Edited version of private advice

Authorisation Number: 5010073460316

Date of advice: 8 February 2021

Ruling

Subject: Deductibility of grant/sponsorship payments

Question 1

Are the grant / sponsorship payments made by X ("X") to community organisations fully deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as advertising and promotion expenses?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The following description of the scheme is based on information that has been provided by the applicant, as contained in correspondence from the applicant (private ruling application form tax professionals, dated XX month 2020).

1.            X is a company limited by guarantee.

2.            X is involved in the provision of community banking services in the towns of X and Y.

3.            X uses their profits to sponsor various projects that are undertaken by community organizations.

4.            The grants / sponsorships made to the community organizations are to be spent on various projects in the community, on the proviso that the organizations promote the X and Y community branches of XY Ltd.

5.            The advertising and promotion generate increased revenues and profits for X, specifically when a greater number of residents use the products and services of the X and Y's community branches of XY Ltd.

6.            There has been continuing growth in the use of the community banks over the past years, with income growing steadily since the first ruling issued.

7.            Prior to receiving a payment from X, the community organisation must complete a grant 'Application Form' which states that 'it is a condition of application that the organization agree to actively promote the X and / or Y Community Branches through the organisation's newsletter, meetings, display of logos on promotional materials, material in mail-outs, acknowledgement of support, and display of banners and signage'.

8.            The applicant must provide details of what the grant will be used for, who the chief beneficiaries of the project being funded are, and how the project will benefit the wider community.

9.            In most cases, the community organizations receiving the grant / sponsorship monies from X will not be using the money to generate assessable income.

10.          The payment of the grant /sponsorship monies increase X's revenue and profit through community advertising and promotion, which helps to promote the use of Community Banks.

Previous private ruling applications

11.          The Taxpayer is seeking an extension of the previous private ruling for a further four years of income, and has advised that there have been no material changes to the facts of the arrangement since the favourable private ruling dated X; and

12.          There have been no changes to section 8-1 of the ITAA 1997 since the previous ruling.

Relevant legislative provisions

Section 8-1 of the Income Tax Assessment Act

Reasons for decision

Question 1

Are the grant / sponsorship payments made by X ("X") to community organisations fully deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as advertising and promotion expenses?

Summary

The grant and sponsorship payments made by X are fully deductible under section 8-1 of the ITAA 1997 as advertising and promotion expenses.

Detailed reasoning

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

2.            A loss or outgoing must be incidental and relevant to operations or activities the taxpayer carries out to earn their income (Ronpibon Tin NL and Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236). There must be a sufficient connection (or nexus) between the loss or outgoing and the operations the taxpayer undertakes to earn assessable income.

3.            Where a taxpayer is carrying on a business for the purpose of gaining or producing assessable income, the commercial and practical implementation of the term 'necessarily incurred', imply that voluntary expenditure incurred for business needs may be deductible. In determining if the expense is reasonable in light of the circumstances, consideration should be given to the business and the context of the expense. An expense need not be compulsory to meet this requirement as it may be voluntary or arise inevitably due to the nature of the business.

4.            It is up to the taxpayer to decide what is necessarily incurred in carrying on their business [Federal Commissioner of Taxation v. Snowden & Wilson Pty Ltd (1958) 99 CLR 431; (1958) 11 ATD 463 (1958) 7 AITR 308 (Snowden's Case)]. This was further supported in Magna Alloys & Research Pty Ltd v. Federal Commissioner of Taxation (1980) 80 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.

5.            The Commissioner has previously issued favourable private binding rulings on the same question to the taxpayer. As there has been no material changes to the facts, or the applicable legislation, it is appropriate to extend the period of the ruling for a further four years. That is, the grant and sponsorship payments made by the taxpayer are fully deductible under section 8-1 of the ITAA 1997, as advertising and promotion expenses are directed to enhance the future growth and income of the business activities of the taxpayer.