On 18 June 2009, the High Court unanimously upheld the taxpayers appeals from the decision of the Full Federal Court and held that fees paid to managers were deductible under section 8-1(1) of the Income Tax Assessment Act 1999 (Act) and were not capital expenses which were denied deductibility under section 8-1(2) of the Act.
Spriggs and Riddell (taxpayers) were professional sportsmen who derived income from playing Australian Rules football and National Rugby respectively. For the financial year ending 30 June 2005, they claimed deductions for management fees paid to their agents. However, the Commissioner of Taxation (Commissioner) disallowed their deductions on the basis that the management fees were paid for negotiating playing contracts with football clubs and as such were not deductible. The taxpayers appealed to the Federal Court where the primary judge found for the taxpayers. However, on appeal by the Commissioner to the Full Federal Court, the taxpayers were denied the deductions for management fees. The Full Federal Court found that the principles in FC of T v Maddalena 71 ATC 4161 (Maddalena) were applicable on the basis that the management fees were paid for negotiating the playing contracts, which were said to be employment contracts and that the activities of the taxpayers did not amount to or constitute a business. From that decision, the taxpayers were granted leave to appeal to the High Court, where the appeals were heard again.
Arguments by both sides
The taxpayers submitted that the playing contracts were not solely contracts of employment, because the contracts contained terms and conditions upon which the taxpayers could turn their sporting prowess to account for money and to produce assessable income. Each taxpayer carried on business, which derived two types of income: “playing income” derived from playing sports and “non-playing income” derived from sponsorship, endorsements and similar or related non-playing activities carried out in conjunction with the club or independently of it. The taxpayers argued that the management fees were incurred in gaining and producing income from the taxpayers businesses as professional sportsmen.
On the other hand, the Commissioner submitted that the playing contracts were contracts of employment, and following the decision in Maddalena and the exclusion of “occupation as employee” from the definition of business in section 995-1 of the Act, it was necessary to separate the taxpayers playing activities from their non-playing activities. The management fees fell within the playing activities and were not incurred in the course of earning income as an employee but to obtain new employment contacts therefore were not deductible under section 8-1(1)(b) of the Act.
High Court decision
The High Court (Court) rejected the Commissioner’s arguments, allowed the appeal and distinguished the case from Maddalena.
The Court said that Maddalena did not oblige the approach for which the Commissioner contended; the court there expressly considered that different results as to deductibility could follow if a taxpayer was conducting a business, as opposed to being only an employee.
The High Court said that is was possible for a taxpayer to perform an employment contract as part of and during the course of running a business and at paragraph 69 said:
“Looking at their activities as a whole, the appellants were engaged in the business of commercially exploiting their sporting prowess and associated celebrity for a limited period. Those businesses were well established before the management fees were incurred . Neither of the appellants was exclusively or simply an employee of his club. They each exploited their sporting prowess and associated celebrity with different clubs over the years during which they played in the AFL Competition and NRL Competition respectively. There was a synergy between playing activities and non-playing activities, each of which was an income producing activity.
The High Court also rejected the Commissioner’s submissions that the management fees were capital in nature, as the playing contracts were revenue assets of a relatively short terms nature.
A decision on the tax treatment of trusts - Bamford
In a landmark case on the taxation of trusts, the Full Federal Court (Court) overturned the Administrative Appeals Tribunal (AAT) finding that the “income of the trust estate” meant ordinary income and instead held that the meaning should be interpreted according to the trust law. This case clearly establishes that a trust deed can determine the income of a trust and a beneficiary then taxed on that income.
The Court did allow the Commissioner’s appeal to some extent and held that a beneficiary of a trust was to be taxed on its proportionate entitlement to the income of the trust estate rather than on a specified or fixed amount. The decision highlights that there should be extra caution taken by trustees to ensure that any excess tax net income over trust income is properly allocated between beneficiaries.
Facts and issues
Mr and Mrs Bamford were beneficiaries of a family discretionary trust (Trust). In 2005, the Commissioner denied deductions for superannuation contributions and interest expenses made by the trustee of the Trust for 2000 financial year. The Commissioner’s amended assessments gave rise to excess tax net income over trust income.
As a result, more tax was payable by the beneficiaries. The Bamfords argued that they were only entitled to be assessed on the specific amount of Trust income which they were entitled to pursuant to the trustee’s resolutions.
The other issue related to the distribution of net income by the trustee in 2002 which included net capital gain from the sale of a property. The Trust had no trust income in that year. The Commissioner then assessed the trustee for the excess tax net income at the highest marginal rate. The trustee argued that the net capital gain was treated as income pursuant to the trustee’s resolutions, and as there were beneficiaries entitled to that income, the Commissioner’s assessment against the trustee was excessive.
Full Federal Court Decision
In relation to the first issue , the Court confirmed the Commissioner’s proportionate approach in determining how excess tax net income should be taxed in the hands of a beneficiary. The Court closely examined section 97(1) of the Income Tax Assessment Act 1936 (Act) and concluded that the meaning of the word “share” meant taking the proportionate approach.
On the second issue, the Court rejected the Commissioner’s argument that the trust income could not include net capital gain. As the provisions of the trust deed entitled the trustee to treat the net capital gain as income for the purposes of determining the entitlements of the beneficiaries to distributions from the Trust, the beneficiary was entitled to the share of that net capital gain within the meaning of section 97(1) of the Act.