The Good News
Sponsorship Expenses paid by your business may be tax deductible. Where the recipient is registered for GST, the sponsor may be able to claim the GST credit on the expense.
Section 8.1 of the Income Tax Assessment Act 1997 states ‘losses and outgoings to the extent that they are incurred in gaining or producing assessable income are deductible’.
In many sponsorship agreements, the business will benefit through advertising and promotion of the business. Sponsorships may be considered an advertising expense for the purpose of enhancing the income producing activities of the business.
For accounting and financial reporting purposes, sponsorship expenses should be separated from other advertising or donation expenses. This will enable the business to identify the differing methods of promotion, and then review and compare the effectiveness of each. For instance looking at advertising on the radio versus sponsoring a youth football club.
To record a transaction as a donation, the organisation receiving the contribution MUST be a registered Deductible Gift Recipient (“DGR’s”). Contributions to DGR’s may be in the form of gifts of cash, in kind, however the tax deduction does not cover donations where something is received in return, for example, tickets to attend a fundraising event or raffle tickets.
To claim the GST a Tax invoice must be issued by the recipient.
As with ALL tax deductions, the ability to substantiate the expense is essential should the ATO request the evidence to support the claim.
When committing to a sponsorship agreement, we recommend keeping written evidence to support the tax deductibility of the expense. Examples of this would be a letter of approach from the organisation, tax invoices for the sponsorship, contract of terms and conditions for the sponsorship. In short – what is the deal and put in writing. This protects all parties.
Fees paid to an organisation for participation are generally not tax deductible e.g. paying for little Johnny to play Auskick is a personal expense and not tax deductible.
In a Nutshell,
Giving to charities, local sporting groups and other community organisations can be a great way of promoting your business and generally tax deductible. Keeping written evidence of all contributions is a must.
Recording of the contributions and expenses needs to be defined by the recipient:
- Contributions Paid to DGR’s
- Sponsorship Expenses
- Contributions to other organisations, normally not for profit and associations with the intent to promote the business.
- Advertising Expenses
- Direct promotion of the business