ATO ID 2003/923: Deductibility of payments to credit union members in respect of monetary gifts
Date of decision: 28 August 2003
Year of income: Year ended 30 June 1998 Year ended 30 June 1999 Year ended 30 June 2000 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 monetary gifts on the occasion of the birth of a baby to a member, death of a member and as a subsidy for the preparation of a will?

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 lump sum amounts on the occasion of the birth of a baby to a member, death of a member and as a subsidy for the preparation of a will (birth, death and will preparation payments). Various policy documents describe the purpose of the birth, death and will preparation payments as promoting the goodwill of the taxpayer in the community; promoting the taxpayer's products and services and expansion of the membership base. Payments from the fund are at the discretion of the taxpayer's Board of Directors. The birth, death and will preparation payments are in the form of a lump sum. The availability of these payments is disclosed in the taxpayer's Annual Reports. The taxpayer states that they are also publicised in the taxpayer's Official Newsletter and at each Annual General Meeting. 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 ( National Australia Bank Case ) 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. The Full Federal Court in Federal Commissioner of Taxation v. Manchester Unity IOOF (1994) 50 FCR 85; 94 ATC 4309; (1994) 28 ATR 251 acknowledged that advertising of particular products designed to attract members has a spin-off effect on other products. In contrast, the birth, death and will preparation payments do not promote a specific income-producing product. However, like sponsorship arrangements, they could potentially raise the profile of the taxpayer amongst recipients of the payments and those who hear about them. In the National Australia Bank Case , the bank purchased from the Commonwealth government the exclusive right to provide Commonwealth subsidised loans to Australian Defence Force personnel for a period of 15 years. The payment to the Commonwealth was considered to be a marketing expense since it secured 'the practical certainty that most of those ADF personnel who qualified for a subsidy and wanted a home loan would become customers of the Bank'. By granting loans to the ADF personnel the bank also expected to gain revenue from other products provided to the home loan customers. The Full Federal Court found that the payment was made as part of a marketing strategy implemented in the course of conducting the bank's business of selling home loans and other products which generated its interest income. The National Australia Bank made a payment to acquire a specific customer base for a specific product. In the present case, the payments are unrelated to any of the taxpayer's products or services and are made to existing members who are not necessarily customers. The availability of the subsidy in the National Australia Bank Case secured a 'practical certainty' that the bank would obtain custom as a result of the payment for the right. There is no similar expectation here that any of the members receiving payments would become customers of the taxpayer as a result of receiving a birth, death or will preparation payment. An early case recognised that income-producing benefits could flow from non-specific promotional expenditure. In Colonial Mutual Life Assurance Society Ltd v. Federal Commissioner of Taxation (1933) 49 CLR 171; (1933) 2 ATD 308 the taxpayer (CML), a life insurance society, claimed a deduction for expenditure on a 'welfare service' under which CML voluntarily provided a nursing service for assured persons and issued pamphlets on matters relating to health. Starke J found that the expenditure was exclusively incurred in gaining life insurance premium income. However, the deduction was denied because premium income was not taxable income within the meaning of paragraph 20(5)(a) of the Income Tax Assessment Act 1922 . The object of the welfare service in CML was to attract life insurance business to the company; hence the service was available to 'assured persons', that is, persons holding policies with the company. Consequently, had the premiums been assessable income, there would have been a nexus between the expenditure and the derivation of income. The present case is distinguishable in that the payments are primarily directed at attracting membership. Eligibility for a birth, death or will payment is determined on the basis of membership, regardless of whether the member might also be a customer or future customer. Accordingly, the payments do not reveal a connection with the production of assessable income. Although policy documents declare a purpose of promoting the goodwill, products and services of the taxpayer, there is little evidence of the promotion of the payments from the fund in the community. The payments are mentioned without detail in the Annual Reports and member newsletters. Presumably some promotion would also occur by word of mouth. 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 2003/922
Subject references: Advertising and promotion expenses Credit unions Financial services industry Financial services industry expenses