Fame – the game has now changed

Taxation Determination TD 2022/D3 was released in draft by the ATO on 5 October 2022.

The draft Taxation Determination proposes to effectively put an end to a long-standing practice by sportspeople, entertainers and the like of licensing their image rights or fame to a related corporate entity or trust, which then generates income by exploiting the individual’s image or fame. Historically, this has been particularly beneficial to sportspeople from a taxation perspective, in circumstances where income structuring has allowed income generated from the exploitation of their image or fame to be taxed at the rate applicable to a company or trust structure, rather than in the hands of the individual at the top marginal tax rate. 

This game-changing move has been on the cards for a number of years – as addressed in our previous blog alert in June 2018 - with the ATO’s release of Draft Practical Compliance Guideline 2017/D11 (PCG 2017/D11), which stipulated an accepted apportionment of a sportsperson’s income to image rights and fame of up to 10 percent of the individual’s overall income; only to be withdrawn upon the announcement shortly thereafter in the Federal Government’s 2018 budget paper that:

“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.”

The Government’s proposed measure intended that, from 1 July 2019, high profile individuals (including sportspeople) would not be able to take advantage of lower tax rates by licensing their fame or image to another entity. The measure aimed to ensure that all remuneration (including payments and non-cash benefits) provided for the commercial exploitation of a person’s fame or image would be included in the assessable income of that individual. However, the announced Budget measure was never enacted.

Income from exploitation of fame and image - a brief history

In 2009, the High Court, in Spriggs v Commissioner of Taxation; Riddell v Commissioner of Taxation [2009] HCA 22, held that sportspeople, because of the nature of their activities, will generally be in a position to derive both (1) personal exertion income from employment activities and (2) income from carrying on a business of using their fame or image.

Most professional sportspeople operating in a team-based code receive a single payment under contract, or as part of a collective bargaining agreement, comprised of a mix of both of these types of income. 

Apportionment of income 

Following the Spriggs and Riddell court decision, it became apparent that some sportspeople were attributing a sizable, and potentially unrealistic, component of their contract sum as income for the use of their fame or image, and entering into arrangements by which that income was not taxed in their own hands, but in the hands of a related company or trust, at a lower tax rate.  

In response to this practice of apportionment, the ATO released PCG 2017/D11, which provided guidance, and a safe harbour, for apportionment of up to 10% of a professional sportsperson’s income to the use and exploitation of their fame or image under licence, while indicating that any greater apportionment was likely to attract detailed scrutiny.

PCG 2017/D11 – the reasoning 

The release of PCG 2017/ D11 prompted further consideration of the effectiveness of arrangements which purported to license a person’s fame or image to a related entity for the purpose of allowing that entity to derive income from its use.

In particular, in 2018, the ATO revisited its views in PCG 2017/D11 and came to consider that licensing arrangements between high profile individuals and their associated entities were not effective at law.  

The ATO’s reasoning, as is now reflected in TD 2022/D3, is as follows:

1. The ATO takes the view that, in Australian law, an individual has no property in their fame and therefore cannot vest or transfer any property in their fame to another entity, citing Australian Consolidated Press Ltd v Ettingshausen [1993] NSWCA 10 as authority for that proposition.
2. The ATO also takes the view that the common law of Australia does not recognise, as a proprietary right, an individual’s ability to exploit their fame separately from an accompanying business. In TD 2022/D3, the term ‘fame’ is used as shorthand for an individual’s name, image, likeness, identity, reputation, and signature. However, the ATO in TD 2022/D3 does acknowledge that in some cases, copyright, trademark or registered design rights legislation may provide certain statutory rights that are proprietary. 
3. On the basis that the purported licensing of the individual’s fame does not create any property in the individual’s fame in the related entity, the ATO takes the view that a related entity is not in a position to exploit the individual’s fame, such that amounts received in connection with that person’s fame will generally be received on the individual’s behalf and represent ordinary income of the individual. This would appear to be consistent with the High Court’s decision in FCT v Everett [1980] HCA 6, where the effectiveness of an assignment of future income was determined on the basis of the existence of a property right relating to that future income being assigned.  In that regard, an arrangement under which an individual may authorise the use of their fame or image to another party, to protect such other party from a cause of action that could otherwise arise under torts law (e.g for passing off or defamation), or under the Australian Consumer Law for misleading or deceptive conduct, does not in the ATO’s view create an effective licensing arrangement. The ATO considers that, absent the creation of any proprietary rights in the other party, such authorised use does not provide a basis for the tax law to treat income received in respect of an individual’s fame or image as being income of the authorised party, rather than that of the individual.
4. The ATO also considers that a purported licensing can be distinguished from one where a related entity engages the individual with fame to provide services. For example, the individual with fame may be engaged by the related entity to attend product launches and promotional events for a third party. In these circumstances, contractual payments by the third party to the related entity can be assessable to the related entity under section 6-5 of the Income Tax Assessment Act 1997. However, consideration would also need to be given in these circumstances to the potential application of the personal services income (PSI) rules in Part 2-42 or the application of Part IVA of the Income Tax Assessment Act 1936.¹

Finally, unlike PCG 2017/D11 which set out an acceptable approach for sportspeople only, TD 2022/D3 will have far broader effect, applying to any individual whose fame is being used for a fee, including media personalities, entertainers, actors, artists and influencers (e.g. on social media).

Compliance approach

The ATO acknowledges that the views on alienation of income set out in TD 2022/D3 differ to the practical compliance approach afforded to sportspeople as set out in PCG 2017/D11. 

Accordingly, the ATO will not devote compliance resources to apply the views expressed in the draft Taxation Determination to income derived before 1 July 2023 from arrangements entered into in good faith that are consistent with the principles outlined in PCG 2017/D11 where they are entered into before 5 October 2022. This compliance approach applies before and after 5 October 2022 in respect of the 2018–19 to 2022–23 income years (inclusive).

Next steps

We expect that the effect of TD 2022/D3 will be widespread and, in particular, throughout the sports, media and entertainment industry. The structuring of payments to sportspeople, entertainers and the like will need to be revisited, in order to ensure that they do not fall foul of the impending effect of TD 2022/D3. 

The ATO is inviting comment on TD 2022/D3, until 4 November 2022.

If you are likely to be adversely affected by this new approach, or otherwise have concerns regarding the approach that is proposed to be taken by the ATO, please get in touch with Jon Erbacher from HopgoodGanim’s Leisure, Sport and Entertainment practice or Saxon Rose from HopgoodGanim’s Taxation practice.

Jon Erbacher acts for a variety of clients in the sports industry. He is a tribunal member for the National Sports Tribunal and the National Basketball League, and is a member of the Australian and New Zealand Sports Law Association.

1. The PSI rules are aimed at improving the integrity of, and equity in, the tax system by ensuring that individuals cannot reduce or defer their income tax by alienating or splitting their PSI through the use of interposed companies, partnerships or trusts, that is, the personal services entity (PSE) under the rules. They do this by ensuring that the PSI received by a PSE is attributed to the individual who performed the personal services.  Where the PSI rules do not apply, then the Commissioner of Taxation has the power to cancel a tax benefit obtained through an income-splitting arrangement where the dominant purpose of entering the arrangement was to obtain the tax benefit associated with the alienation or the splitting of the PSI.