Tax Updates: 28 April 2026

Welcome to this week’s review of tax issues where Richard comments on what’s been happening in the world of tax over the past week. If you have a question or would like a second opinion on any national or international tax issues, please contact Richard via email at [email protected].

Sponsorship — the fine line

The issue of sponsorship and the entitlement to a tax deduction, is a topical subject for this week’s review, I would suggest. Particularly, when there is a very fine line between the recipient of the payment and your client’s favourite private pursuit. It’s in these greyer deduction claims where an understanding of Inland Revenue’s (IR) current thinking is more prudent than with the obvious black and white cases where there is clearly no personal benefit being obtained by your client.

The recent release of IS 26/10 titled “Income tax implications of providing sponsorship” is just the read for you, therefore, if you do have clients in this bucket. I warn you that it’s 50 pages though, so perhaps one for a wet weekend when you have nothing better to do. But I’ll do some of the hard work for you and summarise some of the, in my view, key takeaways from the document.

First up, as with any deduction claim, unless there is a specific deductibility provision within the legislation which overrides the need to satisfy the general permission, then that’s your starting point — can you create a link between the expense and the derivation of income? If yes, then you’ve at least crossed the first hurdle.

The Revenue’s view, in this regard, is that it is necessary to ascertain the true character of the expenditure and consider the relationship between the advantage the taxpayer was seeking to gain from the expenditure and the taxpayer’s income-earning process. Determining the taxpayer’s purpose involves an objective analysis of surrounding circumstances, including the effect of the expenditure. In the absence of associated party or avoidance concerns, the quantum of the expenditure is not material to whether expenditure is deductible. That is, deductibility does not depend on the amount of expenditure being ‘reasonable.’

While the Revenue will undertake an objective analysis of any claim by your client, you need to have a good understanding of their subjective thinking behind the payments so you can advise them properly on how aggressive you consider their position is when compared to the Revenue’s published view. As I often say, the Revenue are not the law (unfortunately some of its representatives often think they are) and, therefore, assertions made by its officers are often challengeable. But where does your client sit on the scale of wanting to have a peaceful life without the Revenue’s presence, versus one where they are more than at peace being on the Revenue’s radar as long as they get their tax deduction?

When considering whether the expenditure meets the nexus test required by the general permission, your client will need to be able to show that it was intended that their business would be promoted or advertised by incurring the expenditure. The following factors may support your client’s position accordingly:

• the specific terms of the sponsorship arrangement (which does not necessarily need to be in writing);

• the place of the sponsorship arrangement in a coherent marketing strategy;

• the relationship between the market, or potential market, and the taxpayer’s business; and,

• the relationship between the expenditure and the resulting income derived

Having crossed the general permission threshold, there are three potential hurdles to stop you in your tracks. Two are the capital and private general limitations, with the third being the influence of the entertainment expenditure rules, which may limit your client’s claim to 50%.

IS 26/10 briefly discusses each of these three road humps, prior to moving on to its detailed analysis of everything I’ve already said (page eight onwards).

On the question of the private limitation (the one we are often most concerned about) the Revenue comments “Where a private or domestic benefit arises because this was a purpose of the expenditure, distinct from the business promotion purpose, then apportionment will be necessary. However, where a benefit of a private or domestic nature arises incidentally to the income-earning or business activity of the person incurring the expenditure, apportionment is not required.” And just to fully appreciate the meaning of the terms “private” or “domestic,” an outgoing is of a private nature if it is referable to living as an individual member of society, whereas domestic expenses are those relating to the household or family unit.

If you don’t have any desire to read the whole document, then just reading pages 24 to 28 will be sufficient to provide you with an understanding of how the private limitation may be applied to your own client’s case – particularly since these pages provide you with several examples as well as some discussion surrounding various case law decisions which have considered the deductibility issue.

Happy reading!

This article was originally published through the ‘A Week In Review’ newsletter. If you would like to receive Richard’s tax updates every Monday morning, you can subscribe here.