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Rich celebrities, sportspeople and entrepreneurs would be hit with higher taxes on money earned through their "fame or image" as part of a Federal Government crackdown, but tax experts have warned that people wanting to evade stronger laws could move their residency elsewhere.
Key points:
- The tax measure is aimed at stopping some high-profile individuals creating sneaky tax structures.
- Some tax groups have welcomed the proposals, while others have warned it will make the law more complex and see people move offshore to avoid the tax.
- There are calls for a transition period so that those who have arranged their tax affairs according to previous ATO rulings are not penalised.
In December, Assistant Treasurer Stuart Robert announced a Treasury public consultation paper to amend tax arrangements for income derived from a person's "fame or image", including money earned through sponsorships, endorsements, paid posts on social media and free gifts and events.
The tax measure, first unveiled in the 2018-19 federal budget, was aimed at stopping some high-profile individuals creating sneaky structures to minimise the amount of tax they pay.
The structures include licensing the use of their fame or image to a related entity, such as a company or trust, and diverting the licence income to that entity.
"This exploitation can consist of advertisements, sponsorships, including wearing associated brand products, public appearances and the promotion of products," the Treasury paper noted.
The Government's proposed new measure would apply from July 1, "without special transitional or grandfathering arrangements", and would affect taxpayers from the 2019-20 financial year onwards.
Tax avoidance 'widespread' in other countries
Some tax groups have welcomed the proposals, while others have warned it will make the law more complex and see people move offshore to avoid the tax.
H&R Block's director of communications Mark Chapman said he was in favour of the new rules as it would predominantly hit the wealthy who were evading tax.
"Given that the motivation for these structures is generally to enable very high income individuals to pay less tax than they ordinarily would, we support these new measures," he said.
Mr Chapman said payments arising from peoples' fame — such as appearance fees, income from an autobiography, sponsorship fees, and licence fees for things like perfumes, after shaves or clothing — are often paid to a different entity.
"This could be a company, that then pays taxes at a lower rate than the individual — 27.5 per cent rather than up to 45 per cent — or a trust, which then funnels the income to a beneficiary like a spouse who pays tax at a lower rate," he said.
The practice had been widespread overseas for years and, in the case of countries like the UK and Spain, often sees football players setting up image rights companies in tax haven countries.
"The new Treasury recommendations here in Australia will effectively disregard these structures and attribute all the income from them back to the sportspeople, to be taxed as their individual income," Mr Chapman explained.
The Instagram, YouTube effect
CPA Australia's external affairs manager Paul Drum said ambiguity about the law had increased with the growth of social media platforms such as Instagram and YouTube.
"There is no doubt that the outcome will be met with significant disdain by those taxpayers affected," he said.
Chartered Accountants national tax leader Michael Croker said the group's submission also noted the potentially wide application of the proposed law given that some ordinary people could now earn millions by creating Instagram profiles.
"It is difficult to see how the proposed law dealing with image rights won't add further complexity," the CA submission noted, adding that capital gains tax consequences would also be hard to value and could give rise to more tax disputes.
The submission also argued the start date for the proposed laws was "unworkable".
Treasury's paper had warned that "affected individuals may need to reorganise their affairs" and that those who had entered into licensing arrangements that extend beyond June 30, 2019 "may need to unwind or renegotiate contracts and agreements underlying these arrangements".
Chartered Accountants argued that the laws could result in more individuals moving their residency offshore to escape the new tax.
The Treasury paper noted that some high-profile individuals may earn income from the use of their fame or image in a number of countries, and that "like any other income with an international element, such income may not always be taxable in Australia".
How to tax minors, dead people and temporary visitors
Treasury's paper was also unclear how the new law would treat the taxing of minors and dead people, Chartered Accountants' submission observed.
It argued that Australia already found it hard to assert taxing rights for image rights where a sportsperson or celebrity worked in Australia for short periods.
"Take for example an offshore tennis player who visits Australia each year to play in the Australian Open and, whilst here, appears in a media campaign for the use of his or her image promoting Australian goods and services, [but] pursuant to a product endorsement contract signed offshore," it said.
Treasury also had not made clear what it would do in cases where celebrities continue to generate income years after their career has ended.
The submission gave the example of English footballer David Beckham's post-football career dividend, from his company DB Ventures Limited, which was reportedly $32.5 million in 2017.
Call to extend transition period
The ATO had released guidance in 2017 stating that it would allow 10 per cent of a professional sportsperson's fame to be diverted. But difficulties in interpreting the law meant the ATO ruling was withdrawn in August and the Government now wants to take this away entirely due to integrity issues.
BDO national tax director Lance Cunningham said that, rather than have the ATO test in the courts its 2017 ruling view that ownership of the fame or image remains with the individual and is assessable, the Government was amending the law.
"The ATO may not have a great deal of confidence in this view because, if it did, it would be expected that the ATO would test it the courts," he said.
"Instead the Federal Government will be changing the law to enshrine this new view in legislation, thus avoiding the ATO having to argue the case in the courts."
PwC's Australian tax leader Pete Calleja said there should be a transition period to ensure those who have arranged their tax affairs according to previous ATO rulings are not penalised retrospectively.
It was also important the law was consistent with international standards, he said.
"We need to guard against Australia becoming uncompetitive and therefore not attracting people in a broad range of industries who may generate significant taxable economic activity in Australia," Mr Calleja said.
The proposed law change follows a 2009 High Court case, in which the court allowed appeals by former Sydney Swans AFL player David Spriggs and former Paramatta NRL player Mark Riddell against the ATO that management fees incurred by Spriggs and Riddell were deductable.
Topics: business-economics-and-finance, tax, sport, arts-and-entertainment, australia
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