Private ruling: Business expenses
Date of advice: 14 April 2016
Published: June 2016
Ruling period: Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020
Date scheme commenced: 1 July 2015

Ruling: Q1: Are you entitled to a deduction for expenses in sponsoring motor racing? | A1: No. | Q2: Are you entitled to a deduction for additional costs incurred for advertising and signage of the business? | A2: Yes.

Relevant facts and circumstances: You are a partnership. One of the partners operates a race car as a hobby. You intend to sponsor the race car by way of paying the operating costs such as fuel, repairs, safety clothing, uniforms and travel expenses. The race car will carry the business name and you will hand out business cards at race meets and promote the business.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1

Reasons for decision: Detailed Reasoning - Sponsorship costs: Section 8-1 of the Income Tax Assessment Act 1997 (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 are 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 considers the issue of whether a deduction would be an allowable deduction by considering the subjective purpose, motive or intention in making the outgoing. 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 your case, you operate a business and intend to sponsor a race car one of the partners operates as a hobby. Whilst it is undeniable the advertising associated with the race car may possibly enhance the income producing activities of your business, in your situation they are merely incidental to the private hobby of one of the partners. The purpose or motive in incurring an outgoing regarding the sponsorship of the race car is private in nature. A legal case similar to your situation is No 3 Board of Review Case H23 (Case H23) , 76 ATC 168, where the taxpayer was denied deductions for expenses incurred in maintaining and running his boat. The taxpayer claimed the boat was used solely for the entertainment of existing and prospective clients of his accounting business. The court determined that the boat had not been acquired by the taxpayer for business purposes but it had been used by him for such purposes as well as for private purposes . The court stated at 76 ATC 170: "it seems that at the time when the boat was purchased in December 1968 no consideration was given to the question of using it to entertain clients or prospective clients". At 76 ATC 170, N. Dempsey (Member) stated: It will be noted that primarily taxpayer claims that he should be allowed the whole of the amounts claimed. To succeed in such a claim he must show that the boat was used solely in connection with his business and that it was not used at all for private purposes. In your situation, the race car is largely used for private purposes and not used solely in connection with your business. The use of sponsorship money to pay for the day to day costs of the race car such as fuel, repairs and clothing have little if any impact on increasing the assessable income of the business. Such expenses are not in the nature of advertising and do not enhance the income producing activities of your business. The connection between your sponsorship expenses and the earning of your assessable income is too remote. Furthermore, the expenses are considered to be private in nature. Therefore a deduction for the sponsorship expenses is not allowable under section 8-1 of the ITAA 1997. | Detailed Reasoning - Advertising: Advertising and marketing expenses are deductible under section 8-1 of the ITAA 1997 to the extent that the expenses are sufficiently related to the production of assessable income. In your case, your business receives market exposure in relation to the costs incurred in having the business name on the race car. Such signage displayed on the vehicles is considered to be in the nature of advertising and is considered to be genuine advertising costs for your business, as are costs associated with stickers and business cards handed out at the racing meets. It is considered that there is a sufficient nexus between the advertising expenses and deriving assessable income. Therefore the additional costs for the advertising and signage of your business name are an allowable deduction under section 8-1 of the ITAA 1997.