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At this time of year it is common to provide gifts to existing clients and customers as an act of goodwill and as a thank you for their custom and support of your business.
As the gift is an expense to your business it is generally considered to be a tax deduction.
The ATO has considered the act of gift making to clients and several cases exist where the tax treatment has been tested in the courts. If there is an expectation that the gift will either generate future business from the client or motivate them to refer your services to others, it is considered that the expenditure of the gift was in the nature of business promotion.
In cases where the gift is provided to a client up to 12 months after the cessation of the services, there is a prospect that the expenditure may produce assessable income in the future. Consequently the ATO considers the gifting expenditure to be incurred in carrying on a business for the purpose of gaining or producing assessable income.
It should be noted that the gift does not constitute the provision of entertainment which is a non-tax deduction.
To clarify how the gifts you intend to provide clients or customers may be interpreted by the ATO, talk to Maddern Accountants on (03) 9999 7200.
Next week, we will discuss tax deductibility of Christmas gifts to staff.