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Edited version of private advice
Authorisation Number: 1051882479717
Date of advice: 06 August 2021
Ruling
Subject: General deductions: competitions
Question 1
Will the cash prize payment be an allowable deduction under section 8-1 of the Income Tax and Assessment Act 1997?
Answer
No.
Question 2
Will the costs associated with running the promotion be an allowable deduction under section 8-1 of the Income Tax and Assessment Act 1997?
Answer
No.
This ruling applies for the following periods:
Income year ending 30 June 2021
Income year ending 30 June 2022
The scheme commences on:
1 July 2020
Relevant facts and circumstances
1. The Company is an Australian private company with branches all over Australia.
2. The principal customer base of the Company ranges from large commercial contractors to smaller trade customers.
3. The Company runs both a web-based competition (the promotion) with the winners of each given a cash prize.
4. The promotion is open to residents of Australia who:
a. Have a trade account with the Company
b. Are employed by a trade account holder of the Company
c. Are currently employed by the Company
5. Entry into the promotion is free.
6. The prize pool for the Company is as follows:
Grand prize pool National competition (1st, 2nd and 3rd)
i. 1st prize - $XXXX
ii. 2nd prize - $XXXX
iii. 3rd prize - $XXXX
Perfect Round winners - Each perfect round winner will receive 1x$XXXX gift card, as the weekly prize, total value $XXXX (total value in second competition $XXXX).
Total prize pool for one Promotion is $XXXX. The total prize pool for second Promotion is $XXXX.
7. In order to determine the results in each Round, Participants will be ranked:
a. The weekly prize (if applicable) is awarded to the competitor who is most accurate. Firstly, by their Score, where the highest Score has the highest rank;
b. If no participant has chosen all tips correct, then the prize will be awarded to the participant with most tips correct.
c. If more than one tipper qualifies then the weekly prize will be awarded to the competitor who completed their tips on the earliest occasion
d. If a tipper does not enter all tips for a round, then they cannot qualify for the weekly prize.
8. Weekly rankings for a given round will be determined 72 hours after the last match of the round has ended. These rankings will be posted on the website as well as at your local branch on a leader board.
9. The purpose of the Promotion is to:
a. Introduce and direct customers to their respective web platforms/e-commerce offerings by housing the promotion on their sites. Doing so the customers become more and more familiar with the platform, and in turn see the ease of use and continue down that path, with an ultimate outcome of making their purchases through the site.
b. Customers are becoming more aware of their brand and offerings through the website access which will then lead to further sales
c. By directing more and more users to their website assists in traffic/session count, that in turn assists with the taxpayers google ranking.
10. Participant's trade accounts will be subject to credit checks throughout the season. Those accounts that have a stop credit or have money owing outside of their trading terms may be suspended from participating in the Promotion.
11. As part of the terms and conditions, participants accept that information about them may also be used by the Promoter, it's agents, contractors and related companies, for the purposes of carrying out marketing, planning, product development and direct mail, telemarketing and promotional campaigns unless a Participant otherwise withdraws their consent to the use of their information in this manner.
12. The participants who enter the competition do so as individuals rather than on behalf of the business they represent.
13. All prizes are given to the individual participants.
14. It cannot be determined how much control each participant has over their representative business purchases/sales orders, just that they are required to have been using the taxpayer as a supplier before entering the competition.
Relevant legislative provisions
Section 8-1 of the Income Tax and Assessment Act 1997
Section 32-5 of the Income Tax and Assessment Act 1997
Section 32-10 of the Income Tax and Assessment Act 1997
Section 32-45 of the Income Tax and Assessment Act 1997
Reasons for decision
Question 1
Summary
The cash prizes and gift cards are not deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) because the promotion is considered 'entertainment' and none of the exceptions under section 32-45 of the ITAA 1997 apply.
Detailed reasoning
Section 8-1 of the ITAA1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income or 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, relate to the earning of exempt income or are excluded by another provision of the taxation legislation.
That is, paragraph 8-1(2)(d) of the ITAA 1997 states that you cannot deduct a loss or outgoing under this section to the extent that a provision of this Act prevents you from deducting it.
Under section 32-5 of the ITAA 1997, a deduction under section 8-1 is not allowable to the extent that you incur a loss or outgoing in respect of providing entertainment, unless it is one of the exceptions set out in subdivision 32-B.
Subsection 32-10(1) of ITAA 1997 provides the meaning of 'entertainment':
a) entertainment by way of food, drink or recreation; or
b) accommodation or travel to do with providing entertainment by way of food, drink or recreation.
Recreation is defined under section 995-1 and it includes amusement, sport or similar leisure-time pursuits. The promotions would fall within this definition and is therefore considered 'entertainment'.
Section 32-10(2) of ITAA 1997 states that you are taken to provide entertainment even if business discussions or transactions occur.
Section 32-45 under subdivision 32B of the ITAA 1997 states that section 32-5 does not stop you deducting expenses of providing entertainment to promote or advertise to the public a business or its goods and services. However, the exception does not apply if some people have a greater opportunity to get the benefits of the entertainment than ordinary members of the public have.
The Macquarie Dictionary defines 'public' as 'of, relating to, or affecting the people as a whole or the community, state or nation'.
The reference to 'some people' can be informed by the previous section 51AE(5)(d)(ii) of the Income Tax and Assessment Act 1936 (ITAA1936) (the precursor to the rewritten section 32-45 of the ITAA 1997) which stated specifically that clients, customers, suppliers, employees and any other associates of the taxpayer, journalists, dignitaries or any other special class of person should not obtain benefits greater than those of ordinary members of the public.
We note that paragraph 5 of TD 94/60 Income tax: are bar shouts and in-house competition prizes of cash and liquor, supplied by hoteliers to encourage patronage, allowable deductions and if so, what documentation is acceptable to support the amount claimed? states that cash competition prizes provided by hoteliers to encourage patronage are deductible under section 8-1 of ITAA 1997. That is, deductions for cash prizes are not precluded by the entertainment expenses provisions as they can fall within the exception for promotion and advertising. However, this is only the case if available to the public at large.
In this case, the promotion is considered entertainment expenses. The exception under section 32-45 of the ITAA 1997 is not applicable because the competition is not available to the public at large, but rather to those who have an account with the Company. Therefore, in accordance with paragraph 8-1(2)(d), section 32-5 prevents a deduction under section 8-1 of the ITAA 1997 for the prize pool amounts, including any gift cards awarded.
Question 2
For the reasons provided in relation to question 1, any costs associated with running the promotion, including the development of the website, will not be an allowable deduction under section 8-1 of the ITAA 1997.