Edited version of private advice

Authorisation Number: 1051951652879

Date of advice: 17 February 2022

Ruling

Subject: Sponsorship of a series of sports events

Question

Can the Trust claim an income tax deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in computing its section 95 of the Income Tax Assessment Act 1936 (ITAA 1936) net income for expenses incurred in sponsoring a series of sports events?

Answer

Yes.

This ruling applies for the following period:

Income year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Trust is the owner of trademarks of a professional sportsperson's name, signature and logo as well as various other contractual rights.

The Trust carries on a business which derives income from the exploitation of these assets and rights.

The Trust has three employees and hires the services of a consultant to assist in the pursuit of its business objectives.

The Trust intends to sponsor a series of sports events in regional Australia. The professional sportsperson will not participate as a player.

The sportsperson's logo, name and signature will be visible on promotional materials and advertising hoardings at these events. Branded apparel and equipment will also be available for purchase by patrons.

All funds contributed by the Trust will be solely for the operational activities of these specific events.

The Trustee considers the sponsorship to be a loss or outgoing connected with its business pursuits and it is incurred under the relevant power of the Trustee to undertake such pursuits. The sponsorship outgoing will be expensed in a drawing up of the trust accounts for the reporting period. The Trustee considers the sponsorship will attract custom to (and thereby enhance the quantum of) the sources of income derived by the taxpayer's business in present and future income years.

The day-to-day operations of the events will be conducted by the clubs hosting the events.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1936 Section 95

Reasons for decision

Subsection 95(1) of the ITAA 1936 relevantly states:

net income, in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions, except deductions under Division 393 of the Income Tax Assessment Act 1997 (Farm management deposits) and except also, in respect of any beneficiary who has no beneficial interest in the corpus of the trust estate, or in respect of any life tenant, the deductions allowable under Division 36 of the Income Tax Assessment Act 1997 in respect of such of the tax losses of previous years as are required to be met out of corpus.

Subsection 8-1(1) of the ITAA 1997 is the relevant deduction provision here and states:

You can deduct from your assessable income any loss or outgoing to the extent that:

(a)  it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

The principle that derives from the following authority are of assistance here. In the case of FC of T v Firth [2002] ATC 4346 at p 4348 it was stated:

The positive tests require that there be a connection between the loss or outgoing on the one hand and the assessable income or business on the other. The nature of that connection has been expressed in different ways in the cases. It is sometimes said that there must be a 'perceived connection' between the loss or outgoing and the assessable income or business: FC of T v Hatchett 71 ATC 4184 at 4187... In other cases it has been said that the expenditure must be 'incidental and relevant' to the operations or activities regularly carried on by the taxpayer for the production of income: Ronpibon Tin NL & Tongkah Compound NL v FC of T (1949) 8 ATD 431 at 435; (1949) 78 CLR 47 at 56, FC of T v Smith 81 ATC 4114 at 4117. These ways of describing the connection that is a necessary prerequisite to deductibility are but part of the process of identifying the essential characterof the expenditure in order to determine whether a particular loss or outgoing is in fact incurred in gaining or producing the assessable income or in carrying on a business which more directly contributes to the gaining or production of the assessable income: Lunney v FC of T (1958) 11 ATD 404; (1957-1958) 100 CLR 478 at 413 and 499 respectively.

In the case FC of T v DP Smith [1981] at 4117, the Full High Court said:

The section does not require that the purpose of the expenditure shall be the gaining of the income of that year, so long as it was made in the given year and is incidental and relevant to the operations or activities regularly carried on for the production of income. What is incidental and relevant in the sense mentioned falls to be determined not by reference to the certainty or likelihood of the outgoing resulting in the generation of income but to its nature and character and generally to its connection with the operations which more directly gain or produce the assessable income.

In the case of Federal Commissioner of Taxation v Snowden & Willson Pty Ltd [1958] 99 CLR 431 (Snowden) it was stated:

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'.

It was also stated in Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation [1980] 80 ATC 4542:

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.

Here, the Trust carries on a business that derives income from exploiting assets and rights that relate to the sports events being sponsored. Indeed, the very subject of these rights are very visibly promoted and advertised at these events. The Trustee believes that by sponsoring these events, custom will be attracted to the sources of the Trust's income. The Trustee's purposes therefore show an overt connection between the outgoings and the assessable income of the Trust, or at least the carrying on of the Trust's business.

Further, as illustrated in the Snowden case, it is for the taxpayer and not the Commissioner to make a judgement around what expenditure best serves the pursuits of the taxpayer's business.

For these reasons, it is accepted on balance that the Trust's sponsorship outgoings satisfy the testing in subsection 8-1(1).

Subsection 8-1(2) provides:

However, you cannot deduct a loss or outgoing under this section to the extent that:

(a) it is a loss or outgoing of capital, or of a capital nature; or

(b) it is a loss or outgoing of a private or domestic nature; or

(c) it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or

(d) a provision of this Act prevents you from deducting it.

These are repetitive revenue outgoings in that they are conceived to attract custom to (and thereby enhance the quantum of) the sources of income derived by the taxpayer's business and as such are not within what is contemplated by paragraph 8-1(2)(a). Further, as the Trustee is a company and as such an artificial legal entity, the character of the outgoing is not one that attaches to what is contemplated by paragraph 8-1(2)(b) (Case S74 85 ATC 534). Further, neither paragraphs 8-1(2)(c) or (d) apply on the facts here.

For these reasons, it is concluded the Trust may claim a deduction under section 8-1 of ITAA 1997 for the sponsorship expenses incurred in computing its net income as defined in subsection 95(1) of the ITAA 1936.