Edited version of private advice

Authorisation Number: 1051983144239

Date of advice: 3 June 2022

Ruling

Subject: Sponsorship of sporting events

Question 1

Can the entity claim a tax deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for expenses incurred in sponsoring an employee to participate in sporting events?

Answer

No.

Question 2

Will Fringe Benefit Tax (FBT) apply where equipment is provided to an employee who is sponsored to participate in sporting events?

Answer

Yes.

Question 3

If the equipment was provided to a trustee of the entity, instead of an employee would FBT apply?

Answer

No.

Question 4

Can the entity claim a tax deduction under 8-1 of the ITAA 1997 for expenses incurred in sponsoring third party sports people?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 February 20XX

Relevant facts and circumstances

The entity carried on a professional business. The trustee of the entity is also an employee of the entity.

The entity is considering sponsoring the trustee by providing the equipment that they need to participate in sporting events. They would also consider paying for other expenses related to travel and accommodation.

The entity logo will be embroidered or attached to the equipment provided. It is the intention to sponsor the trustee to participate in sporting events as the exposure arising from the sponsorship will benefit the business.

In addition, the entity also intends on sponsoring third party sports people to promote the business.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1936 section 95

Fringe Benefit Assessment Act 1986 section 40

Fringe Benefit Assessment Act 1986 section 136

Reasons for decision

Issue - Sponsorship of sporting events

Question 1

Summary

Where the subjective purpose of an expense is private or domestic in nature, a deduction under section 8-1 of the ITAA 1997 is not allowable.

Detailed reasoning

Section 8-1 of the 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.

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 this situation it is considered that the sporting events are a hobby of the trustee. This activity and its associated costs would be undertaken and paid regardless of the existence of the business.

While the sponsorship in sporting events by the entity may enhance the income producing activities of the entity, the subjective purpose, motive or intention in paying for the expenses is to enable the entity to continue to participate in sporting events as a hobby, the nature of which is private.

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

Question 2

Summary

There would be fringe benefit tax if equipment is provided to an employee.

Detailed reasoning

To be subject to FBT, a benefit must be considered a fringe benefit as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). From the Fringe benefits tax - a guide for employers

A fringe benefit is a 'payment' to an employee, but in a different form to salary or wages. A fringe benefit is a benefit provided in respect of employment. This effectively means a benefit is provided to somebody because they are an employee.

As defined in the FBTAA an employee is a current employee, a future employee or even a former employee.

An employee is someone who is, was or will be entitled to receive salary or wages or benefits in lieu of salary and wages.

... A fringe benefit may be provided by an associate of the employer or under an arrangement between a third party and the employer. It may also be provided to an associate of the employee (for example, a relative).

The important factor to determine is if the benefit is provided in respect of employment; would the benefit have been provided if the person was not an employee.

For example: Sarah, an adult daughter of a business owner, is employed in the family business. Her parents give her a birthday present. The gift is given because of the family relationship and would have been given even if Sarah had not been employed in the family business.

Where the equipment was provided to the taxpayer as an employee there would be sufficient connection between the provision of the equipment and the employment requirement specified in section 135(1) of the FBTAA. As such fringe benefits tax would apply.

Question 3

Summary

There would be no FBT if the equipment was provided to the taxpayer in their capacity as a trustee.

Detailed reasoning

To be subject for FBT, a benefit must be considered as a fringe benefit as defined in sub-section 136(1) of the FBTAA. This definition requires that a benefit is provided to an employee in respect to their employment. This payment may also be provided to an associate of the employee. An employee is defined in the legislation as a current, future or former employee. The term "current employee" is defined to mean a person who receives or is entitled to receive salary or wages.

Although the recipient of the gift is an employee, the gift was not provided in respect of employment and, therefore, is not a fringe benefit. In this case as the equipment was provided to the trustee in their capacity as a trustee, there would not be any fringe benefits as it was not provided in respect of their employment.

Question 4

Summary

Sponsorship that's intended to benefit the business through advertising by generating future income is an allowable deduction.

Detailed reasoning

Section 8-1 of the ITAA 1997 allows a deduction for all losses or outgoings to the extent that they are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

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 & Willson Pty Ltd (1958) 99 CLR 431; (1958) 11 ATD 463; (1958) 7 AITR 308 (Snowden & Willson's Case)).

This was further supported in Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation (1980) ATC 4542; (1980) 11 ATR 276, 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.

In this case, the taxpayer intends to provide sponsorship in the belief that the exposure from that sponsorship will benefit his business in the form of advertising and will generate future income. As it is the taxpayer who determines the nature of the expenditure to be undertaken in the conduct of their business (Snowden & Willson's Case) the expenses associated with the taxpayer's sponsorship of third-party sporting individuals 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.