Sponsorship: Tax, GST and Business

Sponsorship: Tax, GST and Business

Author: Michael Levertoff

If you are in business and want to sponsor someone, is it tax deductible? And what about GST?

What is “sponsorship”?

For the purposes of this statement it is first necessary to identify what type of expenditure is being considered, i.e. what type of expenditure constitutes sponsorship expenditure. The term “sponsorship” is used to cover a wide range of situations, with the usage reflecting considerable overlap with the concepts of “advertising”, at one end of a continuum, and “donations” at the other end.

At one extreme, the taxpayer’s sole purpose is to “advertise” / promote the business with the amount incurred reflecting market forces and what he or she considers will best achieve the purpose of business promotion. At the other extreme, the taxpayer’s “donation” is for the sole purpose of benefiting the donee and business promotion is not contemplated or is merely incidental to the philanthropic purpose.

In between these two extremes, the taxpayer intends to promote his or her business in some manner when incurring the expenditure, but the expenditure made also benefits the recipient (or some other person) in a manner unrelated to the ordinary receipt of income from his or her income-earning activities.

This statement does not consider expenditure at the extremes of the continuum, i.e. expenditure made to commercial advertising media, at one end of the continuum, and charitable donations where business promotion is not a purpose, at the other end of the continuum.

Instead, the statement focuses on the deductibility of expenditure in the middle of the continuum (referred to in this statement as “sponsorship expenditure”), i.e. where the taxpayer making the expenditure intends that his or her business will be promoted in some way, but that the recipient, or some other person, will also be benefited in some manner other than by the receipt of ordinary income from business or income-earning activities.

There is no limit on sponsorships – spend away. However, sponsorship expenditure is only deductible under limb (b) of section BD 2(1) where a nexus exists between the expenditure and the taxpayer’s business or income-earning activity.

• There must be a nexus or necessary relationship between the expenditure and the taxpayer’s business or income earning activity.

• This requires a determination of the character of the advantage sought by the taxpayer in incurring the expenditure. This is a subjective matter, depending upon the taxpayer’s purpose when incurring the expenditure. The determination of the taxpayer’s purpose or purposes will require an objective analysis of surrounding circumstances, including the effect of the expenditure.

In order for the nexus test to be satisfied, the taxpayer needs to show that he or she intended that the business would be promoted by incurring the sponsorship expenditure. In this regard, the following objective factors will support a taxpayer’s contention that he or she intended that the business be promoted by the expenditure:

• The specific terms of the sponsorship arrangement, e.g. Is there a specific requirement for the recipient to promote the taxpayer’s business? What is the extent and prominence of the business exposure specified in the agreement?

• The place of the sponsorship arrangement in a coherent marketing strategy. For example, if a business’s market research has identified that potential customers frequently attend cultural events, then part of its marketing strategy may be to sponsor such events in return for its name and products being promoted during the event.

• The relationship between the market or potential market exposure capable of being reached and the taxpayer’s business. For example, market exposure at a tennis tournament is directly related to the business of a sports equipment retailer.

• The relationship between the expenditure and the resulting income derived, i.e. can it be shown that the expenditure resulted in income being derived? For example, the sale of 10 tractors at an agricultural field-day, by a tractor manufacturer sponsoring the event in return for being able to display the tractors, shows a direct relationship between the sponsorship expenditure and the derivation of income.

GST – if the organisation you are sponsoring is GST registered that is a claim for you. If not, the expense is exempt, just like any other business transaction.

As with any GST claim, make sure you get a tax invoice from the supplier as this is a legal requirement when seeking GST back on an expense you have incurred in business.

source: http://www.ird.govt.nz/resources/e/2/e21900004bbe3fc98f14dfbc87554a30/is3229.pdf

ENDS

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