Edited version of private advice

Authorisation Number: 1012679347447

Ruling

Subject: Boat expenses

Questions and answers

1. Are you entitled to a deduction for the costs associated with catering to entertain clients, perspective clients and staff?

No.

2. Are you entitled to a deduction for the costs associated with maintaining property used to entertain your clients, perspective clients and staff on?

No.

This ruling applies for the following periods:

Year ended 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

The scheme commenced on:

1 July 2013

Relevant facts and circumstances

You are the CEO of a company in Australia.

You purchased property which you use for personal and professional purposes.

You use the property to entertain clients, perspective clients and staff to build up your client base.

You have found this approach to be good professionally to get away from the office.

You provide food and drink on these outings.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Division 32

Income Tax Assessment Act 1997 Section 32-5

Income Tax Assessment Act 1997 Section 32-10

Income Tax Assessment Act 1997 Subdivision 32-B

Income Tax Assessment Act 1997 Section 32-20

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) provides a deduction from your assessable income can be claimed for 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) of the ITAA 1997 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 of the ITAA 1997 to the extent that you incur a loss or outgoing in respect of providing entertainment.

Section 32-15 does not allow a deduction for property where the property is used to provide the entertainment. Your use of the property is taken not to be for the purpose of producing assessable income if section 32-5 would stop you deducting a loss or outgoing if you incurred it in the income year in providing the 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.

Taxation Ruling TR 97/17 Income tax and fringe benefits tax: entertainment by way of food or drink (TR 97/17) outlines the Commissioner's view of what is entertainment as it relates to the provision of food or drink for the purposes of applying the relevant provisions of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) and the ITAA 1997.

Paragraph 10 of TR 97/17 states that meal entertainment arises when the food or drink provided has the character of entertainment. The meal may be substantial, may be consumed as part of a social gathering, or may be consumed with other forms of entertainment.

Paragraph 18 of TR 97/17 states:

In most cases the mere provision of food or drink satisfies the entertainment test. It is only a narrow category of cases where the mere provision of food and drink does not amount to entertainment for the purposes of Division 32 of the ITAA 1997

Taxation Determination TD 94/55 Income tax: when does providing an item of property constitute the provision of entertainment within the meaning of subsection 32-10(1) of the Income Tax Assessment Act 1997? (TD 94/55) discusses when providing an item of property constitutes the provision of entertainment, and gives the following example:

Example 2

Costs incurred in providing glasses of champagne, hot meals, theatre tickets, holiday accommodation, hired entertainers, and hired sporting equipment, have a dynamic and immediate character. Consumption can usually occur immediately. These items of property do not last beyond initial consumption (or are to be returned at the end of the hire period).

Hence, these items of property would generally constitute provision of entertainment.

In your case, you take clients, prospective clients and staff to your property providing them with food and drinks.

You are viewed as providing entertainment to your existing and prospective clients by way of food and/or drink. Therefore, section 32-5 of the ITAA 1997 applies to deny a deduction for meal and drink expenses under section 8-1 of the ITAA 1997 to the extent that you incurred a loss or outgoing in respect of providing entertainment.

Exception to section 32-5 of the ITAA 1997

Subdivision 32-B of the ITAA 1997 details the exceptions to section 32-5 of the ITAA 1997. One of the exceptions is section 32-45 of the ITAA 1997, which states that section 32-5 of the ITAA 1997 does not stop you deducting expenses of providing entertainment to promote or advertise to the public a business, or its goods and services.

Under Item 4.2 in section 32-45 of ITAA 1997 a deduction is allowed for the costs of providing or exhibiting the entities products or services provided the costs are incurred to promote those products or services to the public. Even though an event may involve entertainment, the direct costs incurred in promoting the product or services are generally deductible. The costs associated with the entertainment, for example food and drinks, are not deductible unless the entertainment is available to all of the public.

Item 4.3 in section 32-45 of ITAA 1997 allows a deduction for providing entertainment to promote or advertise to the public a business or its goods and services. This 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.

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.

Application to your situation

You provide entertainment to your clients, prospective clients and staff at your property.

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.

As outlined above, the exception to section 32-5 of the ITAA 1997 will not apply under items 4.2 and 4.3 to costs associated with the entertainment unless the entertainment is available to all of the public, or when some people have a greater opportunity to receive the benefits of the entertainment than other members of the public do.

The exception therefore does not apply in your situation given that the entertainment is provided only to those parties who have been invited. You therefore cannot claim a deduction for any costs incurred in relation to the purchase of food and/or drinks along with expenses relating to your property, for your existing, perspective clients and staff.

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