Understanding the New Tax Treatment of Sponsorship Costs

The Inland Revenue Department (IRD) has released an updated interpretation statement on the income tax treatment of sponsorship expenditure, outlining when these costs can be claimed as a business deduction. The new draft replaces older guidance and reflects how sponsorships have evolved, especially as more businesses use goods, services, and brand partnerships to promote their work.

A Broader Definition of Sponsorship

Sponsorship is no longer just about writing a cheque.

The IRD now defines it as supporting an organisation, event, person, or cause through money, products, or services, as long as the purpose is to promote or advertise the business.

This means businesses can potentially claim deductions not only for financial contributions but also for:

• Providing branded merchandise or goods,

• Donating professional services, or

• Offering discounts or support in kind to raise brand awareness.

This broader definition reflects the modern business environment, where sponsorships often involve brand partnerships, donated goods, and service-based contributions rather than straightforward cash payments.

When Can Sponsorship Be Deductible?

To claim a sponsorship expense, there must be a clear link between the cost and your business’s income-earning activities.

In other words, the sponsorship must serve a genuine business purpose such as marketing, brand visibility, or customer engagement.

Key factors that help demonstrate this include:

• Having a written agreement outlining how your business will be promoted,

• Including the sponsorship within your wider marketing strategy,

• Ensuring the target audience or market is relevant to your business, and

• Being able to show how the sponsorship supports future sales, visibility, or business growth.

Even if a sponsorship doesn’t lead to an immediate income boost, it can still qualify as deductible — as long as the intention was commercial rather than purely charitable.

Philanthropy vs Business Purpose

Many businesses sponsor community events or causes because they genuinely want to give back. That’s encouraged, but for tax purposes, only the portion of spending that promotes the business can be deducted.

Where the main intention is charitable or personal, the expense may instead fall under donation rules, which are treated differently for tax purposes.

Non-Cash Sponsorships: Goods and Services

The updated statement recognises that sponsorships often involve non-cash contributions.

If your business provides goods that are part of your trading stock, for example, a café donating catering for a local event, the value of those goods can generally be claimed as a deduction under the trading stock rules.

Similarly, if you provide professional services (like design work or event support) as part of your sponsorship, the related business costs may also be deductible, provided they are clearly linked to promoting your business.

Private Benefit and Apportionment

If the sponsorship provides a personal benefit to a business owner, employee, or shareholder. For instance, free event tickets or reduced fees for a family member, only the portion genuinely related to business promotion can be claimed.

The IRD may require distribution between private and business purposes in these cases.

Multi-Year Sponsorships and Timing

For longer sponsorship arrangements, the deduction must be spread across the relevant years.

For example, if you pay upfront for a three-year sponsorship deal, you can’t deduct the full cost in year one. Instead, the unused portion is treated as income and carried forward to future years until it’s “used up.”

Why It Matters

These updates provide much-needed clarity for businesses that use sponsorships as part of their marketing and community engagement.

They recognise that sponsorship can be a legitimate promotional tool, not just an act of goodwill, and help ensure that tax treatment fairly reflects the commercial intent behind these arrangements.

What Businesses Should Do Now

• Review any existing sponsorship agreements to ensure the promotional purpose is clearly documented.

• Check how non-cash or in-kind contributions are being valued and recorded.

• If you offer multi-year sponsorships, make sure the timing of deductions aligns with the period of benefit.

• Keep evidence - contracts, marketing plans, or photos of signage, showing how your business gained exposure.

Need help understanding how these changes could affect your business?

Our team can provide tailored advice on the deductibility of sponsorship costs, marketing expenses, and tax-efficient community engagement strategies.

Contact us to talk about how these updates might apply to your situation.