not deductible to your business.

This is just one of many questions that often get put to us by our small business clients, and it is essential that clients do ask these questions prior to committing their money to a particular expense as the tax law can be quite complex and what you think may be deductible may not necessarily be the case.