A local café sponsors a junior rugby team, and its logo is proudly displayed on every jersey. A small gesture of community support – is it a deductible business expense? Inland Revenue’s latest draft interpretation statement takes a closer look at where community support and tax intersect.

The draft statement, now open for public consultation, examines the income tax treatment of sponsorship, a common but sometimes misunderstood form of business expenditure. 
This article highlights some of the key issues in focus in the draft statement.

Meaning of sponsorship

While sponsorship is not defined for income tax purposes the draft statement describes it as:

“… supporting an organisation, event, person or cause either monetarily or by providing products or services, where the taxpayer (the sponsor) intends that the sponsorship will promote or advertise their business.”

This is a simple and broad definition.

General principles

There is no specific regime for the tax treatment of sponsorship expenditure.  The matter will be determined by applying the relevant general principles of income, deductions and related legislative provisions.

In essence, to support a deduction the taxpayer will need to be able to show that it was intended the sponsorship expenditure would promote or advertise their business.  Factors that may support this contention include the:

• specific terms of the sponsorship arrangement
• place of the sponsorship arrangement in a coherent marketing strategy
• relationship between the market, or potential market, and the taxpayer’s business
• relationship between the expenditure and the resulting income derived.   

In some circumstances, taxable income may arise from a sponsorship arrangement.  For example, if the taxpayer pays the sponsorship amount relating to a three-year period upfront in one lump sum.  Under the prepayments rules, the ‘unexpired portion’ of the expenditure at the end of the income year of payment will need to be included in the taxpayer’s income for that year (assuming the amount paid exceeds any applicable de minimis thresholds).   

The draft statement includes a detailed discussion and examples about claiming depreciation on depreciable property acquired by the taxpayer that may be used by the recipient under a sponsorship arrangement.  If the taxpayer acquires depreciable property, the cost of the property will not be deductible (the capital limitation will apply).  However, a deduction for depreciation may be available.   

Sponsorship by providing trading stock 

The draft statement also considers the situation where sponsorship may be provided in the form of trading stock.  An example in the draft statement is a supermarket providing a local high school rowing club with ingredients for a fundraising sausage sizzle.  In return, the rowing club agrees to hang signage at the event and display the supermarket logo.   
Generally, the cost of the trading stock provided will be deductible to the taxpayer.  

In some situations, Inland Revenue’s view is that deemed income may arise under the donated trading stock rules.  In our view this is more likely to reflect that the arrangement does not meet the meaning of sponsorship. 

Sponsorship of an employee

The last issue considered in the draft statement is sponsorship of an employee. The example used is an employer who sponsors an employee to compete in the local triathlon by paying the entrance fee.  In return, the employee agrees to display the name of the employer’s business on their t-shirt, bicycle and swimwear. 
The example concludes the cost of the entrance fee is expenditure on account of the employee and deductible to the employer on that basis (i.e. it is a payroll cost).  The amount will be income to the employee.  This position may be a surprise to many.  

If the employer sponsors the employee by providing goods or services, the draft statement highlights that there may be fringe benefit tax implications.

Closing remarks

The draft statement is comprehensive including 17 examples.  The deadline for submissions is 21 November 2025.