Edited version of private advice

Authorisation Number: 1052348703368

Date of advice: 21 January 2025

Ruling

Subject: Work-related deductions

Question 1

Can you claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for food and drink you pay for to take current and prospective clients for coffee or light lunch at cafes, or dinner at a restaurant?

Answer 1

No.

Question 2

Can you claim a deduction under section 8-1 of the ITAA 1997 for your own coffee or light lunch at a café where you are meeting current or prospective clients for a sales pitch or a coaching meeting.

Answer 2

No.

Question 3

Can you claim a deduction under section 8-1 of the ITAA 1997 for the cost of taking a prospective or current client on an excursion to a museum or other recreational activity?

Answer 3

No.

Question 4

Can you claim a deduction under section 8-1 of the ITAA 1997 for gifts you purchase for current clients, such as clothing?

Answer 4

No.

This ruling applies for the following period:

X of XX 20XX to X of XX 20XX

Relevant facts and circumstances

You operate a business as a sole trader.

You have no business premises.

You meet with current and prospective clients in cafes, restaurants, and clubs. This is also where you conduct most of your business. As part of this, you offer your clients refreshments and meals.

Part of your strategy to gain and maintain clients is to take your clients out for activities, as well as purchase them food and drink.

You also have taken clients on other activities.

You provide your current clients gifts such as clothing.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 8-5

Income Tax Assessment Act 1997 section 32-5

Income Tax Assessment Act 1997 section 32-10

Income Tax Assessment Act 1997 section 995-1

ATO view documents and case law

FC of T vs. Cooper (1991) 21 ATR 1616: 91 ATC 4396

Magna Alloys & Research Pty Ltd v FC of T 80 ATC 4542

Taxation Determination TD 2016/14 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?

Taxation Ruling TR 95/33 Income Tax: subsection 51(1) - relevance of subjective purpose, motive or intention in determining the deductibility of losses and outgoings

Taxation Ruling TR 97/17 Income tax and fringe benefits tax: entertainment by way of food or drink.

Taxation Ruling TR 2020/1 Income Tax: employees: deductions for work expenses under section 8-1 of the Income Tax Assessment Act 1997.

Reasons for decision

Question 1

Can you claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for food and drink you pay for to take current and prospective clients for coffee or light lunch at cafes, or dinner at a restaurant?

Summary

No. You cannot deduct the expenses incurred in taking your current and prospective clients out for meals and drinks. This is because these expenses are not necessarily incurred in carrying on a business for the purpose of producing assessable income, and they are also private in nature. Furthermore, these expenses are expressly prohibited from being claimed as a deduction as they are classified at entertainment expenses and are prohibited from being deducted against your assessable income.

Detailed reasoning

You can deduct 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 (8-1(1) ITAA 1997).

However, you cannot deduct a loss or outgoing if it is a loss or outgoing of a private or domestic nature, or a specific provision prevents you from deducting it (8-1(2) ITAA 1997).

To be considered necessarily incurred for the purpose of determining whether an outgoing is deductible for a business, the outgoing must have essential character to the business, and have sufficient connection with the operations or activities which more directly gain or produce your assessable income (paragraph 2 TR 95/33).

Judge Deane and Fisher provided the view that an outgoing incurred by a company will be necessarily incurred "if" the outgoing was reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of that business (Magna Alloys & Research Pty Ltd v FC of T 80 ATC 4542 per Deane and Fisher JJ at p 4,561).

Considering this, purchasing your current and prospective client's food and drink is far removed from performing your income producing activity. Even if business is being discussed, these expenses are not related to your income producing activity and are therefore not deductible under section 8-1 of the ITAA 1997.

Furthermore, you cannot make a deduction for a loss or outgoing to the extent that it is a loss or outgoing that is private or domestic in nature.

It is generally considered that expenditure on the daily necessities of life (for example food and drink), are generally a private expense and are not incurred in gaining or producing assessable income.

The issue of deductibility of meals was considered by the Full Federal Court in FC of T vs. Cooper (1991) 21 ATR 1616; 91 ATC 4396. A professional rugby player attempted to claim a deduction for expenses incurred for purchasing extra food and drink they were instructed to consume to increase size and strength. Judge Hill stated in an appeal in Full Federal Court "For the Commissioner, it was submitted that, except in a rare case, the essential character of food was always private." Because the characteristics were found to be inherently private in nature, the deduction for the taxpayer was denied.

Because food and drink are considered to be private in nature, then the second negative limb of 8-1 of the ITAA 1997 is satisfied, and you will not be able to claim a deduction for the outgoing.

In addition to this, if there is a specific provision of the act that strictly prohibits the deductibility of an outgoing, then you cannot deduct it (8-1(2)(d) ITAA 1997).

Subdivision 32-A of the ITAA 1997 specifically prohibits the deduction of entertainment expenses, except for some specific exceptions outlined in Subdivision 32-B of the ITAA 1997.

The exceptions in subdivision 32-B are:

•                Fringe benefits

•                Certain employer expenses

•                Seminar expenses

•                Entertainment industry expenses

•                Promotion and advertising expenses, and

•                Certain other expenses, specifically food and drink where an overtime allowance is paid and providing entertainment to disadvantaged members of the public.

Entertainment means entertainment by way of food, drink or recreation; or accommodation or travel to do with providing entertainment by way of food, drink or recreation (32-10 ITAA 1997).

To the extent that you incur an expense in respect to providing entertainment, you cannot deduct it, even if business discussions or transactions occur (32-5 ITAA 1997).

Some examples of what is entertainment include business lunches and social functions.

Taxation Ruling TR 97/17 Income tax and fringe benefits tax: entertainment by way of food or drink (TR 97/17) provides an objective analysis is required in all circumstances surrounding the provision of food or drink to determine when the provision of food or drink to a recipient result in the entertainment of that person.

In making this determination the following should be considered:

•                Why the food or drink is being provided;

•                What type of food or drink is being provided;

•                When that food or drink is being provided; and

•                Where the food or drink is being provided.

Food or drink which is determined by these criteria to constitute entertainment is taken to be 'meal entertainment'.

Paragraph 18 of TR 97/17 states that the mere provision of food or drink satisfies the 'entertainment' test and there is only a narrow category of cases were the provision of food or drink does not amount to 'entertainment' for the purposes of Division 32 of the ITAA 1997.

The Entertainment table at paragraph 25 of TR 97/17 states that food or drink consumed off the premises by employees, associates and clients is classified as meal-entertainment.

Application to your circumstances

You purchase food and drink at cafes and restaurants for your current and prospective clients, which is, in your opinion, a strategy to gain and maintain their business. However, you are unable to claim a deduction for these expenses because these purchases do not satisfy the first positive limb to be deductible because they are not necessarily incurred in running your business, and they satisfy the second negative limb of section 8-1 of the ITAA 1997 because they are inherently private in nature.

In addition, entertainment expense by way of food or drink are specifically excluded from being claimed as a deduction (32-5 ITAA 1997).

Whilst the food and drink may not provide entertainment in itself, the mere provision of food and drink satisfies the entertainment test.

Despite business discussions taking place, the food and drink in your case is consumed away from any business premises, which characterises it into meal entertainment. Table (b)(1) at paragraph 25 of TR 97/17 shows that circumstances where food or drink is consumed off premises by clients constitutes the provision of meal entertainment.

You don't meet any of the exceptions under 32-B of the ITAA 1997.

Therefore, the expenses you have incurred in providing light lunch at cafes and dinner at restaurants is not an allowable deduction under section 8-1 of the ITAA 1997.

Question 2

Can you claim a deduction under section 8-1 of the ITAA 1997 for your own coffee or light lunch at a café where you are meeting current or prospective clients for a sales pitch or a coaching meeting.

Summary

No. You are unable to claim a deduction for expenses incurred for purchasing your own food and drink while meeting with current and prospective clients. Food and drink are inherently private in nature, and there is not sufficient connection between earning your business income and the expenses of food and drink.

Detailed Reasoning

you are unable to claim a deduction for a loss or outgoing to the extent that it is a loss or outgoing of a private or domestic in nature (8-1 ITAA 1997).

The Commissioner has confirmed this view in Taxation Ruling TR 2020/1 in paragraph 46 to 48. In this ruling, it confirms that the terms 'private' or 'domestic' do not have a strict definition but have the ordinary meanings of 'personal' and 'relating to the home, household, or household affairs', respectively.

Characterisation of an expense as private typically supports a conclusion that the expense does not have a sufficiently close connection to the earning of assessable income.

Everyday clothing, personal grooming items, and food and drink are usually private expense items.

Application to your circumstances

The expenses that you incur in purchasing yourself food and drink while taking out your current and prospective clients is not deductible under section 8-1 of the ITAA 1997. This is because the food and drink purchased are private in nature, and there is not sufficient connection between earning your business income and the expenses of food and drink.

Question 3

Can you claim a deduction under section 8-1 of the ITAA 1997 for the cost of taking a prospective or current client on an excursion to a museum or other recreational activity?

Summary

No. Entertainment expenses are expressly prohibited from being claimed as a deduction under section 32-5 of the ITAA 1997. Therefore, you cannot claim a deduction for expenses made in taking prospective clients out for recreational activities.

Detailed reasoning

As detailed in question 1, you are unable to claim a deduction for losses or outgoings in respect to providing entertainment (32-5 ITAA 1997).

Entertainment includes recreational activities. The definition of recreation includes amusement, sport, or similar leisure-time pursuits (995-1 ITAA 1997).

Application to your circumstances

You taking your clients out for an excursion qualifies as a recreational activities and out-goings for recreational activities are explicitly prohibited from being claimed as a deduction under section 32-10 of the ITAA 1997. Therefore, you are unable to claim the costs of these recreational activities under section 8-1 of the ITAA 1997.

Question 4

Can you claim a deduction under section 8-1 of the ITAA 1997 for gifts you purchase for current clients, such as clothing?

Summary

No. You cannot claim a deduction for clothing purchased as a gift for your current clients under section 8-1 of the ITAA 1997. This is because there is no connection between you issuing the gifts and earning assessable income.

Detailed reasoning

You can deduct 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 (8-1(1) ITAA 1997). However, you cannot deduct a loss or outgoing to the extent that it is private or domestic in nature (8-1(2) ITAA 1997).

A taxpayer is entitled to a deduction under section 8-1 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. However, the outgoing is not deductible if some other provision of the income tax law prevents it from being deductible, or if the gift is private or domestic in nature (TD 2016/14).

An example of when a gift is deductible is provided in paragraphs 3 to 6 of TD 2016/14. In this example, Sally is carrying on a renovation business. Sally gifts a bottle of champagne to a client who had a renovation completed within the preceding 12 months. Sally expects the gift will either generate future business from the client or make them more inclined to refer other to her business. Although Sally got on well with her client, the gift was not made for personal reasons and is not of a private or domestic character. The outgoing Sally incurred for the champagne is not of a capital nature. Sally is entitled to a deduction under section 8-1 of the ITAA 1997.

Application to your circumstances

You stated that you purchase shirts for your clients. You purchased these pieces of clothing as a way of thanking them for working with you throughout the year. This would indicate that the providing of the gift was made for personal reasons and does not suggest that the underlying reason for purchasing these shirts are connected with earning future income. Therefore, they are not deductible under section 8-1 of the ITAA 1997 as the purchase in private in nature, and not connected with you gaining or producing your assessable income.

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