Tutorial No 9 Specific Deductions - Deduction Limitations Solution PDF

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The University of Adelaide

Income Tax Law III

Tutorial No. 9 Trading Stock, Gifts & Entertainment Solutions (Starting the week beginning Monday 17 May 2021) Tutorial 9 Q 1 (1)

Consider the following scenarios involving gifts and advise whether the expenditure is deductible. Assume all the recipients are deductible gift recipients.

(1)

Jiao-Long made a donation of $300 to a compulsory Catholic school building fund.

A gift or donation may be allowable under Division 30 subject to certain conditions. It is not necessary to consider this legislation under these facts. A gift is not defined in the ITAA 1997 or ITAA 1936 and so its meaning must be made according to ordinary concepts. In ordinary terms, a gift is a ‘thing given willingly to someone without payment; a present’ (Google Search)

A legal definition according to US Legal.com A gift is the voluntary transfer of property or funds to another without receiving anything of value in return and without conditions attached while both the giver and the recipient are still alive. ……

Also refer to TR 2005/13 – Tax deductible gifts What is a gift? This ruling advises that a gift is a transfer made voluntarily where the taxpayer receives no material advantage. The payment of the $300 building fund to the Catholic school would not be a gift because it is a compulsory payment, as part of the school fees. The payment is not a voluntary transfer. See TD 93/57, TD 2004/7.

(2)

Jiao-Long made a donation purchasing ten $5 tickets in the BoysTown Lottery - 1st prize winner received a property at the Gold Coast valued at $600,000, and 99 subsequent prize winners received a $1,000.

Based upon the definitions above, the payment of $50 has come with conditions attached ie a winning member has rights to receive property and prizes (money) in the lottery. Therefore, the purchase of lottery tickets does not constitute a gift.

(3) Jiao-Long made a $1 donation to the Royal Society of Prevention of Cruelty to Animals (South Australia) Incorporated.

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Income Tax Law III

Division 30 sets out various rules for working out deductions when making gifts or contributions. S 30-15 provides “Section 30-15(1): You can deduct a gift or contribution that you make in the situations set out in the following table. It tells you:

   

Who the recipient of the gift or contribution can be; and The type of gift or contribution that you can make; and How much you can deduct for the gift or contribution; and Any special conditions that apply. “

Important requirements of s 30-15 include:  The gift must be paid to a qualifying recipient  The gift may be in money or property  The gift must be $2 or more to be deductible  The gift must not be a testamentary gift. Jiao-Long has made a donation to the Royal Society for Prevention of Cruelty to Animals (South Australia) Incorporated. According to s 30-15, one of the special conditions is that the recipient must meet the requirements of s 30-17 or be mentioned by name in the relevant table item in Subdivision 30-B. There are many funds, authorities or institutions specifically mentioned in the tables in Subdivision 30-B. These tables include institutions that deal with:  Health  Education  Research  Welfare and Rights  Sports and Recreation and  Cultural Organisations. This is a gift paid to a Welfare and Rights institution. The Royal Society for Prevention of Cruelty to Animals (South Australia) Incorporated is a qualifying recipient as it is mentioned in the Welfare and Rights table, s 30-45(2) Item 4.2.9. Therefore there is no need to consider s 30-17 because the fund has been specifically mentioned. (NB s 30-17 is outside the scope of this course and will not be considered further). When you make a donation in money form, you can claim the amount of money you donate. However, in this situation, Jiao-Long’s donation in money form is not greater than $2. Jiao-Long cannot claim a deduction under section 30 for a gift of $1.

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(4)

Income Tax Law III

Jiao-Long gifted a Pro-Hart painting to the Flinders Medical Centre (the public hospital, not the private hospital). He bought the Pro Hart painting for $2,000 in 2005. At the time of donation its market value was $10,000.

This is a gift paid to a health institution. Jiao-Long has made a donation to a public hospital – refer to the table item in Subdivision 30-B, s 30-20(1) Item 1.1.1. The question advises that the Flinders Medical Centre is a deductible gift recipient and therefore meets the requirements of s 30-17. However, the donation is made in the form or property, not money. Under s 30-15, the value of a property donated to a recipient under Item 1 – where the type of contribution is at para (d) is valued at more than $5,000 by the Commissioner – the deduction is the value that the Commissioner determines. The cost or the market value is not relevant. Therefore Jiao-Long would need to ask for the Commissioner how much would his Pro Hart painting’s value be, and he would claim a tax deduction accordingly.

Tutorial 9 Q 2 - Entertainment Common examples of entertainment include:  Business lunches  Cocktail parties  Tickets to sporting and theatrical event  Sightseeing etc What about the following examples? (1) Airport lounge membership of an employee paid by employer Airport lounge facilities are used primarily by taxpayer's employees whilst they are on business travel and air lounge memberships provide a number of benefits, including food and drink, business centres and full bathroom facilities. It is arguable that this is therefore entertainment. In ATO ID 2002/95, the taxpayer stated that the primary function of Airport Lounge Clubs was to provide business facilities and prompt and efficient services relating to the travel of their members. Hospitality, such as food, drink and recreation, was merely incidental to the primary function of these. The ATO took the view in ATO ID 2002/957 that the airport lounges fees were deductible under s 8-1 and were not an entertainment expense under Division 32. Note further that lounge memberships are exempt under S 58Y as an exempt benefit.

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(2)

Income Tax Law III

Overtime meal allowances paid to employees vs Entertainment allowance paid to senior managers.

Overtime meal allowance Arguably a meal allowance paid under an industrial award could be entertainment, if it is regarded as entertainment by way of food or drink. But, perhaps the stronger case is that a meal allowance is not entertainment, because although the employer is expressly paying the employee to eat food and drink, the character of the food and drink may not be entertainment, but more so of sustenance to permit the employee to continue being able to effectively focus and work the longer hours required with overtime. Here food and drink is provided for a work-related purpose rather than for the purpose of entertainment. Overtime meal allowances generally are included in the employees’ assessable income. However, conclude, on balance that an overtime meal allowance would not be regarded as entertainment. Exceptions But even if the meal allowance is considered entertainment then, the following exceptions apply. 

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To the employer - Note that s 32-30 Item 1.4 provides that an employer can claim the cost of providing food and drink (not an allowance) under an industrial instrument relating to overtime. BUT s 32-30 Item 1.8 provides that an employer can claim the cost of an allowance that is included in an employee’s assessable income. (This includes an overtime meal allowance under an industrial award) Therefore, s 8-1 would not be denied by Division 32. To the employee – The employee would be able to claim a deduction for the cost of meals under s 8-1 spent for overtime. TD 2014/19 and TR 2004/6. Sec 32-50 specifically provides that you can still claim a deduction to buy food or drink associated with an allowance under an industrial instrument.

Entertainment allowance paid to senior managers Similar to the discussion above regarding the Director who took clients to dinner, an entertainment allowance paid to senior managers to entertain clients would be entertainment and would not be deductible under s 8-1 because of s 32-5. Exception  To the employer - S32-30 Item 1.8 provides an employer can claim the cost of entertainment where the employee is given an allowance that is included in his or her assessable income. The employee would include the allowance in their income under either s15-2 Smith or s 6-5 British Columbia vs Ostrum. In contrast to the meal allowance, a senior manager would not be able to claim an entertainment expense because of s 32-5.

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(3)

Income Tax Law III

Christmas lunch and gifts provided to employees at a restaurant vs sandwiches and coffee provided at the workplace

Morning teas, afternoon teas and light lunches are not considered an entertainment expense, and are fully deductible by employers under s 8-1. IT 2675 But, the costs of providing social functions like Christmas lunches are an entertainment expense and not deductible. s 32-5 In this situation the location would be irrelevant, although generally speaking, it is more likely an expense is more likely to be workrelated if it is on the employer’s premises. Also, the cost of providing Christmas gifts may or may not be entertainment depending on the nature of the gift. For example, theatre tickets and sporting event tickets, would be an entertainment expense, and therefore would not be deductible. Exception : If an employer pays FBT on the Christmas lunch and gifts provided, the cost is deductible under s 8-1, s 32-20. However, an employer can provide non-entertainment gifts, such as flowers, perfume, gift vouchers, wine and hampers, which would be deductible under s 8-1. (Note some students think that a gift of a bottle of wine is entertainment. This can be so if consumed on employer premises, but if consumed at home it would not be entertainment. Refer students to the definition of entertainment and also TD 94/55 where the Commissioner talks about ‘timeliness’.) (4) $5,000 paid by an employer on a seminar that went from 9 – 3 pm with a one-hour break for lunch, and was to train employees in its new business procedures/ The legislation is very specific around seminars, and therefore what can be deducted under s 8-1. If an employer has paid for a seminar, it is assumed that some of the cost would relate to food and drink in the lunch break, and that part would not be deductible because of s 32-5. Exception : But it could still remain deductible because of s 32-35 Item 2.1, which stops the denying provision under s 32-5 applying. Under s 32-35, entertainment for the food, drink, travel and accommodation of an individual is allowable providing the individual attends a *seminar that *goes for at least four hours. S 32-65 provides a wide definition of seminar as a ‘conference, convention, lecture, meeting (including a meeting for presentation of awards), speech, “question and answer” session, training session or educational course.’

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Income Tax Law III

As this is a training session, this would be a seminar. S 32-65 also works out when a seminar goes for at least 4 hours and does not include the time during a meal, or any break during the seminar for the purpose of a meal, rest or recreation. As the seminar goes for 5 hours (ie 6 hours less a 1hour break) then it goes for at least 4 hours. Exceptions to the Exception. But there are 3 exceptions to the exception. The exception under s 32-65 does not apply if the seminar is (1) a *business meeting, or (2) the seminar’s main purpose is to promote or advertise a business for its goods or services or (3) the seminar’s main purpose is to provide entertainment. S 32-65(3) defines a business meeting. 

A seminar is a business meeting if its main purpose is for individuals who are associated with the carrying on of a business to give or receive information, or discuss matters relating to the business.

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However, a seminar is not a business meeting if it is organized by an employer solely for training employees in matters relevant to the employer’s business.

In this situation, the seminar’s purpose was training regarding new business procedures, not to promote or advertise the business or to provide entertainment. It is also not a business meeting. So the 3 exceptions to the exception do not apply. Conclusion The entertainment expense for food and drink at the training would be allowed as a deduction under s 8-1. It would not be denied under s 32-5 because it meets the requirement of a seminar. The seminar goes for at least 4 hours and the 3 exceptions at s 32-35 Item 2.1 do not apply.

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