Image counts for plenty as sports stars score tax goal

A proposed tax ruling aims to simplify the way AFL stars, like Adelaide Crows captain Taylor Walker, earn money from their image.

A new draft guideline from the Australian Taxation Office is set to simplify the taxation of income that many sportspeople earn from their image rights.

When Australian Football League (AFL) superstars such as Taylor Walker and Buddy Franklin line up a shot at goal, their focus is on winning games and premierships rather than cash rewards.

However, under proposed new tax rulings for professional sportspeople regarding their image rights – that is, their ability to cash in on their name and fame – a winning kick is also likely to translate into financial benefits and, importantly, simplify compliance hurdles.

Earlier this year, the Australian Taxation Office (ATO) released draft Practical Compliance Guideline 2017/D11 on the taxation of sportspeople’s image rights.

If approved, it will allow players to identify, under ATO safe harbour provisions, up to 10 per cent of income from their contract as arising from the “use and exploitation of their ‘public fame’ or ‘image’ under licence”. 

Listen to the podcast: Tax and pro sportspeople's fame and image rights

This can be directed into a private trust or company, where it may attract a lesser tax rate than the player’s marginal rate, which could be as high as 45 per cent. The changes are designed to simplify documentation requirements for sportspeople and limit the need for private binding rulings from the ATO for every image rights case.

How do you value your image?

James Gallagher, senior legal counsel at the AFL Players’ Association, says the draft is a welcome update to ATO rulings announced in 2004 accepting that sportspeople can grant a licence to a third party for the exploitation of their image rights. With the accurate valuation of such rights being difficult to determine, he believes the move represents a smart application of tax laws.

“There is a significant value in the image of a sportsperson, which in turn drives significant revenues in the game,” Gallagher says. “This is just in some way recognising the flow of those payments to the various parties involved.”

Professional Development: CPA Q&A. Access a handpicked selection of resources each month and complete a short monthly assessment to earn CPD hours. Exclusively available to CPA Australia members.

Conditions apply to sportspeople

The new guideline will not cover all sportspeople. To be eligible, players must be part of a collective bargaining agreement with their relevant sports body or clubs, which means that participants in individual sports such as tennis and golf may fall outside the rules.

“It’s purely about players’ relationship between them and the club,” says Hall & Wilcox tax lawyer Frank Hinoporos.

He says the guideline is important because it will help sportspeople and their advisers manage their personal tax risk and provide clarity about image rights structures.

The 10 per cent safe harbour simplifies image rights valuations for players and the ATO alike.

“(Valuations are subjective) and they will be different for every player,” Hinoporos says. “The ATO didn’t want hundreds of private binding ruling applications tumbling in that were effectively all going to be on a common issue.”

The guideline does not preclude players from valuing their image rights at more than 10 per cent of their contractual payments. In such cases, though, players will have to produce additional evidence to support the higher value they have placed on their image rights.

Hinoporos says those who go outside the threshold are likely to be the superstars of their respective sports, while adding that the new guideline does not remove the need for rigour around documentation and structuring of image rights arrangements.

Sensible move on image rights structures

CPA Australia agrees that the draft ATO guideline, which if passed will be backdated to 1 July 2017, is a pragmatic way of dealing with an issue involving complex tax compliance hurdles.

“It looks like a good example of effective administration of the tax laws by the commissioner,” says Paul Drum FCPA, head of policy at CPA Australia.

Buddy Franklin talking to the media.While the draft guideline has been criticised in some quarters as a tax break for the rich, Drum rejects such a notion.

“Some people will ask why sportspeople get preferential treatment,” he says. “But this is a pragmatic response by the ATO to an administrative problem and the fact that there are very long player lists that change all the time. In the absence of some market guidance, every one of those players would have to apply for a private binding ruling about the use of their image rights. That’s terribly resource-intensive not only for the players but also the ATO.”

The ATO guideline relates only to sportspeople and does not cover other celebrities who may benefit financially from their fame. Drum believes, however, the groundwork of the AFL Players’ Association and other sporting bodies in this case will potentially set a precedent for anyone with an image rights agreement.

“There’s nothing to stop others seeking to have a similar conversation with the ATO.”

Advice essential for sports players

For Gallagher, the aim now is to ensure that sportspeople are aware of the pending image rights changes and any associated contractual documentation. Specialist tax lawyers and financial advisors can provide clarity.

“There may be a benefit for players from the tax perspective, but it really depends on the circumstances,” Gallagher says.

“I don’t think every player is going to be looking at this guideline as something for them, but a lot of them probably will. Certainly, it makes sense for those who have outside commercial agreements and they’ve already got their image rights held by another party.”

Read next: Why athletes go broke – and how good accounting can help

Like what you're reading? Enter your email to receive the INTHEBLACK e-newsletter.
Like what you're reading? Enter your email to receive the INTHEBLACK e-newsletter.
December/January 2022
December/January 2022

Read the December/January issue of INTHEBLACK in digital magazine format.

Our digital magazine brings you quality content every month, in an interactive and sustainable format you can enjoy on a PC, tablet or mobile.