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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of private ruling

Authorisation Number: 1011616867365

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Ruling

Subject: marketing and membership fees, deduction for prizes

Question 1

Are you entitled to a deduction for the cost of prizes used in competitions run by your business for customers of members?

Answers

Yes.

Question 2

Are members of your business entitled to claim a deduction for the cost of their membership and marketing fees?

Answer

Question invalid

This ruling applies for the following period

1 July 2010 to 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

You are establishing a marketing business.

You will have members and you will charge membership and marketing fees to the members.

You will supply the following things in return for the membership and marketing fees:

Yellow Pages style advertisements of the members on your website, which will have the members' names, say what the members do and provide contact details

The members' customers will register on your website to participate in prize draws that you will conduct.

There will be no charge to your members' customers to register for the prize draw and the winners will be selected randomly by computer.

You will give cash and non-monetary prizes to the winners.

You will purchase the non-monetary prizes.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1 and

Taxation Administration Act 1953 Schedule 1 Section 14ZAF

Reasons for decision

Question 1

Summary

You are entitled to claim a deduction for the value of cash and non-monetary prizes awarded to clients of members who belong to your business as there is a connection between the cost of the prizes and your assessable income.

Detailed reasoning

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income or a provision of the taxation legislation excludes it.

The Courts have held that a deduction will be allowable if there is a sufficient nexus between a loss or outgoing and whatever produces the assessable income (Ronpibon Tin NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431).

In your case, your business will charge membership and marketing fees to members. This entitles the members' clients to enter competitions on your website to win cash and other prizes which you purchase. It is considered that a link exists between the prizes and the fees earned from members.

When prizes are awarded, it is necessary to consider whether Division 32 of the ITAA 1997 prevents a deduction from being claimed.

Under Division 32 of the ITAA 1997 the costs of providing entertainment are generally not an allowable deduction. The cost of providing holiday accommodation is generally regarded as entertainment for taxation purposes as outlined in Tax Determination TD 94/55.

Division 32 of the ITAA 1997 provides for some exceptions in relation to entertainment expenses. The prohibition on entertainment expense deductions does not apply where the expense is incurred to promote or advertise to the public a business or its goods or services. This exception does not apply if some people have a greater opportunity to get the benefits of the entertainment than ordinary members of the public have (item 4.3 section 32-45 of the ITAA 1997).

In your case, it is considered that Division 32 of the ITAA 1997 would not apply.

As a link exists between the prizes and the earning of your assessable income a deduction will be allowable for the value of cash prizes and the purchase cost of non-monetary prizes.

Question 2

Summary

The Commissioner has declined to rule on your query as to whether members of your business are entitled to claim a deduction for the cost of membership and marketing fees as the question relates to the tax affairs of other entities.

Detailed reasoning

Section 14ZAF of the Taxation Administration Act 1953 provides that a person may apply for a ruling on the way in which, a tax law or tax laws would apply to that person in respect of a year of income in relation to an arrangement.

Taxation Ruling TR 2006/11 states that a taxpayer, their agent (which includes their tax agent) or their legal personal representative (which includes a person who holds a general power of attorney granted by the taxpayer) may apply for a private ruling about how a relevant provision of the taxation legislation applies to the taxpayer. Trustees may apply for private rulings about the affairs of the trust, and a partner (or other authorised person) may apply for private rulings for a partnership as agent of the partnership (and its partners).

A private ruling applies only to the entity in respect of whom the application was made. The exception being a private ruling given to a trustee in respect of the tax affairs of a trust. In this situation, the private ruling also applies to the beneficiaries of the trust and to any replacement trustee provided the ruling would have applied to the former trustee.

You have requested a ruling on whether members of your business will be entitled to claim a tax deduction for membership and marketing fees.

Your ruling request is invalid as you have not clearly identified the entity to whom the ruling will apply. The Commissioner cannot issue a ruling covering all of your members as their individual circumstances may differ and this may affect the outcome of the ruling.

Members who wish to know if they are entitled to a tax deduction for the cost of membership of your business and associated marketing fees should contact the Tax Office to discuss their particular situation.

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