HCA 22 (18 June 2009)
The High Court recently unanimously held that professional sportspeople can claim management fees as tax deductions. In a judgement delivered on 18 June 2009, appeals of AFL’s David Spriggs and NRL’s Mark Riddell against the Commissioner of Taxation (Commissioner) were allowed, allowing both Spriggs and Riddell to claim management fees as tax deductions under section 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA).
Impact of case
The case confirms that professional sportspeople will, in most cases, be considered to be carrying on a business. This has important implications for a raft of analogous pursuits, such as entertainers, musicians and professional adventurers.
The court held that management fees are a revenue expense rather than a capital expense, despite the relevant management fees being associated with the negotiation of new player contracts between the players and their clubs (which the Commissioner argued were capital).
The court also affirmed that under section 995 of the ITAA an individual can enter into an employment relationship within the scope of carrying on a business, as the exclusion that ‘business’ does not include occupation as an employee, but merely requires that there be something more than an employment relationship.
Facts and background
Spriggs and Riddell had arrangements with their managers to negotiate player contracts and other activities on their behalf. Spriggs and Riddell were obliged to enter into playing contracts with their football clubs as a requirement of playing in their respective football leagues. Each had appointed their managers to negotiate the contracts (and perform other activities). After negotiating these contracts, the managers charged their clients a fee, which each footballer claimed as a tax deduction. The main issue before the High Court was whether management fees were a ‘loss or outgoing’ incurred in the ‘gaining or producing’ of assessable income under section 8-1 of the ITAA, and if so, whether they were of a capital nature.
The primary judge found in favour of the taxpayers, finding that they were carrying on a business of exploiting their sporting skills and associated celebrity, a part of which involved playing for a football club. The primary judge distinguished Maddalena.1 Her Honour considered that entering into playing contracts formed part of the footballers’ business, and that management fees paid for negotiation of such contracts is an outgoing incurred in the gaining or producing of assessable income.
The Commissioner appealed and the Full Court unanimously allowed the appeal. The Full Court applied Maddalena, finding that even if Spriggs and Riddell were carrying on a business to the extent of marketing their celebrity, this was separate to their employment by the football clubs. As such, the management fees for negotiating their employment contracts were not incurred in the course of carrying on a business or gaining and producing income from their employment.
The High Court unanimously overturned the decision of the Full Court.
It was agreed that the non-playing activities of Spriggs and Riddell (which included activities such as product endorsements and media appearances) constituted activities in the course of carrying on a business.
The Commissioner submitted however that the scope of the players’ business did not extend to the employment relationship between player and club. As such the management fees were paid in order to obtain new employment contracts, and thus were paid ‘in getting, not in doing’ work, relying on Maddalena.2
While the High Court found that the fees were paid for the negotiation of new employment contracts, the High Court distinguished Maddalena on the basis that these contracts were not solely concerned with employment, and in any case their employment by the club was ‘inextricably linked’ to their business as a whole. The court found that even if the management fees did amount solely to procuring new employment contracts, those amounts paid were still incurred in the course of running a business because those fees were ultimately productive of both playing and non-playing income.
Additionally, the High Court resolved that management fees are revenue expenses rather than outgoings of a capital nature, and as such are not excluded under section 8-1(2)(a). In reaching this conclusion, the court noted that the contracts were not lasting assets but of a short duration, and management fees are a recurrent expenditure that do not secure a lasting asset. The court reached this conclusion despite the fact that any given employment contract lasts for a relatively long period of a footballer’s career.