Edited version of private advice

Authorisation Number: 1052109550358

Date of advice: 19 April 2023

Ruling

Subject: Advertising expenses

Issues

Question

Is the Taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for expenses incurred in sponsoring motor racing team?

Answer

Yes

This ruling applies for the following periods:

1 July XXXX to 30 June XXXX

Relevant facts and circumstances

The Taxpayer) operates a business.

The Taxpayer intends to sponsor a motor racing team in the belief that the exposure arising from the sponsorship will benefit its business in the form of advertising to increase sales and business development opportunities. To this end, the Taxpayer intends to sponsor an entity incorporated by an affiliate of the Taxpayer (the Motorsport Entity) to undertake motorsport activities.

A director of the Taxpayer is also a director and controller of the Motorsport Entity. However, the common director is a X shareholder of the Taxpayer and does not have sole control of whether the sponsorship agreement is accepted. The sponsorship arrangement also requires the approval of the other X directors and shareholders based on a business case and the commerciality of the arrangement.

Where the common director is engaged in racing (i.e. driving the Motorsport Entity's motor vehicle in races) or participates in promotional track days on behalf of the Taxpayer, the director will be:

•                     Paid by the Taxpayer for the time spent advocating and promoting the Taxpayer's business to associated motorsport event attendees as expected under the sponsorship arrangement; and

•                     Paid by the Motorsport entity as a driver, paid at market rates - as per any other commercial arrangement for professional drivers.

The common director's remuneration or trust distribution from the Taxpayer is not reduced by an amount commensurate with the amount paid under the sponsorship arrangement to the Motorsport Entity.

The Taxpayer does not have separate similar sponsorship arrangements with the other two directors.

The Taxpayer will enter into a X year sponsorship agreement with the Motorsport Entity.

The sponsorship arrangement will provide brand visibility.

The sponsorship will be for flagship/major branding and promotion of the Taxpayer's business.

The Taxpayer's sponsorship will primarily cover branded merchandise and vehicle signage,as well as partially covering some of the operating costs of the motor vehicle such as advertising, fuel, services, maintenance, improvement costs and event entry costs.

A motor vehicle will be purchased by the Motorsport Entity solely as a business asset and will be used exclusively at motorsport club and registered racing events, where the Motorsport Entity will undertake promotional activities to stimulate interest in the Taxpayer's business (e.g. handing out business cards and brochures).

Employees of the Taxpayer will have an opportunity to participate in events to promote the activities of the Taxpayer as a sponsor of the event participant (the Motorsport Entity). The employees will be working for the Taxpayer and not providing services to Motorsport Entity

The sponsorship arrangement will be priced competitively against other flagship marketing opportunities. The Taxpayer and the Motorsport Entity will be dealing on an arm's length basis: the sponsorship arrangement will reflect commercial sponsorship arrangements between unrelated parties dealing on arm's length terms having regard to matters such as the driver's abilities, the standard of racing, the type of racing, crowd numbers, the standard of performance and conduct required, and the duration of such arrangements.

The Motorsport Entity will also be sponsored to varying extents by third party businesses on commercial terms.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Summary

The expenses incurred in sponsoring motor racing are incurred in carrying on the Taxpayer's business and are not excluded on the basis of being capital or of a private or domestic nature

Detailed reasoning

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). 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 this 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, the expenses associated with the Taxpayer's sponsorship of motor 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.

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