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Edited version of private ruling
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Ruling
Subject: Donation of trading stock as an advertising or promotional expense
Question
Are you entitled to a deduction for the cost of materials used in making trading stock given to clubs and associations for use as prizes where you have included that cost in calculating your cost of goods sold amount for the income year?
Answer
No
Relevant facts and circumstances
You operate a business manufacturing equipment.
The equipment has your logo and phone number printed on them.
You give items of equipment as prizes to clubs and associations.
In return the clubs and associations advertise your products.
Relevant legislative provisions
Income Tax Assessment Act 1997 8-1 and
Income Tax Assessment Act 1997 70-90.
Reasons for decision
Summary
You are not entitled to a deduction for the cost of materials used to make trading stock which is given to clubs and associations to use as prizes where the expense has already been included in calculating your cost of goods sold.
Detailed reasoning
Section 8-1 of the Income Tax Assessment Act 1997 allows a deduction for losses or outgoings incurred in earning assessable income except where those outgoings are of a private, domestic or capital nature.
Established commercial and accounting principles calculate gross profit from business operations by deducting the cost of goods sold from receipts.
The cost of goods sold is calculated as the total of purchases of raw materials, labour and parts used.
When calculating your cost of goods sold for an income year, you include the total amount of raw materials purchased. Thus, you are unable to claim the cost of the materials in manufacturing trading stock given to clubs and associations as the purchase cost of these materials has already been included in calculating the cost of the goods sold.
If you were to claim a deduction for the cost of trading stock given for use as prizes, you would effectively receive two deductions for the same expense.