ENTERTAINMENT EXPENSE
Public Ruling No. 3/2008
Date of Issue: 22 October 2008
This Ruling is effective from the year of assessment 2008 and subsequent years of assessment. This Ruling supersedes Public Ruling No. 3/2004 issued on 8 November 2004 and Addendum to Public Ruling No. 3/2004 issued on 23 August 2007.
1. This ruling explains:
(a) the tax treatment of entertainment expense as a deduction against grossincome of a business; and
(b) steps to determine the amount of entertainment expense allowable as adeduction.
2. General provision for deduction
Generally, under subsection 33(1) of the ITA, an expense wholly and exclusively incurred in the production of gross income from a source is allowable as a deduction against gross income from that source.
However, the allowable expense under subsection 33(1) of the ITA is subject to the specific prohibition under subsection39(1) of the ITA.
3. Deduction for entertainment expense
An entertainment expense that is wholly and exclusively incurred in the production of gross income under subsection 33(1) of the ITA is not allowed a deduction of fifty percent (50%) unless the entertainment expense falls within any of the specified categories in proviso (i) to (viii) of paragraph 39(1)(l) ITA, then it qualifies for adeduction of one hundred percent (100%).
4. Principles in determining the allowable entertainment expense
In determining whether an entertainment expense can be allowed as a deduction and the amount to be allowed, the following steps have to be adhered to:
(a) Determine whether the expense falls within the definition of entertainment as provided under section 18 of the ITA.
No deduction is allowed as entertainment expense if the expenditure does not fall within the definition ofentertainment.
(b) If the expense amount falls within the definition of entertainment provided under section 18 of the ITA, determine whether the expense is wholly and exclusively incurred in the production of gross income under subsection 33(1)of the ITA.
If the expense is not wholly and exclusively incurred in the production of gross income, then the expense is not allowed a deduction. The test under subsection 33(1) of the ITA is also applicable to entertainment expense as it is applicable to other expenses.
(c) If the expense is allowable under subsection 33(1) of the ITA, determine whether that expense is included under any of the categories of entertainment expense specified under proviso (i) to (viii) to paragraph 39(1)(l) of the ITA. If the expense is included under any of those provisos, a deduction of one hundred percent (100%) against gross income is allowed. The remaining entertainment expense which does not fall within the mentioned provisos is allowed a fifty percent (50%) deduction against gross income.
5. Steps to determine allowable entertainment expense
The principles mentioned in paragraph 4 should be applied in determining the amount of allowable entertainment expense. Below illustrates the tax treatment for several examples of entertainment expense:
5.1 Entertainment given to a potential customer in a closed transaction - 0% deduction (Not wholly and exclusively incurred under subsection 33(1)of the ITA)
5.2 Entertainment given to potential or existing customers during the launching of company’s new product - 100% (Proviso (vii) to paragraph 39(1)(l) of the ITA)
5.3 Wedding gift to customer - 0% (Not wholly and exclusively incurred under subsection 33(1)of the ITA)
5.4 Entertainment to employees of related companies - 0% (Not wholly and exclusively incurred under subsection 33(1)of the ITA)
5.5 Entertainment for annual general meeting of company - 0% (Not wholly and exclusively incurred under subsection 33(1)of the ITA)
5.6 Cash contribution for customer’s annual dinner- 0% (Not wholly and exclusively incurred under subsection 33(1)of the ITA)
5.7 Annual dinner to employees - 100% (Proviso (i) to paragraph 39(1)(l) of the ITA)
5.8 Gift with business logo for customer’s annual dinner - 100% (Proviso (vi) to paragraph 39(1)(l) of the ITA)
5.9 Gift without business logo for customer’s annual dinner - 50% (Not included under provisos (i) to (viii) toparagraph 39(1)(l) of theITA)
5.10 Free trip as an incentive to sales agent for achieving the sales target - 100% (Proviso (vii) to paragraph 39(1)(l) of the ITA)
5.11 Gift of flower for customer’s opening of new outlet - 50% (Not included under provisos (i) to (viii) to paragraph 39(1)(l) ofthe ITA)
5.12 Entertainment to suppliers - 50% (Not included under provisos (i) to (viii) to paragraph 39(1)(l) of the ITA)
5.13 Hampers for customers during festive seasons - 50% (Not included under provisos (i) to (viii) to paragraph 39(1)(l) ofthe ITA)
Public Ruling No. 3/2008
Date of Issue: 22 October 2008
This Ruling is effective from the year of assessment 2008 and subsequent years of assessment. This Ruling supersedes Public Ruling No. 3/2004 issued on 8 November 2004 and Addendum to Public Ruling No. 3/2004 issued on 23 August 2007.
1. This ruling explains:
(a) the tax treatment of entertainment expense as a deduction against grossincome of a business; and
(b) steps to determine the amount of entertainment expense allowable as adeduction.
2. General provision for deduction
Generally, under subsection 33(1) of the ITA, an expense wholly and exclusively incurred in the production of gross income from a source is allowable as a deduction against gross income from that source.
However, the allowable expense under subsection 33(1) of the ITA is subject to the specific prohibition under subsection39(1) of the ITA.
3. Deduction for entertainment expense
An entertainment expense that is wholly and exclusively incurred in the production of gross income under subsection 33(1) of the ITA is not allowed a deduction of fifty percent (50%) unless the entertainment expense falls within any of the specified categories in proviso (i) to (viii) of paragraph 39(1)(l) ITA, then it qualifies for adeduction of one hundred percent (100%).
4. Principles in determining the allowable entertainment expense
In determining whether an entertainment expense can be allowed as a deduction and the amount to be allowed, the following steps have to be adhered to:
(a) Determine whether the expense falls within the definition of entertainment as provided under section 18 of the ITA.
No deduction is allowed as entertainment expense if the expenditure does not fall within the definition ofentertainment.
(b) If the expense amount falls within the definition of entertainment provided under section 18 of the ITA, determine whether the expense is wholly and exclusively incurred in the production of gross income under subsection 33(1)of the ITA.
If the expense is not wholly and exclusively incurred in the production of gross income, then the expense is not allowed a deduction. The test under subsection 33(1) of the ITA is also applicable to entertainment expense as it is applicable to other expenses.
(c) If the expense is allowable under subsection 33(1) of the ITA, determine whether that expense is included under any of the categories of entertainment expense specified under proviso (i) to (viii) to paragraph 39(1)(l) of the ITA. If the expense is included under any of those provisos, a deduction of one hundred percent (100%) against gross income is allowed. The remaining entertainment expense which does not fall within the mentioned provisos is allowed a fifty percent (50%) deduction against gross income.
5. Steps to determine allowable entertainment expense
The principles mentioned in paragraph 4 should be applied in determining the amount of allowable entertainment expense. Below illustrates the tax treatment for several examples of entertainment expense:
5.1 Entertainment given to a potential customer in a closed transaction - 0% deduction (Not wholly and exclusively incurred under subsection 33(1)of the ITA)
5.2 Entertainment given to potential or existing customers during the launching of company’s new product - 100% (Proviso (vii) to paragraph 39(1)(l) of the ITA)
5.3 Wedding gift to customer - 0% (Not wholly and exclusively incurred under subsection 33(1)of the ITA)
5.4 Entertainment to employees of related companies - 0% (Not wholly and exclusively incurred under subsection 33(1)of the ITA)
5.5 Entertainment for annual general meeting of company - 0% (Not wholly and exclusively incurred under subsection 33(1)of the ITA)
5.6 Cash contribution for customer’s annual dinner- 0% (Not wholly and exclusively incurred under subsection 33(1)of the ITA)
5.7 Annual dinner to employees - 100% (Proviso (i) to paragraph 39(1)(l) of the ITA)
5.8 Gift with business logo for customer’s annual dinner - 100% (Proviso (vi) to paragraph 39(1)(l) of the ITA)
5.9 Gift without business logo for customer’s annual dinner - 50% (Not included under provisos (i) to (viii) toparagraph 39(1)(l) of theITA)
5.10 Free trip as an incentive to sales agent for achieving the sales target - 100% (Proviso (vii) to paragraph 39(1)(l) of the ITA)
5.11 Gift of flower for customer’s opening of new outlet - 50% (Not included under provisos (i) to (viii) to paragraph 39(1)(l) ofthe ITA)
5.12 Entertainment to suppliers - 50% (Not included under provisos (i) to (viii) to paragraph 39(1)(l) of the ITA)
5.13 Hampers for customers during festive seasons - 50% (Not included under provisos (i) to (viii) to paragraph 39(1)(l) ofthe ITA)
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