The ATO's draft Practical Compliance Guideline 2017/D11 (PCG 2017/D11), proposed a 'Safe Harbour' for apportioning lump sum payments for both the provision of a sportsperson's services and the use and exploitation of a professional sportsperson's 'public fame' or 'image' under a licence. The Safe Harbour, if an agreement was set up in compliance with PCG 2017/D11, meant that up to 10% of the payment received would be referable to the 'public fame' or 'image' of a sportsperson (commonly referred to as "image rights").

On Friday, 24 August 2018, the ATO withdrew PCG 2017/D11, and ATO Interpretative Decision 2004/511 (ID 2004/511) which provided discussion and guidance on the income tax payable where there was a licence granted to a family trust to use an image.

The withdrawal comes after the Government's announcement in the 2018 Budget Paper 2, on 8 May 2018, that it intended to "improve [the] 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 ATO's position has a significant impact for all sportspersons, sporting clubs and governing bodies in Australia.

Impact on current image right agreements

Those involved in the assignment of image rights know that it previously involved two agreements, the first being the assignment of a sportsperson's image to a company (or family trust) for it to licence (Assignment Agreement). The second agreement was the triparted agreement where the company (or family trust) licenced the sportsperson's image to a third party for use and exploitation (Triparted Licence Agreement). The net effect of such an arrangement was that the payments received for use of the licence were returned as income of the company (or family trust), and were therefore taxed at lower tax rate than would have been applicable if returned as income of an individual.

The process for establishment of the agreements, in particular the Triparted Licence Agreement, was always quite detailed to ensure that:

• only the fee for the exploitation of the image was paid to the company (or family trust) and that any appearance fee remained payable to the sportsperson; and
• the fee referable to the image rights was within the scope of Safe Harbour, particularly if the fee was part of an annual salary payment.

The ATO has stated that it is not seeking to apply compliance resources to review any arrangements entered into prior to 24 August 2018, provided they were entered into and carried out as a consequence of the taxpayer relying on the withdrawn draft Guideline in good faith.

Therefore any Assignment Agreement, based on the current language of the ATO's withdrawal, will not be subject to a targeted compliance review by the ATO.

However, that is not to say that the ATO, in investigating any other matter, will not review an arrangement or that it will allow the arrangement to continue indefinitely. It may be that, as a matter of practical application and subject to any further comment by the ATO, that current Triparted Licence Agreements will continue until they expire under the terms of that agreement and that any new arrangements (including renewals post 24 August 2018 with the same third party) will be through a Licence Agreement directly with the sportsperson.

Impact for future image rights agreements

The second impact of the ATO's withdrawal is for new agreements moving forward.

Sportspersons are still able to licence their image; in fact, it is required given that they do not have a right of property in their publicity or personality rights and need to protect any goodwill in their reputation.

However, given the ATO's withdrawal of PCG 2017/D11 and ID 2004/511:

• sportspersons will no longer have the benefit of the Assignment Agreement; and
• the Triparted Licence Agreement will change to a Licence Agreement between the sportsperson and the third party, given the company (or family trust) is no longer involved.

As a result, sporting clubs and sportspersons (and their agents) need to significantly change their approach to the licensing of image rights moving forward.

To ensure compliance immediate steps should be taken

In order to ensure compliance, sportspersons (and their agents) and sporting clubs should take immediate steps to:

• Review all Assignment Agreements to see if they comply with PCG 2017/D11.
• Review all Triparted Licence Agreements to determine if the agreement needs to be redrafted as a Licence Agreement due to non-compliance of the Assignment Agreement.
• Review any offers made to sportspersons prior to 24 August 2018, which have not yet been reduced to a signed agreement, to see if representations were made regarding the ability to enter into an Assignment Agreement.
• Put in place an appropriate strategy to transition current Triparted Licence Agreements to a Licence Agreement.
• Follow any guidance notes issued by a governing body.

Governing bodies should take proactive steps to issue any guidance notes or directions in line with their current policies on image rights and assignment.

Third parties need to ensure that any transitioning of a Triparted Licence Agreement to a Licence Agreement is carried out effectively to avoid any exposure to a passing off claim.

All agreements involving image rights require strict terms to ensure compliance, not only with taxation legislation, but with the policies of a governing body, particularly those with salary cap measures. To avoid any penalties, the above steps should be taken as a matter of priority.