Two recent decisions handed down in Queensland have shown the importance of ensuring there is a clear separation between payments for use and exploitation of an image and payments for promotional and marketing services, say through an appearance by a sportsperson.
In October 2016, Bond J handed down his decision in the Brisbane Supreme Court regarding the appeal by the Brisbane Bears – Fitzroy Football Club (the Brisbane Lions) against the Commissioner of State Revenue's decision to impose payroll tax on payments made to players and coaches for use of their images, promotional and marketing services. Bond J dismissed the appeal by the Brisbane Lions and concluded that the payments were wages, therefore payroll tax was payable.
The Court of Appeal decision was handed down Friday, and again the Brisbane Lions' appeal was dismissed . But does this spell the end to the ability of players to capitalise, from a monetary sense, on the exploitation of their image? The short answer is no.
Essentially, all those involved at the Brisbane Lions took the right steps to ensure that the respective Collective Bargaining Agreements (2007 and 2012) were complied with in terms of individual Standard Playing Contracts and individual Additional Services Agreements. The agreed facts show that there were Additional Services Agreements between the Club and the players personally (Type 2 agreements) and the Club, an associated entity of the player and the player (Type 3 agreements).
Throughout the AFL season, Brisbane Lions recorded each appearance of the player and use of their image under the player's Additional Services Agreement in a "Schedule 7B Reconciliation Form", which also set out the total of all amounts paid for the player's marketing and promotional services and the market value for use of the player's image. However, the forms did not record any split between payments made for marketing and promotional services and payments for the use of the player's image.
The recording of split payments is relevant in this context.
The ATO has previously issued an Interpretative Decision and Private Ruling which confirmed that if a sportsperson grants a non-exclusive right and licence to an associated entity, say a family trust, to exploit their image and the associated entity receives an income for the use of the image, provided that the sportsperson has not provided any personal services (eg an appearance), that portion of the income is not personal services income for the purposes of the Income Tax Assessment Act 1997. This essentially confirms that the formation of a triparty agreement when dealing with the image rights of a professional sportsperson would not be an arrangement for tax avoidance purposes , provided the agreement is specifically for the exploitation and use of the professional sportspersons 'public fame' and 'image', does not violate any collective bargaining agreement or requirement of the sport's governing body and any payment for personal services is attributed as personal income to the sportsperson.
While both the trial and appeal decisions go into detail on what constitutes a payment for services and the appeal grounds led by the Brisbane Lions, what is relevant for the sports industry is that the decisions are consistent with the positions set out by the ATO previously; if a sportsperson receives payment for their personal efforts and skill, for example, an appearance for promotional and marketing services, it would likely be classed as personal services income for that person.
The Court at first instance and on appeal found that what remained in issue was not what was attributed to the use of an image by the parties, rather the characterisation of the payments made by the Brisbane Lions to the players as employees pursuant to the contract . The Court of Appeal confirmed the initial finding that there was 'no warrant for a conclusion that payments made' by the Brisbane Lions, 'for the use of image rights, were made other than in the course of the provision of such services or independently from the provision of promotional or marketing services' .
Where to from here? First, all involved in an image rights arrangement need to ensure that they have proper agreements in place. This generally would include an agreement between a player and an associated entity assigning a non-exclusive licence for use of their image and then a triparty agreement between the player, the associated entity and the company looking to make payment for use of the image. The agreements should ensure that apportionments are agreed upon (or valued) for both the image rights fee and for appearances, and tax paid accordingly.
Such an arrangement, however, will not seek to prevent players and Clubs looking to avoid salary cap restrictions or payment of tax, by assigning a high portion of a player's salary to use of their image.
To assist in addressing this, the ATO released a Practical Compliance Guideline 2017/D11 in July 2017 which called for submissions by 1 September 2017 . The Draft Guideline provides a 'Safe Harbour' for apportioning lump sum payments for the provision of a professional sportsperson's services and the use and exploitation of their 'public fame' or 'image' under licence. The ATO has proposed that it will accept that up to 10% of payments can be treated as referable to the use and exploitation of the sportsperson's 'public fame' or 'image'. A number of examples have been given to show how the Safe Harbour could be used in practice, including guidance on GST and PAYG consequences.
With image rights remaining a topic of interest in the sports industry, now is the time for players, intermediaries and agents, Clubs, governing bodies and companies to review all agreements and records of payments to ensure that:
- the sportsperson has appropriately licenced the image on a non-exclusive basis;
- there is an arrangement in place which satisfies the requirements of the governing sporting body, any collective agreement and is in line with any ATO Rulings;
- they review any agreement which provides an apportionment of more than 10% (for image payments) of the total amount paid to the sportsperson; and
- if the Draft Guideline is confirmed, that they take steps to immediately review and amend agreements to minimise any future tax consequences.
