Sponsorships

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Sponsorships

• 20 May 2024
• Accounting
• Marita Jordaan

Practical Question from Taxpayer

Can a company claim an Income Tax deduction for a motorbike purchased, used to compete in competitions that are branded with the company logo? Can the cost be allocated to Advertising expense and could one claim the VAT back? Lastly, the person being sponsored is the owners son, so other than noting it in the financials under related parties contributions, would this be allowed?

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Background & Facts

A company purchases a motorcycle branded with the company’s logo and marketing material to sponsor it to a non-connected individual to compete in competitions. The ownership of the motorcycle will transfer to the individual.

Can the company (sponsor) deduct the expenditure as an advertising expenditure in terms of section 11 of the Income Tax Act 58 of 1962. 

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Applicable Law 

• ITA no 58 1962, section 11(a)
• SARS: Guide of Professional Sports Clubs and Players, 2018
• The New State Areas Ltd v CIR 1946 AD 610, 14 SATC 155 at 170

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Application of the Law to the Facts

Due to the limited information available, let’s assume the company entered into a sponsorship agreement with a professional biker, whereby the company (the sponsor) sponsors a motorcycle to the individual, with the sole purpose of the transaction being marketing or advertising for the company (sponsor). 

The general deduction formula provided in section 11(a), allows a taxpayer to deduct expenditure if the taxpayer is engaged in a trade, the trade must generate income and the expenditure must be incurred in connection with the sponsor's trade or linked to income-producing activities (not of a capital nature).  However, there is a fine line between expenditure being of a revenue or of a capital nature. 

SARS's "Guide of Professional Sports Clubs and Players, 2020" sheds light on such scenarios by providing factors to be considered when having to prove whether the advertising expenditure was of a revenue or capital nature. One of the factors to consider is whether anything is received by or accrues to the sponsor which must be included in gross income. If the receipt or accrual is in a form other than money, the monetary value of such item is deemed to be the market value. 

In this scenario the receipt or accrual will be in a form other than money. The receiver of the sponsorship will be giving advertising and promotional services to the company (sponsor), which should be stipulated in the sponsorship agreement.

Based on the above, the receipt or accrual is revenue in nature since it represents an expense actually incurred by the sponsor in the course of its business, specifically for advertising purposes. Additionally, the motorcycle cannot be considered a capital asset of the company (sponsor), because the motorcycle was not acquired for the sole purpose and benefit of the company, but rather for the purpose of marketing, thereby linking it to the income-earning operations. 

SARS’ Guide of Professional Sports Clubs and Players, 2020 makes reference to The New State Areas Ltd v CIR-case which highlights the importance of determining the true purpose of the item being sponsored, in this case the motorcycle. 

in The New State Areas Ltd v CIR-case, Watermeyer CJ, made the following statement:

“ . . . the purpose of the expenditure is an important factor; if it is incurred for the purpose of acquiring a capital asset for the business it is capital expenditure even if it is paid in installments; if, on the other hand it is in truth no more than part of the cost incidental to the performance of the income producing operations, as distinguished from the equipment of the income producing machine, then it is revenue even if it is paid in a lump sum.”

In addition to the requirements set out in the SARS guide, the company must be able to justify the amount actually incurred. The company (sponsor) would need to prove that the market value of the sponsored motorcycle is equal to the value of the advertising and marketing services which the biker (receiver of the sponsorship) is supposed to provide to the company in terms of the sponsorship agreement. 

It is suggested that the company include specific information in the sponsorship agreement to justify the amount incurred. This might include a schedule of the competition events and the break-down of the actual marketing fees per event. However, it might be challenging to provide a break-down of the actual costs of the services provided by the person who receives the sponsorship. 

This is one possible interpretation of the consequences of a sponsorship and the possibility thereof to qualify as advertising or marketing expenditure as these type of advertising costs remain within a grey area of our tax law.

 

FAQs

1. Are sponsorship expenses tax-deductible in South Africa?

Yes, sponsorship expenses can be tax-deductible if they meet the requirements of section 11(a) of the Income Tax Act—specifically, if the expense is in the production of income and not of a capital nature. The sponsorship must directly benefit the business.

2. What qualifies as a tax-deductible sponsorship for South African companies?

To qualify as tax-deductible, a sponsorship must offer direct marketing, advertising, or brand exposure that helps generate income. The company must demonstrate a clear commercial benefit, not just goodwill or social contribution.

3. Is sponsoring a sports team tax-deductible in South Africa?

Yes, sponsoring a sports team may be deductible if the sponsorship includes advertising rights, brand visibility, or other promotional benefits that help your business earn income. SARS will assess whether there is a real business purpose.

4. Can you claim tax deductions for sponsoring community events?

You can claim a deduction only if there is proof of a business benefit, such as advertising your brand or increasing sales. Sponsorships that are purely philanthropic or for public relations are usually not deductible.

5. How does SARS assess if a sponsorship is deductible?

SARS looks at whether the sponsorship is incurred in the production of income, is closely connected to business operations, and provides a measurable return (like advertising or leads). Documentation and contracts help substantiate the claim.

6. What’s the difference between a donation and a sponsorship for tax purposes?

A donation is a voluntary gift without expectation of return, often eligible for a deduction under Section 18A if given to a qualifying public benefit organisation (PBO). A sponsorship, on the other hand, must provide commercial benefits to the sponsor to be deductible under Section 11(a).

7. Do you need a contract to deduct sponsorship expenses?

Yes. Having a written sponsorship agreement that outlines deliverables (e.g., logo placement, advertising value) strengthens your case for a deduction and proves the income-producing intent to SARS.

8. Is VAT applicable to sponsorships in South Africa?

Yes. If the sponsored party is a VAT vendor, the sponsorship may be subject to VAT if it’s considered a supply of goods or services in exchange for value. Sponsors may claim input VAT if the expense is incurred for taxable supplies.

9. Can small businesses claim tax deductions on sponsorships?

Yes, small businesses can claim sponsorship deductions if they meet the same criteria: commercial benefit, income-producing intent, and proper documentation. Even modest brand visibility can qualify if directly linked to business growth.

10. How should I record sponsorships for tax purposes?

Keep detailed records including invoices, contracts, evidence of advertising, and proof of benefit (e.g., social media reach, event photos). These documents help justify the deduction if SARS requests an audit or review.

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