ATO ID 2003/922: Deductibility of payments to credit union members in respect of financial hardship
Date of decision: 28 August 2003
Year of income: Year ended 30 June 2001
Business line: Private Groups and High Wealth Individuals

Issue
Is the taxpayer, a credit union within the meaning of subsection 23G(1) of the Income Tax Assessment Act 1936 (ITAA 1936), entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for expenditure incurred in providing financial assistance to members suffering financial hardship?

Decision
No. The payments do not have a sufficient connection to the gaining or producing of the taxpayer's assessable income or the carrying on of the taxpayer's business for the purpose of gaining or producing assessable income within the meaning of section 8-1 of the ITAA 1997.

Facts
The taxpayer provides its members with financial, lending and deposit services including various savings and investment account options, insurance, travel services, financial and retirement counselling. The taxpayer's Constitution includes the object of providing grants, programs and services to its Members to assist them to meet their financial, economic and social needs. The Constitution also provides for a Financial Assistance Fund (the fund), which is to be financed from the taxpayer's interest income received from loans and overdrafts during the year. Payments from the fund include financial assistance to hospitalised, sick, poor or needy members of the taxpayer (financial hardship payments). The financial hardship payment is in the form of an unconditional money grant. Payments from the fund are entirely at the discretion of the taxpayer's Board of Directors. The availability of financial hardship payments was published in the taxpayer's Annual Report three years prior to the year in which the deduction is claimed, but not in subsequent years' Annual Reports. The taxpayer characterises these payments as a form of advertising expense.

Reasons for decision
Summary: Section 8-1 of the ITAA 1997 allows a deduction for all losses or outgoings to the extent to which 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 incurred in gaining or producing exempt income Under section 8-1 of the ITAA 1997, the deductibility of the payments depends upon the connection between the payments and the gaining or producing of the taxpayer's assessable income, or the carrying on of the taxpayer's business for the purpose of gaining or producing assessable income. Expenditure incurred in advertising and/or marketing is deductible under section 8-1 of the ITAA 1997 to the extent that it sufficiently relates to the production of assessable income or is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. In National Australia Bank v. Federal Commissioner of Taxation (1997) 80 FCR 352; 97 ATC 5153; (1997) 37 ATR 378 the Full Federal Court recognised the use of advertising, promotion and marketing strategies in the banking and finance industry, aimed at attracting and maintaining customers. The Court accepted that expenditure with a close nexus with advertising, promotion or marketing is likely to be deductible. Marketing strategies may include sponsorship to raise and broaden a company's profile so that it can continue to attract customers. Through a sponsorship relationship a credit union may become better known, building strong ties with the community. Such involvement may include supporting disadvantaged groups and individuals. In the present case, the financial hardship payments support disadvantaged members. However, assistance is not provided to the community but only to the taxpayer's own members. Nor is there evidence (apart from the brief statement in the earlier year's Annual Report) of the promotion of these payments in order to increase the taxpayer's profile in the community. In assisting members suffering financial hardship, the taxpayer is providing a service to its members consistent with the social responsibility objects of its Constitution. These objects reflect the taxpayer's foundation as a co-operative within an ethnic community. Whilst the payments may also possess an element of promotion or marketing, it is considered that they are more closely connected with the taxpayer's undertaking to its members in its Constitution than in carrying on the taxpayer's income producing business. Such promotion as there is, does not promote the advantages of doing business with the taxpayer, but merely the advantage of membership. Accordingly, the requirements for deductibility under section 8-1 of the ITAA 1997 are not met as the expenses were not incurred in earning the taxpayer's assessable income.

Legislative references: Income Tax Assessment Act 1997 section 8-1
Case references: National Australia Bank Ltd v. Federal Commissioner of Taxation (1997) 80 FCR 352 (1997) 37 ATR 378 97 ATC 5153
Related ATO interpretative decisions: ATO ID 2003/923
Subject references: Advertising and promotion expenses Credit unions Financial services industry Financial services industry expenses