Is Sponsorship Tax Deductible?

Tax treatment of sponsorships

Sponsorships are often sought by local sporting clubs and community organizations. Sponsorship expenses are deductible if the taxpayer provides sponsorship with the expectation that it will generate future income through advertising. This deduction is by virtue of section 8-1 of the ITAA 1997.

Section 8-1 of the 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 the purpose of gaining or producing assessable income. No deduction is allowed to the extent that the losses or outgoings are of a capital, private or domestic nature or are necessarily incurred in gaining or producing exempt income.

For example, if a plumbing business sponsors a local netball team, including advertising on uniforms and at games, the sponsorship expenses would be deductible.

A sponsorship tax deduction is valid even if the expected income does not materialize, so long as there was a genuine intention of earning income as a result of the sponsorship. 

Sponsorships of family or friends would not usually be tax deductible, as such arrangements are normally of a private or domestic nature and would not usually be done for the primary purpose of earning income.

Sponsorships of employees may be tax deductible, depending on the facts of the situation. Note that non cash benefits provided to employees may result in Fringe Benefits Tax (FBT) for the employer.

Record keeping

To substantiate tax deductions, it is essential to maintain proper documentation. When entering into a sponsorship agreement, businesses should keep written evidence such as letters of approach, tax invoices, and contracts outlining the terms and conditions of the sponsorship. These documents serve as evidence in case the Australian Taxation Office (ATO) requests proof of the claim.

Sponsorships vs Donations

It’s important to understand the distinction between sponsorships and donations when considering the tax implications. While sponsorships can be tax deductible, donations are subject to different rules. Donations are not tax deductible unless the recipient organization is registered as a Deductible Gift Recipient (DGR). DGRs are organizations entitled to receive tax-deductible gifts.

It is important to note that not all charities or sporting clubs are eligible for DGR endorsement. In fact, many charities and most sporting clubs are not registered as DGRs, making donations to such organisations ineligible for tax deductions.

The Australian Charities and Not-for-profits Commission (ACNC) is responsible for registering organizations as charities, while the ATO handles the endorsement of organizations as DGRs.