The deductibility of sponsorship expenditure in respect of branded items used for marketing
27 January 2015
Posted by: Author: SAIT Technical
Author: SAIT Technical
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?
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.
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).
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 :
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.”
our view this statement better describes the current law in this regard.
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:
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'.
matter was recently dealt with in Stellenbosch Farmers Winery Limited v C:SARS
 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.