Edited version of your private ruling

Authorisation Number: 1012416541334

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 fact 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. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Self-sponsorship expenses relating to vehicle racing.

Question 1

Can you claim a deduction for expenses paid by your business, such as running and servicing costs, protective clothing and club membership fees, in relation to your vehicle racing activity?

Answer

No.

Question 2

Can you claim a deduction for expenses incurred in advertising your business name on your racing related equipment and protective clothing?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You operate a sole trader business.

You will be racing a vehicle and will incur expenses such as running costs (fuel and oil), servicing, the purchase of safety equipment and club membership fees.

You will also incur expenses for stickers, sign writing and embroidery when advertising your business name on the trailer, vehicle and safety equipment.

You have not raced vehicles previously. However you have been around the vehicles for a number of years and you have friends who race, and therefore want to give it a go.

The vehicle is a hobby of yours and you will be racing in your spare time at race meets and practice days about three to four times a month.

The vehicle racing expenses and associated costs would be incurred by you regardless of the existence of your business. However it would be a much more expensive hobby to you as an individual if you have to pay the expenses yourself.

You believe that the exposure your business will receive through advertising on the vehicle racing related equipment will result in an increase your business's assessable income.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

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 is 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.

Vehicle racing related expenses paid by your business

A number of significant court decisions have determined that for an expense to be an allowable deduction:

1) 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)

2) 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

3) 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 discusses the relevance of the subjective purpose, motive or intention in determining the deductibility of an expense. The ruling states that an expense will generally be deductible if its essential character is that of expenditure sufficiently connected with the operations or activities which more directly gain or produce your assessable income. 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.

You have been involved with a certain type of vehicle for a number of years and will be racing a vehicle as a hobby. As the racing activity is a hobby of yours, its associated costs would be incurred and paid by you regardless of the existence of your business.

Whilst you state that your business's sponsorship of the vehicle and its related equipment will enhance the income producing potential of the business, the subjective purpose, motive or intention in paying for your racing expenses is to enable you to participate in your hobby and lessen the cost to you, the nature of which is private.

A case with aspects 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. However, 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, 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 the 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 vehicle is largely used for private purposes and not used solely in connection with your business.

Therefore a deduction for expenses paid by your business, such as running and servicing costs, the purchase of protective clothing and club membership fees, are not allowable under section 8-1 of the ITAA 1997.

Expenses for advertising your business name on the vehicle, trailer and protective clothing

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 will incur expenses in advertising your business name on your vehicle, trailer and protective clothing. This will be in the form of stickers, sign writing and embroidery.

Your business will receive market exposure with its name displayed on the racing equipment, and therefore the expenses are considered to be genuine advertising costs for your business.

It is considered that there is a sufficient nexus between the advertising expenses and deriving assessable income. Therefore expenses for promoting and advertising your business are an allowable deduction under section 8-1 of the ITAA 1997.