Business owners are approached to contribute to local associations, clubs, charities and community organisations. You may ask whether sponsorships and donations are tax deductible.
To begin with, sponsorships and donations are not the same thing.
A donation is a genuine gift with no strings attached. You don't expect more than a "thank you" in return when you donate to a not-for-profit. Businesses, on the other hand, normally expect to be promoted in exchange for their contribution.
To claim a tax deduction for a donation / gift:
Both individuals and businesses may claim tax deductions for gifts to certain charities and not-for-profit organisations. The donee must be registered as a Deductible Gift Recipient (DGR), and their status can be verified by searching the public register (ABR).
However, many small associations and clubs are not registered as DGR's - which means they cannot offer tax-deductibility to donors.
Also, you cannot claim a tax deduction for a gift or donation if you received something in return, such as raffle tickets or some other material benefit.
Public recognition accorded to the giver for the purpose of commercial advertising is a material benefit. Sponsorships of DGRs by businesses generally fall into this category. If so, the contribution cannot be classified as a gift yet it may be tax deductible as a business expense.
Can I claim a tax deduction for sponsorship?
A sponsorship is most definitely not a gift.
A business will sponsor an event or organisation in return for official recognition and promotion. Sponsorships is regarded as ordinary business expenditure, similar to advertising.
Contributions are tax deductible on the basis that there is an income producing purpose. This will be the case even if the promotion of the business doesn't generate any future income.
ATO ID 2005/284 confirms the Tax Office view of deductions claimed in relation to sponsorship.
In-kind (or contra sponsorship) refers to support in the form of goods or services, time or expertise, rather than cash or property. This is like a barter arrangement so an equal market valuation for each supply is typically calculated, and no tax deduction is claimed. Contra-sponsorship constitutes a taxable supply for GST-purposes, according to the ATO; so if only one entity is GST registered then they will be out of pocket for a deemed GST amount.
- The sponsorship expenses should be recorded separately from advertising and donations in the accounting records, so the business can compare the effectiveness of each method of promotion.
- If the organisation is GST registered it should give the business a Tax Invoice to claim back the GST.
- Written evidence of the sponsorship agreement will support the tax deduction if the Tax Office query it. For example: tax invoices, contracts and terms of the deal.
- In-kind is nice but if you want a tax deduction money is better.
How does a business choose what to sponsor?
The first thought is to get your name out and be viewed positively as a participating member of your community. However, when deciding whether or not to sponsor something a business owner also looks at their limited marketing budget.
You may ask "how will I get the most bang for my buck?" and consider:
- Does the event or organisation have some degree of relevance to your services or products?
- Is your brand compatible with the event? Would there be any conflict of interests?
- Will the sponsorship lead to increased awareness and positive views of your business in the community, which will increase the probability of sales?
- Are other forms of advertising and promotion more effective?
Are you fairly confident that your business will, as a result of the promotion, eventually earn back more than what the sponsorship cost? Getting a tax deduction is not the only motivating factor for a sponsor.
If it doesn't add up commercially you may still want to support a cause. In which case, you'll need a receipt from a DGR to claim a tax deduction for your donation.
For further information:
- ATO Q&A's regarding GST as it applies and does not apply to sponsorship and gits: See here.
- Taxation Ruling TR 2005/13 '...what is a gift?': See here.
- ATO Crowdfunding factsheet: See here
- Arts Law Centre Factsheet: Accounting for donations and in-kind support. See here.
- GST Ruling GSTR 2001/6 'non-monetary consideration', relevant to in-kind sponsorship:See here.
This information is general in nature and is not intended to be taken as advice. Please contact us for further information or advice which is relevant to your own situation.