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Is it deductible?

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Many accountants say that small business owners are often flying blind about important tax deductions. And remember that the tax office also harasses small businesses to pay overdue tax debts, but ignorance can leave anxious taxpayers with costly accounting and legal bills.

For simple and straightforward deductions, the tax office provides booklets showing what can and can't be claimed. However, for the many grey areas, the process is convoluted, confusing and costly. There are many grey areas in working out your tax -- and mistakes can be expensive

The issue was made clear when a reader asked about his special circumstances. He owns a public relations business involved in sponsorships for a prominent sporting stadium. Not only do his clients have a strong presence at the venue, they conduct business and other events there.

The consultant believed his business would benefit if he was a member of a club associated with this particular sports ground. And, of course, he wanted to know if his membership would be tax-deductible.

Chartered accountant Neil Wickenden, from HLB Mann Judd, says the ATO knocked out a lot of membership deductions around the time that the Hawke government disallowed entertainment expenses, to the chagrin of restaurant owners, in 1985.

That said, some loopholes – sorry, I should say exemptions – remain.

“A 1976 ruling concerned with race clubs, where the principal purpose of the club was to operate a public amenity, could provide a tax deduction,” Wickenden says. “However the person's business or income would have to be aligned closely with the club.”

So a freelance, self-employed racing journalist might be able to argue that membership of the Australian Jockey Club was important for getting stories and making connections. A football agent might be able to argue that membership of a related organisation where footballers congregate should be an acceptable deduction.

But it is not an open and shut case. Small businesses have to pay to find out about the legality of deductions and it can be expensive. And recreational clubs, such as leagues clubs, an RSL clubs or golf clubs, could be trouble for those looking for deductions.

But there are exceptions. A tax tribunal found that an art gallery and theatre association did not represent a “recreational club”, so membership was deductible.

Wickenden thinks a PR consultant wanting to join a footy club would probably have no case for a deduction -- but there could be exceptions.

“It's a borderline case,” he says. “If the PR consultant specialised in sporting team sponsorships at the stadium and it could be shown that there is a nexus between his income and the facility, then there could be a case.”

If the consultant wants to reduce his anxiety, he could seek a tax barrister's opinion, Wickenden says.

“If the consultant was ever challenged, he could show that he has acted in good faith and sought expert advice. Otherwise he could opt for a private ruling from the tax office.”

But accountants say this can be even more costly than using a legal eagle.

The tax office finds it difficult to comment on specific cases, but the deputy commissioner of small business, sheds some light on the subject. “The tax law allows you to claim deductions for costs you necessarily incur in carrying on your business,” he says. “However, you cannot claim for things of a private or domestic nature such as child care. The tax law expressly stops or limits deductions for some outgoings, such as fines or entertainment, for example.”

He says taxpayers in doubt should head to the ATO website.

“We have some good publications on our website,” he says. “Anyone with a question can always give us a call on 13 28 66.”

The website, at, provides a booklet of deductible expenses for small businesses. But this doesn't help with the really curly questions. Accountants say that the assistance offered on the help lines is of varying quality and can leave the taxpayer exposed.

A private ruling from the tax office offers certainty. At the end of the day anyone trying to work out whether an expense is deductible will either have to fork out a lot of money to experts – or take an expensive punt. 

Published on: Friday, October 16, 2009

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