Last year, we drew attention to the Brisbane Bears Case. This decision dealt with payroll tax in the context of payments made by a sporting club to sportspersons for use of their images etc.
Payroll tax is a state/territory tax. However, as the earlier article noted, payments for use of player images also implicitly raise Federal tax questions.
The ATO has issued a draft PGC 2017/D11 (the Guideline) which deals with the income tax treatment of unapportioned payments for a sportsperson’s marketing services and use of the person’s image. For readers who are unfamiliar with Practical Compliance Guidelines, their nature, role, and limitations are set out in PGC 2016/1, with the ATO website providing more general information.
The Guideline defines an amount which the ATO will not challenge as being consideration paid to an entity which is associated with a sportsperson for the use/exploitation of the person’s image/fame. Accordingly, where a payment is contractually documented as such consideration, the ATO would not treat the payment as income of the sportsperson to the extent of that amount.
When the Guideline Applies
The Guideline addresses the situation in which:
- a professional sportsperson has assigned to an associated party (the third party), such as the sportsperson’s family trust, ‘a non-exclusive licence to use and exploit the sportsperson’s “public fame” or “image” ‘;
- the third party is an Australian resident for income tax purposes;
- the third party ‘is contractually entitled to receive income from the use and exploitation of the sportsperson’s “public fame” or “fame” ‘; and
- the payment received by the third party is ‘not referable to the use or exploitation of rights which are recognised and specifically protected under Australian law, such as copyright, trademarks or registered design rights’.
Basically, the third party is contracting with another person (the Purchaser) to allow the Purchaser to make use of the sportsperson’s image/fame in consideration of a payment made to the third party. The sportsperson may also be a party to the contract:
- The sportsperson may be a party because the contract is also an employment contract – e.g. sportsperson employed to play sport and/or to provide marketing services (such as attending ‘Member Days’, junior coaching, sport promotion in schools etc.) to a sporting body.
- The sportsperson may be a party that is agreeing to provide personal services to the Purchaser – e.g. undertake activities of endorsing the Purchaser’s product, deliver motivational speeches etc.
Remuneration paid to the sportsperson as reward for the person’s personal efforts and skill, whether as an employee (sub-para (a) above) or as a business person (sub-para (b) above) will be income of the sportsperson. However, the payment to the third party will prima facie be income of the third party.
The Guideline is directed to dealings between a Purchaser that is a sporting body, the sportsperson and the third party. In particular, it is directed to playing contracts, collective bargaining agreements or an agreement to provide (the sporting body) with services additional to playing activities, where the third party is contractually entitled to payments made for the use/exploitation of the professional sportsperson’s public fame or image. It seems implicit that the Guideline is not directed to Purchasers described in sub-para (b) above, but it is hoped this will be clarified in the final version of the Guideline.
Difficulties arise where lump sum payments are made for use of the image/fame, on the one hand, and the employment/personal services, on the other hand. Income splitting between the sportsperson and the third party in order to minimise tax can be a force in drawing the line between the wages/salary component and image/fame fee. It follows that the ATO is interested in where the line is drawn.
What the Guideline Says
The ATO will accept that up to 10% of payments received under a playing contract, collective bargain agreement or an additional services agreement can be treated as referrable to use/exploitation of sportsperson’s public fame or image. Accordingly, to this extent, the ATO will not challenge that contractual payments made to a third party are income of the third party and not income of the sportsperson.
The Guideline gives the following illustration:
- ‘Player A’ is new to elite level sport. They were selected as an early draft pick and have played less than 10 career games at the elite level. The income paid to them under their playing contract, and in accordance with their sport’s collective bargaining agreement, is necessarily reflective of ‘Player A’ being new to the game. Payments totalling $110,000 are made.
- ‘Player A’ has also granted a licence for the use and exploitation of their ‘public fame’ or ‘image’ to an associated resident third-party and it is contractually entitled to receive the income from the use and exploitation of ‘Player A’s; ‘public fame’ or ‘image’. Player A has not entered into an additional services agreement.
- Whilst ‘Player A’ is in the early stages of their career, their public fame’ or ‘image’ will have been exploited as a result of their being an early stage draft pick. Consequently some portion of their remuneration is referrable to use or exploitation of their ‘public fame’ or ‘image’ despite them being new to elite level sport.
- Under the Safe Harbour, up to 10% ($11,000) of the total contracted payment could be included in the associated resident third-party’s income tax return. ‘Player A’ would return the balance of the payment in their personal income tax return.
It may be that a sportsperson can commercially justify a proportion greater than 10% is referrable to person’s fame/image. The Safe Harbour of 10% does not preclude the person from establishing a higher image/fame fee should apply having regard to the commercial market value of the player’s fame/image and limits placed on the amounts sporting clubs can pay their players – see para 14 and the comment at para 4 of the Guideline.
The Guideline illustrates this:
- ‘Player C’ is an elite level sportsperson of repute solely within Australia. They have played a significant number of Australian domestic games in their chosen sport. ‘Player C’ has entered into a playing contract, granted a licence for the use or exploitation of their ‘public fame’ or ‘image’ to an associated Australian resident third-party as well as being a party to a ‘tailored’ additional services agreement and independent service agreements to which their associated resident third-party is also a party.
- Given the significant recognition of their sporting prowess, ‘public fame’ and ‘image’ ‘Player C’s’ additional services agreement and independent service agreements provide for separate payments, at genuine commercial market rates, to the Player for both their personal services and to their associated resident third-party for the use and exploitation of their ‘public fame’ or ‘image’. No apportionment of payments is required. ‘Player C’ returns the payments received for their personal services in their individual tax return. Their associated resident third-party returns the payments received by it for the use of the licence for exploitation of Player C’s ‘public fame’ or ‘image’ in its tax return.
Where the Guideline Does Not Apply
Some agreements may only provide for use of a sportsperson’s image, without requiring additional personal services. The 10% Safe Harbour for which the Guideline provides will not apply to these agreements – see para 17 of the Guideline.
GST Implications for the third party
Where the third party supplies a right to the sporting body to use/exploit the fame or image of the sportsperson, the third party will need to account for GST if the third party is registered (or required to be registered) for GST.
If GST is payable by the third party and (as outlined below) the sporting body would be entitled to an input tax credit (ITC), one might expect that the contractual arrangement between the sporting body and the third party would provide for grossing up the payment by the amount of GST.
Implications for Sporting Bodies
It should be noted that the Guideline is primarily directed to the tax treatment of the recipients of the payment (the sportsperson and the sportsperson’s associated entity) rather than to the taxation obligations of the paying club, such as PAYGW and super guarantee obligations. This bias is evident from the examples, although the text is capable of suggesting a safe harbour is being provided in relation to the apportionment of the payment (i.e. applies to the paying club and recipient) and not merely to the recipient of the payment.
GST Implications for the sporting body
It is anticipated that the sporting body which is engaged in professional sport would be acquiring that right for the purpose of carrying on its enterprise. Accordingly, where the body is registered (or required to be registered) for GST, it would be able to claim an ITC for the grossed-up amount.
PAYGW Implications etc.
Logically, one might expect that the willingness of the ATO to recognise apportionment of payments into amounts for service (wages) and amounts for use of images should apply to determine PAYG withholding and superannuation guarantee payments as well determining the income derived by a sportsperson as an employee.
The Guideline notes (see para 33):
‘PAYG Withholding in respect of the personal services element (which typically will be salary or wages) will be calculated on the net amount after taking into account the GST inclusive amount taken to be charged for the supply of the right to use player’s “public fame” and “image”.’
Practical Observation
While the 10% safe harbour provides guidance to the sportsperson, it does not alleviate the need for the sporting body and the sportsperson to agree on the amount of the payment to be ascribed to the provision of services and the amount to be ascribed as consideration for the use/exploitation of the sportsperson’s fame and image. The sporting body will need to remit PAYGW and account for superannuation guarantee contributions on the former and, depending on the GST registration status of the third party, may be entitled to claim an ITC in relation to the latter.
The Guideline will be relevant to the sportsperson’s decision-making on the division of any payment between these two heads of charge. However, an interesting question for the sporting body arises where the agreed apportionment is made outside the 10% safe harbour and is not commercially justified, with the result the sportsperson has additional employment income on which the sporting body has not remitted PAGW or superannuation guarantee contributions. Discussion of this circumstance is beyond the scope of this article.