Edited version of private advice

Authorisation Number: 1051524113098

Date of advice: 13 June 2019

Ruling

Subject: Deductions

Question

Are the expenses incurred in the sponsoring of your motor racing activities deductible pursuant to the second limb of section 8-1 of the Income Tax Assessment Act 1997?

Answer

No

This ruling applies for the following period:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are in a partnership that operates a business.

You are one of a number of sponsors for a Racing Team. The racing team participates competitively in race events on a national and state level.

You undertake the sponsorship of the racing team as a promotional activity, to provide a point of differentiation for their business. The participation of the Racing Team in the race events on national and state level as well as the winning of titles provides significant exposure to the transport and logistics business operated by the Taxpayer and is used as point of differentiation when reaching out to existing and potential customers.

You sponsor the racing team by way of paying for the day to day operating costs.

In return for the sponsorship, the race car would display the business name and logo of your business. The uniforms and clothing worn by the driver and crew would also bear the business name and logo.

The racing team merchandise that is available for sale (such as jumpers and caps) would display the business name and logo of the Taxpayer. Stickers and posters are also handed out during the events. These items would also display the business name and logo.

You and/or staff of the business would network with the potential stakeholders at the race events.

Where a podium finish is obtained, photographs of the race car and driver are reported and displayed in local newspapers and the name of the driver is closely associated with the business carried on by yourselves.

Your records for the 20XX financial year indicate that XX percent of the business revenue is sourced from customers with whom racing is a forum for contact.

Relevant legislative provisions

Income Tax Assessment Act 1997

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.

Racing team expenses paid by your business

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 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.

In your situation you have been a competitor in racing for a number of years. It is considered that racing is a vigorously pursued hobby of yours and your family, and this activity and its associated costs would be undertaken and paid by you regardless of the existence of your business.

Whilst you state that the sponsorship in racing by your business has enhanced the income producing activities of your business, the subjective purpose, motive or intention in paying for the expenses is to enable you to continue to participate in your racing hobby, the nature of which is private.

Therefore a deduction for the sponsorship expenses is not allowable under section 8-1 of the ITAA 1997.