ATO Interpretative Decision
ATO ID 2005/284
Income taxDeductions and expenses: sponsorship of motor cycle racing
FOI status: may be released
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Status of this decision: Decision Current
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Can the taxpayer claim an income tax deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for expenses incurred in sponsoring motor cycle racing?
Yes. The taxpayer is entitled to claim an income tax deduction for expenses incurred in sponsoring motor cycle racing under section 8-1 of the ITAA 1997.
The taxpayer operates a business.
The taxpayer intends to sponsor motor cycle racing in the belief that the exposure arising from the sponsorship will benefit his business in the form of advertising.
The taxpayer will provide sponsorship for up to four motor cycle riders. This will include paying the day to day costs such as fuel, repairs, spare parts and safety clothing only.
The motor cycles and a support vehicle as well as the clothing and caps worn by the riders will carry the taxpayer's business name.
In addition, the taxpayer intends to hand out business cards at the motor cycle events to stimulate interest in his business through his position as sponsor of the sporting event.
The taxpayer will not pay the costs of purchasing motor cycles.
Reasons for Decision
Section 8-1 of the ITAA 1997 allows a deduction for all losses or outgoings to the extent that they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, no deduction is allowed to the extent that the losses or outgoings are of a capital, private or domestic nature or are necessarily incurred in gaining or producing exempt income.
Losses or outgoings are incurred in gaining or producing assessable income where they are 'incidental and relevant to that end' (Ronpibon Tin NL and Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236). Where a taxpayer is carrying on a business for the purpose of gaining or producing assessable income, the commercial and practical implications of the term 'necessarily incurred' imply that voluntary expenditure incurred for business needs may be deductible. It is the taxpayer who decides whether the expenditure 'is dictated by the business ends to which it is directed' (Federal Commissioner of Taxation v. Snowden & Willson Pty Ltd (1958) 99 CLR 431; (1958) 11 ATD 463; (1958) 7 AITR 308 (Snowden & Willson's Case)). This was further supported in Magna Alloys & Research Pty Ltd v. Federal Commissioner of Taxation (1980) ATC 4542; (1980) 11 ATR 276, when the Court stated
For practical purposes and within the limits of reasonable human conduct, it is for the man who is carrying on the business to be the judge of what outgoings are necessarily incurred
In this case, the taxpayer intends to provide sponsorship in the belief that the exposure from that sponsorship will benefit his business in the form of advertising and will generate future income. As it is the taxpayer who determines the nature of the expenditure to be undertaken in the conduct of their business (Snowden & Willson's Case) the expenses associated with the taxpayer's sponsorship of motor cycle racing are deductible under section 8-1 of the ITAA 1997. They are in the nature of advertising expenses and are directed to enhance the income producing activities of the taxpayer's business and are not excluded on the basis of being capital or of a private or domestic nature.Date of decision: 29 September 2005
Year of income: Year ended 30 June 2001 Year ended 30 June 2002 Year ended 30 June 2003
Income Tax Assessment Act 1997
Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation
(1949) 78 CLR 47
(1949) 8 ATD 431
(1949 4 AITR 236
(1958) 99 CLR 431
(1958) 11 ATD 463
(1958) 7 AITR 308 Magna Alloys & Research Pty Ltd v. Federal Commissioner of Taxation
(1980) ATC 4542
(1980) 11 ATR 276
Advertising & promotion expenses
Deductions & expenses