Edited version of your private ruling

Authorisation Number: 1012610892972

Ruling

Subject: Sponsorship deduction

Question 1

Are the sponsorship expenses incurred by the entity deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commences on:

1 July 2013

Relevant facts and circumstances

The entity intends to supply another entity with various goods and services. In return the entity will receive extensive market exposure and publicity of its business, leading to an increase in its sales.

Relevant legislative provisions

Income Tax Assessment Act - section 8-1

Reasons for decision

Section 8-1 of the ITAA 1997 allows a deduction for all losses and 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.

The phrase necessarily incurred does not mean that the expense was unavoidable. The expense must be clearly and appropriately adapted for the ends of the business.

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 and Wilson Pty Ltd (1958) 99 CLR 431; 1958 11 ATD 463; (1958 7 AITR 308 (Snowden & Wilson's case)). This was further supported in Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation (1980) ATC 4542; (1980) 11 ATR 286, 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

Expenditure incurred in advertising or promotion is deductible under section 8-1 of the ITAA 1997 to the extent that it sufficiently relates to the production of assessable income or is necessarily incurred in carrying on a business for the purpose of producing assessable income.

It is also recognised that advertising may have a two-fold effect. On the one hand, it may lead to the immediate purpose of gaining assessable income. On the other hand, it may also create or enhance long term goodwill which is an affair of capital.

The distinction between capital and revenue expenses was highlighted in the case Sun Newspapers Ltd and Associated Newspapers Ltd V Federal Commissioner of Taxation (1938) 61 CLR 337; 5ATD 87 (1938) 1 AITR 403 (Sun Newspapers case).

In the Sun Newspapers case, it was pointed out that expenditure in establishing, replacing and enlarging the profit yielding structure of a business is capital and is to be contrasted with working or operating expenses. In other words, any part of expenditure which relates to the acquisition of an asset or advantage of an enduring kind is capital in nature and not deductible under section 8-1 of the ITAA 1997.

The case Ward & Co Ltd v C or T (NZ (1923) AC 145 is an example of a case where advertising was not deductible. In that case, the taxpayer brewery company expended money in printing and distributing literature in its attempt to defeat a prohibition referendum about to be put to the New Zealand voters.

On the other hand, the Federal Court held that advertising costs involved in opposing the passing of legislation that affected but did not threaten the existence of the market share of a taxpayer were allowable - FC of T v Rothmans of Pall Mall Australia Ltd 92 ATC 4508.

In this case, the taxpayer intends to provide sponsorship in the belief that the exposure from that sponsorship will benefit the business in the form of advertising and will generate future income.

It is considered that the expenditure is not capital in nature. It is not incurred with the purpose of forestalling the extinction of an entity - Ward & Co Ltd v C or T (NZ (1923) Ac 145, nor is it incurred with the specific purpose of creating or enhancing long term goodwill. Any such capital component that may be present would be merely incidental to the immediate intended effect of generating increased sales in the short term.

As it is the taxpayer who determines the nature of the expenditure to be undertaken in the conduct of their business, (Snowden and Wilson's case) the expenses associated with the taxpayer's sponsorship of the entity 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 the taxpayer's business and are not excluded on the basis of being capital or of a private or domestic nature.