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The deductibility of sponsorship expenditure in respect of branded items used for marketing

27 January 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: My question has to do with sponsorships provided by a close corporation. For example, the CC has a team which is entering a cycling tournament; can they sponsor all the equipment and clothing (bike and branded clothes) and claim this as a full tax deduction or is there a limit on this amount?

My question arises as I would take the expenses, ensure the items are branded appropriately and used for advertising purposes, then claim the cost as an advertising expense. However, being a cyclist, the costs involved can be disprportionate to the gains made as bikes etc have a varied price brand. Should they deduct the full amount as advertising, is there a cost limit or a ceiling that must be adhered to depending on turnover? Or should they take the bikes, and depreciate them normally as assets would be over the required years. I am also trying to find practice notes regarding sponsorships but to no avail.

A: Firstly we assume that when you sponsor the bicycles and clothing, you are in fact disposing thereof (i.e. ownership transfer to the other person and he is not merely entitled to use).

Advertising expenditure has in the past been disallowed partially for being excessive but these have been in ITC cases and are quite old, though the principle remains valid (See ITC 621 (1946) 14 SATC 498; ITC 629 (1946) 15 SATC 93). In ITC 12262 7 Dec 2010 this matter again came up and the court held, citing authority, in respect of SARS’ attack on excessive marketing fees as follows at [17]:

"The marketing fees were not excessive in the generally accepted sense of such term in such matters. These cases make it clear that it is not for the court  (or the Commissioner)  to say, with the benefit of hindsight, that business expenditure should be disallowed on the basis that it was not strictly necessary, or that it was not as effective as it could have been. If the purpose of the expenditure was to produce expenditure, in the course of trade and the expenditure is not of a capital nature, then that it sufficient.”

In our view this statement better describes the current law in this regard. 

The further consideration is whether the amount is capital in nature, especially if the sponsored bicycles are to be used for an extended period by the recipients for the purposes of advertising, thus creating a right for the taxpayer to such advertising over such period or use. Traditionally advertising is revenue expense unless an asset with an enduring benefit is created by the expense (SILKE on Income Tax at 7.2.2.). However, there is no single test to determine the capital nature of the expense as was held in CIR v Pick ‘n Pay Employee Share Purchase Trust 1992 (4) SA 39 (A) at 56:

"There are a variety of tests for determining whether or not a particular receipt is one of a revenue or capital nature. They are laid down as guidelines only – there being no single infallible test of invariable application. In this regard I agreed with the following remarks of Friedman J in ITC 1450 (at 76): ‘But when all is said and done, whatever guideline one chooses to follow, one should not be led to a result in one's classification of a receipt as income or capital which is, as I have had occasion previously to remark, contrary to sound commercial and good sense'.

The matter was recently dealt with in Stellenbosch Farmers Winery Limited v C:SARS [2012] ZASCA 72. In the course of its judgment, the SCA reaffirmed the principles that should generally be applied in relation to the disposal of an asset in order to determine whether the proceeds are of a capital or a revenue nature. The court emphasised that the adoption of the principles most appropriate to the situation must be commercially sensible. You will therefore have to, based on the facts, determine which capital test is applicable to the various expenditure sponsored and conclude once it has been applied, whether the expenditure is capital or revenue in nature.

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision.


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