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Is providing sponsorship to a staff member seen as a sponsorship or advertising for tax purposes?

Monday, 02 March 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: One of my corporate clients is considering providing sponsorship to a staff member who is involved in go-karting. My question is can these costs be raised in the company’s books of account as a tax-deductible expense either as sponsorship or advertising and promotions?

A: Advertising expenditure is by its very nature either capital or revenue and this distinction are very obscure, but you would first have to make this determination from a corporate tax point of view. 

Where an asset of a permanent nature results from the advertising sponsorship it will mostly be capital in nature (INCOME TAX CASE NO 469 (1940) 11 SATC 261(U) and INCOME TAX CASE NO 217 (1931) 6 SATC 137(U). For example if the go kart was bought by the taxpayer and a mere right of use for the races/practices was given that would result in capital expenditure. 

Where money or non-returnable goods are provided the case law is obscure as some have held if the purpose was promotion of image and goodwill it is capital (See INCOME TAX CASE NO 1129(1969) 31 SATC 144(R) ) as well as if the amount was given with a philanthropic intention rather than to get advertising ( See Commissioner for Inland Revenue v Pick ’n Pay Wholesalers (Pty) Ltd [1987] 4 All SA 432 (AD)), while other cases have held that the promotion of the business to increase sales is revenue in nature (INCOME TAX CASE NO 696 (1950) 17 SATC 86(C)). The general advertising of goods for sale or promotion of the organisation to increase sales by awareness would in our view be more revenue in nature.

You would also have to consider the employment tax implications; though if the amount is held to be employment related it is a mere 11(a) salary cost in our view, negating the above. Para (c) of gross income in section 1 of the Income Tax Act applies to amounts, including voluntary awards, in respect of services rendered or in respect of employment. Therefore if the employee must render a promotional/ marketing function for the amount (i.e. service rendered) or if the award is only available to employees, this aspect together with para (i) (taxable benefits) should also be considered.  

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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