Edited version of private ruling

Authorisation Number: 1011483353030

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Ruling

Subject: sponsorship expenses

1. Are you entitled to a deduction for expenses in sponsoring a sport?

No.

2. Are you entitled to a deduction for additional costs incurred for signage?

Yes.

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on

1 July 2009

Relevant facts

You operate a profitable business.

You intend to sponsor a sport. You believe that the exposure arising from the sponsorship will benefit your business in the form of advertising and generate additional income.

You will provide sponsorship for two sportspersons. The sponsorship money will pay for the day to day costs, clothing and the costs of equipment. The money is paid to the individual sportspersons and not the club.

The sports equipment as well as the associated merchandise will carry your business name.

The sportspersons are members of your family.

You don't have a formal agreement with the sportspersons. You pay the money as needed.

You intend to hand out business cards at events to help stimulate interest in your business.

The sports club meets locally every second weekend. The sportspersons also travel around the state to other clubs.

The advertising is directed at the general public.

Your business also advertises in the yellow pages as well as on the business vehicles.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Summary

The sponsorship expenses to pay for the day to day costs for family members sport are considered to be private in nature and therefore not an allowable deduction. However, costs incurred for signage is an allowable deduction as the expenses are sufficiently connected to the production of your assessable income.

Reasoning

Sponsorship costs

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 are 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.

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. Federal Commissioner of Taxation (1958) 100 CLR 478; (1958) 11 ATD 404; (1958) 7 ATR 166)

· 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 N.L.Tongkah Compound N.L. v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236), 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. Federal Commissioner of Taxation (1956) 95 CLR 344; (1956) 11 ATD 147; (1956) 6 AITR 379; Federal Commissioner of Taxation v. Hatchett (1971) 125 CLR 494; 71 ATC 4184; (1971) 2 ATR 557).

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 considers the issue of whether a deduction would be an allowable deduction by considering the subjective purpose, motive or intention in making the outgoing. 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 case, you have a family interest in a sport and the activity and its associated costs would be undertaken and paid for regardless of the existence of your business. Whilst it is undeniable the advertising associated with the sport may possibly enhance the income producing activities of your business, in your situation they are merely incidental to the private hobby of your family members. The purpose or motive in incurring an outgoing regarding the sponsorship of the two sportspersons is private in nature.

A legal case 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. The court determined that 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 in December 1968 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 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 sports equipment are largely used for private purposes and not used solely in connection with your business. The use of sponsorship money to pay for the day to day costs of the sportspersons have little if any impact on increasing the assessable income of the business. Such expenses are not in the nature of advertising and do not enhance your income producing activities.

The Commissioner considers your sponsorship of the sportspersons does not have a genuine commercial aspect. There is no formal agreement and money is given as needed for the day to day costs of the sport. Such an arrangement is not considered to be a reasonable commercial arms-length transaction.

The connection between your sponsorship expenses and the earning of your assessable income is too remote. Furthermore, the expenses are considered to be private in nature. Therefore a deduction for the sponsorship expenses is not allowable under section 8-1 of the ITAA 1997.

Advertising

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 various items of the sportspersons. Such signage displayed on the merchandise is considered to be in the nature of advertising and is considered to be genuine advertising costs for your business.

It is considered that there is a sufficient nexus between the signage 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.

Please note, that the costs of purchasing the various items are not considered to be incurred in earning your assessable income and are therefore not an allowable deduction. However, the additional costs for the signage of your business name on these items are an allowable deduction.