Every year, we receive a common question: Are client Christmas gifts tax deductible?
If you’re planning to give gifts to your clients this Christmas, you can relax knowing that, in most cases, these expenses will be deductible for your business. So, feel free to get those stockings ready and spread some Christmas cheer without stressing too much about the taxman!
How Does the ATO Classify a Gift?
Numerous types of gifts provided to clients can be tax deductible, as long as they are intended to promote goodwill and encourage future business. The ATO views gifts as part of your business’s marketing and relationship-building strategies. This makes them entirely tax deductible.
The same principle applies to gifts given to your referral sources. For instance, let’s say you’re an electrician and often receive referrals from a local real estate agent. A gift as a token of appreciation would qualify for a tax deduction. These thoughtful gestures towards clients, suppliers, and referral sources not only enhance business relationships but also serve as a more tax-efficient method of expressing gratitude compared to hosting a Christmas party.
How Do Gifts Compare to Christmas Parties?
Although client Christmas gifts are typically tax-deductible, Christmas parties for clients, suppliers, and referral sources do not qualify for deductions. This is because the ATO classifies parties as “entertainment,” which is ineligible for tax breaks. Therefore, if you must choose between hosting a Christmas party or giving a thoughtful gift to your clients or referral partners, the gift is the more tax-efficient choice.
The tax rules change again when considering Christmas parties and gifts for your employees. To learn more, you may like to read our article “Are Office Christmas Parties Tax Deductible?”
What About Fringe Benefits Tax (FBT)?
FBT primarily applies to gifts given to employees, not clients. Therefore, if your gifting is exclusively for clients, FBT typically won’t be an issue. However, if you’re also considering gifts for your employees, it’s essential to closely monitor the total cost of the gift and any associated entertainment (like a Christmas party) to remain beneath the minor benefits exemption threshold of $300 per employee. Surpassing this limit may subject you to FBT.
Tax-Deductible Gift Ideas
If you’re looking for a tax-effective way to say thanks to your clients or referral sources this Christmas, gifts are the way to go. To ensure you adhere to the guidelines and make the most of your tax deductions, here are some examples of client gifts that are tax-deductible:
- Hampers or wine: These thoughtful and practical gifts are quite popular among clients.
- Gift vouchers: A flexible choice that allows clients to indulge at their convenience.
- Corporate merchandise: Branded items such as pens, diaries, or calendars may also qualify as deductible gifts, as long as they are given as part of your goodwill strategy.
So, feel free to fill up those stockings and spread some festive cheer. Your generosity will not only be appreciated by your clients but also by your tax return!
