Private ruling: Advertising Expense
Date of advice: 30 October 2015
Published: October 2015
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Can you claim a deduction for the expenses paid on behalf of a charity to construct a structure in exchange for advertising? | A1: Yes.

Relevant facts and circumstances: You carry on a business. You paid for a structure to be constructed for a charity. This structure is to be used as a place to conduct their activities and store materials. The business paid $XXXX for the construction of the structure. The structure is able to be dismantled and moved if need be and is currently on land owned by an associate of one of the charity's members. The structure is owned by the charity. In acknowledgement of the business' donation the charity attached a plaque to the structure stating you are the provider, attached signage to the charity's motor vehicle advertising your business and also promoted your business on their website. Your business also designed advertising material that was distributed by the charity's members. A percentage of the sales generated by the advertising material go to the charity for fundraising purposes. Given the community in which you operate you believe that the advertising and the plaque on the structure have increased your assessable income.

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 and outgoings to the extent to which they are incurred in 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). Where a taxpayer is carrying on a business for the purpose of gaining or producing assessable income, the commercial and practical implementation of the term necessarily incurred', imply that voluntary expenditure incurred for business needs may be deductible. In determining if the expense is reasonable in light of the circumstances, consideration should be given to the business and the context of the expense. An expense need not be compulsory to meet this requirement as it may be voluntary or arise inevitably due to the nature of the business. In your case you have incurred a sum in the construction of a structure that has been provided to the charity and which they now own. In return for the structure the charity has agreed to advertise your business through signage, have placed a plaque on the structure in your honour and acknowledged your commitment on their website. You have also produced advertising material that is distributed by the charity. You have stated that the advertising has appeared to increase the assessable income generated by the business. The expenditure has the characteristics of an advertising expense directed to enhance the future growth and income of your business activities. Therefore the purchase of the structure by your business for the charity is fully deductible under section 8-1 of the ITAA 1997.