Private ruling: Deductibility of sponsorship expenses
Date of advice: 17 November 2015
Published: February 2016
Ruling period: Year ended 30 June 2015 | 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 2014

Ruling: Q1: Are the naming rights expenses incurred deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No

Relevant facts and circumstances: The entity is an Australian private company and the head entity of a consolidated group. There are two subsidiary companies of the head entity. A trust which has individuals as trustees is the 100% shareholder of the head entity. There is an agreement between the entity which owns a professional sporting team and a venue for sponsorship of the venue. Under this agreement, the venue will be named after one of the individual trustees, not the sporting team. The entity entered into the agreement as a sponsor to promote the business of the sporting team.

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

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 ( 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 that purpose. However a deduction will not be deductible where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income or where a provision of this Act prevents it from being deductible. The courts have established that for a loss or outgoing to be deductible under section 8-1 of the ITAA 1997: (a) it must have the essential character of a loss or outgoing incurred in gaining assessable income or, in other words, of an income producing expense ( Lunney & Hayley v. Federal Commissioner of Taxation (1958) 100 CLR 478; (1958) 11 ATD 404; (1958) 7 AITR 166) (b) there must be a nexus between the loss or outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 7 AITR 236 (the Ronpibon Case), and (c) it is necessary to determine the connection between the particular loss or outgoing and the operations or activities by which the taxpayer more directly gains or produces his or her assessable income (Charles Moore & Co (WA) Pty Ltd v. Federal Commissioner of Taxation (1956) 95 CLR 344; (1956) 11 ATD 147; (1956) 6 AITR 379; Federal Commissioner of Taxation v. Hatchett (1971) 125 CLR 494; 71 ATC 4184; (1971) 2 ATR 557). Expenditure incurred for sponsorship 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 producing assessable income. In this case, the entity will be using the individuals' name and not the entity's name to sponsor and promote the business of the sports team. There is no nexus between the expenditure incurred by the entity for the sponsorship using the individual's name and the assessable income of the sports team. Therefore the entity is not entitled to a deduction under section 8-1 of the ITAA 1997 for sponsorship expenses. If under the sponsorship agreement the venue was officially named and referred to the professional sports team a deduction would be allowable under section 8-1 of the ITAA 1997.