ATO ID 2001/81: Deductions: scholarship payments made by a non-profit organisation
Date of decision: 29 March 1999
Business line: Private Groups and High Wealth Individuals

Issue
Can a non-profit association claim the payment of sponsorships, awards and scholarships as allowable deductions against interest income?

Decision
No. The payment of sponsorships, awards and scholarships are not deductible against interest income derived by the non-profit organisation.

Facts
A non-profit association has paid various sponsorships, awards and scholarships for the benefit of its members. The funds to pay these amounts have been derived from interest earned from the investment of bequests from members.

Reasons for decision
Summary: The legislative requirements for general deductions are set out in section 8-1 of the Income Tax Assessment Act 1997 . The first requirement is that expenditure must be an outgoing incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purposes of gaining or producing assessable income. The expenditure must have the necessary and relevant connection with the operation or activities which directly gain or produce assessable income ( Charles Moore & Co (WA) Pty Ltd v. Federal Commissioner of Taxation (1956) 95 CLR 344; (1956) 11 ATD 147; Federal Commissioner of Taxation v. DP Smith (1981) 147 CLR 578; (1981) 11 ATR 538; 81 ATC 4114; Ronpibon Tin NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431). Non-profit organisations not formed with a profit making purpose, but operating for the benefit of its members will generally be taxable non-profit organisations. Some examples of this are body corporates, social clubs, professional associations, and political parties. The assessable income of non-profit organisations such as this organisation essentially consists of interest, dividends or other income derived from the investment of moneys held in its funds or income from activities directly involving the public. Deductions for expenditure incurred are only allowed in respect of expenses relating directly to the gaining of such assessable income (e.g., bank fees). The scholarship and award expenses are not deductible, as they are not incurred in gaining or producing assessable income of the non-profit association. The payment of sponsorships, awards and scholarships is not relevant or necessary to earning income from the investment of moneys bequeathed by members.

Legislative references: Income Tax Assessment Act 1997 section 8-1
Case references: Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344 (1956) 11 ATD 147
Related public rulings and determinations: TR 2015/3
Subject references: Advertising and promotion expenses Associations, organisations and societies Deductions and expenses Prizes and awards Scholarships, fellowships and bursaries