An analysis of the tax deductibility of sponsorship expenses for income tax purposes in South Africa

Abstract

In today’s business climate, marketing a company’s brands and causing them to stand out as a competitive brand is becoming more complicated and demanding. Companies have to introduce themselves and their brands in such a way as to compete effectively with other competitors. Therefore, companies must be creative when communicating their message and be familiar with all the marketing and advertising techniques used. The purpose of this study is to better understand why companies sponsor events or organisations when the sponsorship expenditure may not be allowed as a deductible expense for income tax purposes, as well as why companies offer sponsorship when no benefit will be derived. In order to achieve the objective of this study I consulted previous studies which have been carried out, reported cases and relevant sections of the South African Income Tax Act. This research shows that the most common objective of companies sponsoring an event or organisation is to make their brands known in order to reach a specific target market. The challenge they encounter in order to enjoy the benefit of incurring such expenditure is to link the expenditure incurred with the income earned. This research identified certain precautions to take before incurring the expenditure in order to enjoy the tax benefit. It is concluded that South African taxpayers enjoy limited tax benefits for sponsorship expenditure if precautions and tax planning are not thoroughly considered (Smith, 2005:5). Therefore further research will be needed to determine whether a section should be introduced in the South African Income Tax Act specifically to deal with sponsorship AFRIKAANS : In vandag se besigheidsklimaat word die bemarking van ’n besigheid se handelsmerke en die vermoë om uit te staan as ’n kompeterende handelsmerk al hoe moeiliker en meer ingewikkeld. Maatskappye moet hulself en hul handelsmerke voorstel op ’n manier om te kan kompeteer met hul mededingers. Maatskappye moet dus kreatief wees wanneer hulle hulle boodskap kommunikeer en vertroud wees met al die bemarkings- en advertensietegnieke wat gebruik word. Die doel van hierdie navorsing is om beter te verstaan waarom maatskappye geleenthede of organisasies borg wanneer die uitgawes nie toegelaat kan word as ’n aftrekbare uitgawe vir belastingdoeleindes nie of waarom maatskappye borgskappe aangaan wanneer geen voordeel daaruit benut kan word nie. Om die doelwit van hierdie studie te bereik, het ek vorige verslae, gerapporteerde sake en relevante artikels van die Inkomstebelastingwet in oorweging neem. Hierdie navorsing wys dat maatskappye wat geleenthede of organisasies borg se belangrikste doelwit is om hulle handelsmerke bekend te stel om sodoende ’n spesifieke teikenmark te bereik. Die uitdaging wat hulle teëkom om sodoende die voordeel te geniet van hierdie uitgawes wat hulle aangegaan het,, is om die uitgawes aangegaan te met die inkomste verdien te verbind. Die navorsing het getoon dat ’n mate van voorsorg getref moet word alvorens die uitgawe aangegaan word om die belastingvoordeel te kan geniet. In die navorsing word daar tot ’n gevolgtrekking gekom dat Suid-Afrikaanse belastingpligtiges ’n beperkte belastingvoordeel geniet vir borgskapuitgawes indien voorsorg en belastingbeplanning nie sorgvuldig oorweeg word nie. Gevolglik sal verdere navorsing nodig wees om vas te stel of ’n artikel in die Suid-Afrikaanse Inkomstebelastingwet ingevoeg moet word wat spesifiek met borgskappe te handel.