Edited version of private ruling

Authorisation Number: 1011712705211

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fac sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Deductions - advertising and promotional expenses

Are grant/sponsorship payments made by the taxpayer fully deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as advertising and promotion expenses?

Advice/Answers

Yes

Scheme

The taxpayer is a company involved in the provision of community banking services.

The taxpayer uses their profits to sponsor various projects undertaken by community organizations.

The grants / sponsorships made to the community organizations are to be spent on various projects in the community on the provision that the organizations promote the community banking services.

This advertising and promoting generates increased revenues and profits for the taxpayer when more residents use the products and services of the community banking branches.

There has been continuing growth in the use of the community banks over the past years.

Prior to receiving a payment from the taxpayer the community organisation must complete a grant `Application Form' which states that "it is a condition of application that the organization agree to actively promote the Community Branches through the organisation's newsletter, meetings, display of logos on promotional materials, material in mail-outs, acknowledgement of support, and display of banners and signage".

Further, the applicant must provide details of what the grant will be used for, who the chief beneficiaries of the project being funded are, and how the project will benefit the wider community.

In most cases the community organizations receiving the grant/sponsorship monies from the taxpayer will not be using the money to generate assessable income.

The payment of the grant/sponsorship monies increase the taxpayer's revenues and profits through community advertising and promotion which promotes the use of the Community Banks.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Issue 1

Question 1

Summary

The grant/sponsorship payments made by the taxpayer are fully deductible as advertising and promotion expenses under section 8-1 of the ITAA 1997.

Detailed reasoning

Discussion of law

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.

A loss or outgoing must be incidental and relevant to operations or activities the taxpayer carries out to earn their income (Ronpibon Tin NL and Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236). There must be a sufficient connection (or nexus) between the loss or outgoing and the operations the taxpayer undertakes to earn assessable income.

Where a taxpayer is carrying on a business for the purpose of gaining or producing assessable income, the commercial and practical implementation of the term necessarily incurred', imply that voluntary expenditure incurred for business needs may be deductible. In determining if the expense is reasonable in light of the circumstances, consideration should be given to the business and the context of the expense. An expense need not be compulsory to meet this requirement as it may be voluntary or arise inevitably due to the nature of the business.

It is up to the taxpayer to decide what is necessarily incurred in carrying on their business Federal Commissioner of Taxation v. Snowden & Wilson Pty Ltd (1958) 99 CLR 431; (1958) 11 ATD 463 (1958) 7 AITR 308 (Snowden's Case)) This was further supported in Magna Alloys & Research Pty Ltd v. Federal Commissioner of Taxation (1980) 80 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.

Application of the law to your circumstances

The taxpayer provides community banking services and uses the profits to sponsor community projects. The community organisations, who are recipients of sponsorship, agree to actively promote the community banks through; organisations' newsletters; meetings; display of logos on promotional materials; material in mail outs; acknowledgement of support and display of banners and signage; as a condition of receiving the sponsorship payments.

The taxpayer incurs this expenditure in the belief that they will receive the benefit of advertising that will promote the use of the Community Banks, resulting in more residents using the products and services, in turn generating future growth and income.

Conclusion

The nature of the expenditure to be undertaken in the conduct of their business (Snowden's Case) has been determined by the taxpayer. The expenditure has the characteristics of an advertising expense directed to enhance the future growth and income of the business activities of the taxpayer, therefore the sponsorship provided by the taxpayer for community projects is fully deductible under section 8-1 of the ITAA 1997