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Ruling

Subject: Sponsorship

Question 1

Can you claim a deduction for sponsorship expenses in relation to repairs and maintenance of racing vehicles which you own?

Answer

No.

Question 2

Can you claim a deduction for expenses incurred in purchasing advertising stickers to be placed on the racing vehicles, and business stickers and cards which are distributed at racing meets?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You operate a sole trader business.

You sell and repair parts from vehicles.

You are the owner of numerous vehicles which you race in your spare time and on weekends, and have been racing for a number of years. You consider your racing activity a hobby rather than a business.

You have numerous main sponsors for the vehicles, including your own business.

For your class of racing there is no standard sponsorship amount that you receive from businesses, and you accept whatever financial support you are offered. In return you display the badging/sticker of the sponsor, which can vary in size. There is no set size on the advertising you will display for the sponsor, as it depends on what signage the business is able to provide.

Your business has paid for major and minor repairs and maintenance for the vehicles. In return for your sponsorship, your business name is heavily displayed on the vehicle. You also hand out stickers and business cards during the events, promoting your business.

You believe that the exposure arising from the sponsorship will benefit your business in the form of advertising. It also gives you direct exposure to the type of clientele that you seek to deal with in your business.

As a direct result of your sponsorship advertising you have obtained orders to make numerous parts in the next few weeks for vehicles that participate in racing events.

You race in a number of series numerous times per year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

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, or is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature.

Racing vehicles expenses paid by your sole trader business

A number of significant court decisions have determined that for an expense to be an allowable deduction:

· it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v. FC of T; (1958) 100 CLR 478)

· there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. FC of T, (1949) 78 CLR 47), and

· it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore Co (WA) Pty Ltd v. FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184).

The phrase 'necessarily incurred' does not mean that the expense was unavoidable or logically necessary. The expense must be clearly and appropriately adapted for the ends of the business.

Where the expense is voluntary, the controlling factor is whether the expense can objectively be seen to be appropriate to the business activity (Magna Alloys & Research v. FC of T 80 ATC 4542; (1980)11 ATR 276).

Taxation Ruling TR 95/33 discusses the relevance of the subjective purpose, motive or intention in determining the deductibility of an expense. The ruling states that an expense will generally be deductible if its essential character is that of expenditure sufficiently connected with the operations or activities which more directly gain or produce your assessable income. The essential character of an expense is a question of fact to be determined by reference to all the circumstances.

It may be necessary to examine the taxpayer's subjective purpose where there is no obvious commercial connection with the business activity, or where the expense does not achieve its intended result. If an arrangement has an independent pursuit of some other objective, for example, to support a personal hobby, then the outgoing may not be deductible.

In your situation you have been a competitor for a number of years. It is considered that the racing is a vigorously pursued hobby of yours, and this activity and its associated costs would be undertaken and paid by you regardless of the existence of your business.

Whilst you state that the sponsorship of the vehicle by your business has enhanced the income producing activities of your business, the subjective purpose, motive or intention in paying for the expenses is to enable you to continue to participate in your hobby, the nature of which is private.

A case with aspects similar to your situation is No 3 Board of Review Case H23 (Case H23), 76 ATC 168, where the taxpayer was denied deductions for expenses incurred in maintaining and running his boat. The taxpayer claimed the boat was used solely for the entertainment of existing and prospective clients of his accounting business. However, the court determined at 76 ATC 168: the boat had not been acquired by the taxpayer for business purposes, but it had been used by him for such purposes as well as for private purposes. The court stated at 76 ATC 170: it seems that at the time when the boat was purchased, no consideration was given to the question of using it to entertain clients or prospective clients. At 76 ATC 170, N. Dempsey (Member) stated:

It will be noted that primarily the taxpayer claims that he should be allowed the whole of the amounts claimed. To succeed in such a claim he must show that the boat was used solely in connection with his business and that it was not used at all for private purposes.

In your situation, the vehicles are largely used for private purposes and not used solely in connection with your business.

Therefore a deduction for repairs and maintenance of the vehicle is not allowable under section 8-1 of the ITAA 1997.

Expenses from purchasing vehicle stickers, and business advertising stickers and cards

Advertising and marketing expenses are deductible under section 8-1 of the ITAA 1997 to the extent that the expenses are sufficiently related to the production of assessable income.

In your case, your business receives market exposure in relation to the costs incurred in having the business name on the vehicles. Such signage displayed on the vehicles is considered to be in the nature of advertising and is considered to be genuine advertising costs for your business, as are costs associated with stickers and business cards handed out at the meets.

It is considered that there is a sufficient nexus between the advertising expenses and deriving assessable income. Therefore such expenses for promoting and advertising your business are an allowable deduction under section 8-1 of the ITAA 1997.

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