On Wed 27.7.2016, the ATO released TD 2016/14 stating that a taxpayer who carries on a business is entitled to a general deduction under s8-1 of the ITAA 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.

ATO ID WITHDRAWN: Following the release of this Determination, the ATO withdrew ATO ID 2004/427 (Deductions: gifts to clients). The ATO said the ID is withdrawn because the ATO view is considered in the Determination.

DATE OF EFFECT: Applies to income years commencing both before and after its date of issue.

[LTN 143, 27/7/16]

[FJM comment: in my opinion, this ruling unlikely to be correct, to the extent that it requires the gift to be designed to encourage future income, as opposed to acknowledge past patronage. This determination grew out of the above ATOID, which was ruling on a situation where the gift happened to be to encourage future income and somehow, in escalating this to a Determination, this ‘future income’ aspect became a requirement. In the Ronpibon case [1949] HCA 15, quoted by the Commissioner as his authority, the High Court also said that it was a ‘necessary and sufficient’ requirement (for a general deduction) that the ‘occasion of’ the loss or outgoing, being incurred, was to be found in what was productive of assessable income. And Placer Pacific [1995] FCA 1362 went on to make it clear that the relevant ‘occasion’ could be found in what was productive of ‘past’ income. This appears to an invented requirement – perhaps even inadvertent given that the explanation in para 13 does not articulate any such requirement.]

Extract from Tax Determination

Income tax: is an outgoing incurred by a business taxpayer for a gift provided to a former or current client deductible under section 8-1 of the Income Tax Assessment Act 1997?

1. Yes, a taxpayer who carries on a business is entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 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.

Explanation

12. Losses or outgoings are incurred in gaining or producing assessable income where they are ‘incidental and relevant to that end’ (Ronpibon). Where a taxpayer is carrying on a business for the purpose of gaining or producing assessable income, voluntary expenditure incurred for business needs may be deductible. It is the taxpayer who decides whether the expenditure ‘is dictated by the business ends to which it is directed’ (Snowden & Willson) [1958] HCA 23.

13. If a taxpayer provides a gift that is characterised as being made for the purpose of producing future assessable income, the outgoing incurred on the gift will be incidental and relevant to gaining or producing assessable income. The taxpayer’s outgoing is ‘dictated by the business ends to which it is directed’ and is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.