Edited version of private ruling

Authorisation Number: 1011742428392

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Ruling

Subject: business deduction - sponsorship

Question 1

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

Answer

No.

Question 2

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

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You are an Australian resident company.

You intend to sponsor a sport.

You intend to sponsor one athlete. The athlete is a family member of the company director.

The equipment will only be used for participating.

There is no formal sponsorship agreement in place.

The sponsorship will include paying the day-to-day costs.

The equipment will carry your business name.

You intend to hand out business cards at the events to stimulate interest in your business through your position as sponsor.

You believe that the exposure from sponsorship will benefit your business and generate future income.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Question 1

Summary

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

Detailed 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. FC of T; (1958) 100 CLR 478), 

· 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 NL v. FC of T, (1949) 78 CLR 47), 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. FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184).

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 the sport 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 athlete 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 at 76 ATC 168: "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 equipment is largely used for private purposes (that is, participation in the sport) and not used solely in connection with your business. The use of sponsorship money to pay for the day to day costs 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 athlete does not have a genuine commercial aspect. There is no formal agreement and 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.

Question 2

Detailed reasoning

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 equipment of the athlete. Such signage displayed on the equipment 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.