Given the money involved in the sports industry of today, it’s no surprise that the top five percent of income earners in Australia includes a number of high profile sportspeople. It also comes as no surprise that professional sportspeople have traditionally looked at methods to protect their income as an asset, including by structuring their affairs so as to legally reduce their individual taxable income.
One such method of reducing individual taxable income is by the licencing of a sportsperson’s image rights or fame to a related corporate entity or trust, which then generates income by allowing a sporting club or sporting association, to use the sportsperson’s image or fame, for a fee. To date, the existing taxation regime in Australia has catered for this, with the ATO only recently issuing Practical Compliance Guideline 2017/D11 which specifically permits up to 10 percent of a sportsperson’s income to be apportioned in this way (subject to the marketability of the sportsperson's fame or image).
As professional sportspeople can earn annual income in the multi-millions of dollars, the tax advantages which can be achieved if a portion of that income is diverted to a separate corporate entity or trust, can be significant.
The game changer
Notwithstanding the ATO’s recent release of Practical Compliance Guideline 2017/D11, Treasurer Scott Morrison’s 2018 Federal budget includes game changing new rules for sportspeople and other high profile individuals.
Under the proposed changes, the Federal government plans to treat all remuneration generated by a sportsperson, including in respect of the licensing of his or her image and fame, as taxable income in the hands of the individual.
The budget paper states under the proposed changes:
“The Government will improve integrity in the tax system by ensuring that from 1 July 2019, high profile individuals are no longer able to take advantage of lower tax rates by licencing their fame or image to another entity.”
This means that sportspeople (including players and coaches), together with actors and other high profile individuals to whom the proposed changes apply, will no longer be able to use image licensing agreements as a method of apportioning their income (whether by way of cash or non-cash benefits) between themselves and their related entities.
Effect on the sports industry
It is expected that the changes to the taxation regime will have a profound impact on existing arrangements between sportspeople and their clubs and associations, in circumstances where the majority of sportspeople would have structures in place to allow for the tax-effective allocation of income for the exploitation of their image and fame. Whilst there may still be benefits associated with the licensing of a sportsperson’s image and fame (for example, for asset protection purposes), what was once a significant incentive for the creation of these arrangements will no longer exist under the new taxation regime.
On an individual level, sportspeople will need to treat any income received by a related company or trust from the licensing of his or her image rights or fame, as personal income in their own hands. This will result in an overall increase in tax payable.
At a club and sporting body level, it is possible that the changes could lead to increases in player salaries and salary caps to account for adverse consequences of the new regime on players’ overall taxable income. There is also concern that the proposed changes could lead to the loss of high-level talent from local professional sporting leagues, given the opportunity for sportspeople to earn a higher income in more tax-friendly jurisdictions overseas.
Unsurprisingly, the changes to the taxation regime for sportspeople have been met with criticism from those involved in the sports industry, largely spearheaded by the Australian Athletes’ Alliance which represents athletes across a variety of professional sports. It remains to be seen as to whether the government will proceed with the foreshadowed changes in light of the initial backlash.