Tabl 5551 Taxation Law

1. Advertising expense

MPC incurred the $1 millioin to the organisers of the Rugby World Cup to be entitled to show its name in the competition arena during the Cup and to mention its sponsorship in its advertising. The cost can be regarded as advertising expense.

1.1 Positive Limbs of section 8-1

This expense satisfies the first and second positive limbs of s 8-1. MPC makes the payment with the purpose to enhance MPC’s popularity and brand name. Its activities are sufficiently related to gain or produce its assessable income^[1], as frequent display in the Cup assists in attracting new customers and strengthening existing customers’ confidence. Meanwhile, it is likely to be necessary for MPC to make the payment in carrying on the business^[2]. For these reasons, the expense could be deductible.

1.2 Section 32-45

According to this legislation, if you incur the loss or outgoing to promote or advertise to the public your business or its goods or services^[3], s 32-5 does not stop you deducting a loss or outgoing^[4]. S 32-5 states that the loss or outgoing to provide entertainment is not deductible, while there are exceptions including s 32-45. In this question, MPC incurred the costs to push its brand and garner publicity for its operation. It is clear that the costs do not fall within the definition of 'entertainment' and they are deductible on the basis of s 32-45.

2. Payments received for giving up valuable rights/CGT event

MPC incurred the payment to Jack Smith to enter into an agreement under which Jack will only purchase petrol from MPC and sell this brand. On the basis of similar cases^[5], it appears that Jack received the payment as an inducement, i.e. a payment made to incite a person to enter into an agreement, and the feature in it was no longer income. The sum of $100,000 could be regarded as compensatory for the loss of future profits. Hence, the payment has the character of capital instead of income.

2.1 Positive limbs of section 8-1

The payment does not give rise to assessable income. After entering into the contract there will be no immediate benefits adding to sales, and Jack might be faced with decreasing sales revenue because of limited choice of petrol brand. The purpose of the fund is not to gain or produce Jack’s assessable income, and none of the positive limbs are satisfied. Meanwhile, the negative limbs apply. In short, the payment is not deductible.

2.2 CGT event D1

In a CGT event, a capital gain or loss is made. CGT event D1 happens when creating the contract^[6] and if the capital proceeds from creating the right, i.e. $100,000, are more than the incidental costs incurred, a capital gain is made^[7]. As stated in the example in the legislation, entering into a contract with the buyer of the business with $20,000 paid implies that a contractual right is created^[8]. The fund of $200,000 is non-assessable capital receipt. Accordingly, the payment of $100,000 in this question is non-assessable capital receipt.