Proposed Guideline could mean significant income tax savings for pro sports people

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Aug 23, 2017 | Posted in Business Advice, Tax
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Last month the ATO released a draft Guideline (PCG 2017/D11) which provides professional sports persons with a limited safe harbour from the Personal Services Income (PSI) regime. Potentially from 1 July 2017,  a professional sports person who receives fees for participating in sports, attendances and appearances at sport-related events, and when some component of those fees are referable to their ‘public fame’ or ‘image’, may divert 10%  to a related resident entity. The safe harbour provides that the Commissioner will only require the remaining 90% to be attributed to the individual directly with the 10% being permitted to be income of the related entity.

Generally, earnings of this nature would be linked to personal exertion or personal services and taxed to the individual directly irrespective of how the contract is constructed. As the quantification of the ‘fame’ component isn’t easily ascertained, it becomes bundled with the personal services component.  However, this Guideline attempts to address this reality and would allow up to 10% of these monies to be contracted to a related entity of the sports person.

For an individual who receives significant sums relating to their public profile as a sportsperson, the income tax saving could be great, particularly if they are already paying tax in the top marginal bracket.

It is important to note that this Guideline does not include royalty type payments for rights already identified and distinct from the individual – such as trademarks, copyright or registered designs. These rights generally yield separate payments and are not considered to fall into the category of ‘personal services’ amounts (see below).

The draft Guideline can be relied upon where:

·       a professional sports person grants an associated resident third-party a non-exclusive licence to use and exploit the sports person’s ‘public fame’ or ‘image’

·       it is the resident third-party who is contractually entitled to receive the income from the use and exploitation of the professional sportsperson’s ‘public fame’ or ‘image’, and

·       the payment 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.

….

To apply the safe harbour, payments under the relevant agreements are to be treated as a total sum comprising:

-          a payment for personal services which includes playing, appearances and attendances, and

-          a payment for the use of the player’s ‘public fame’ or ’image’ that is no greater than 10% of the total sum.

 

To rely on the Safe Harbour, the apportionment must be applied regardless of whether the relevant agreements specify a distinct amount for the use of a player’s ‘public fame’ and ‘image’. [For clarity this refers to an agreement that bundles in personal services with ‘public fame’ or ‘image’ amounts and NOT an agreement of the type discussed below.]

 

Another important point is that, for sports people who have been able to quantify their ‘image’ component  the 10% apportionment does not limit a contract, involving a third party, that does not require additional personal services and that also specifically quantifies, "at genuine market rates”, the amount paid for a sportsperson’s ‘public fame’ or ‘image’.

The Guideline includes several examples that help to illustrate the issues involved.

The Guideline covers some of the quirks of Australian tax law around this issue. Moreover, it attempts to contextualise the discussion against the backdrop of a much-commercialised sector where ‘public fame’ and ‘image’ are almost a type of property and are increasingly being treated as such, both in Australia and abroad.

Like all specific anti-avoidance provisions the Personal Services Income regime can be very complex and care must be taken when considering its impact on your affairs.

DarylCorpe
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