Edited version of private ruling

Authorisation Number: 1011635627925

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Ruling

Subject: Sponsorship

Question 1

Are you entitled to an income tax deduction for the cost of a motorcycle?

Answer

No.

Question 2

Can you claim a tax deduction for expenses incurred in sponsoring motorcycle racing?

Answer

Yes.

Question 3

Are you entitled to a deduction for accommodation expenses incurred whilst attending motocross events both locally and interstate?

Answer

No.

This ruling applies for the following period

30 June 2009

The scheme commenced on

1 July 2008

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You have a motorcycle repair business.

You were encouraged by your motocross customers to enter a motorcycle in motocross racing to promote your business to show potential customers that you know what you are doing by having reliable machinery, as racing puts extreme pressure on components.

You entered a motorcycle in several weekends of state racing.

You incurred expenses for the cost of the motorcycle, fuel, repairs, entry fees, licence fees and accommodation.

You were unable to ride the motorcycle yourself due to an injury. Your son rode the motorcycle in these events.

The motorcycle carries your business name.

You did not print t-shirts, hats or other advertising items, as you are a small business and could not afford the cost.

You took business cards and handed them out.

You went to Philip Island to watch motocross racing and to liaise with customers and catch up with the latest innovations. You did not take the motorcycle. You took business cards and handed them out. You got a job from your attendance at this event.

Reasons for decision

These reasons for decision accompany the Notice of private ruling.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Section 8-1 of the Income Tax Assessment Act 1997 (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 ( Snowden & Willson's Case )). 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 your case you were encouraged by your motocross customers to enter a motorcycle in races across the state to promote your business, to show potential customers that you know what you are doing by having reliable machinery which performs under the extreme pressure of racing. The motorcycle carried your business name. You handed out business cards to potential customers and to promote your business at these events. You did not have the funds to purchase additional promotional materials such as shirts and hats. You were unable to ride the bike yourself due to injuries. Your son rode the motorcycle for you.

The expenses associated with your sponsorship of motor cycle racing in your regional area 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 your business. The sponsorship will benefit your business in the form of advertising and will generate future income. The cost of the motorcycle is a capital expense and is not deductible.

You did not enter the motorcycle in the events on Phillip Island. You took business cards and handed them out. Although you were able to obtain a job from attendance at these races, you did not take the motorcycle with you. This event is considered to be too remote from your regional market to enhance the production of your income in your regional market. The expenses incurred in travelling to Phillip Island to attend the motocross race are considered to be private in nature and are not deductible business expenses.