Athletes, celebrities, and influencers put on notice by new ATO ‘fame’ tax ruling

A tax structure used by leading sportspeople, celebrities, and even influencers will now come under Australian Taxation Office’s scrutiny, thanks to new rules that define some earnings from an individual’s ‘fame’ as personal income.

For years, famous Australians have assigned their image rights, likeness, reputation, and even their signature to related entities, including companies and family trusts.

Those related entities can then enter into commercial deals with businesses hoping to capitalise on their fame, like when a cereal brand uses the image of a sports star on its packaging, for example.

Earnings from those endorsements were long viewed as earnings of the company or family trust.

This allowed directors or trustees to distribute funds to family members or other beneficiaries who may face lower tax rates than the notable individual themself.

The new tax determination turns those long-held structures on their head.

The ATO last week ruled that famous individuals have no “property” to their fame, meaning any income derived through a related entity’s endorsement deal likely counts as their own personal income — not the earnings of the company or family trust.

“The fees paid for use of the individual’s fame will be ordinary income of the individual and assessable to them” under existing income assessment rules, the ATO said.

The ATO provided the following hypothetical example for how the new rules will apply:

 “A family trust is established by a media personality, Harry Smith. The trustee of the family trust enters into a deed with Harry which grants a right to use and exploit Harry’s fame (name, likeness, image and reputation) throughout Australia.

The trustee contracts with an unrelated business, Products Pty Ltd, for the use of a photo of Harry and Harry’s name on the packaging of their product for a fee. Neither Harry nor the family trust has any copyright, trademark or registered design rights in the photo to be used or in Harry’s name. Payment by Products Pty Ltd is made to the trustee. However, the income from this use of Harry’s fame is ordinary income of Harry. This is because while the trustee has a right to use that fame, the deed does not provide any property to the trustee which could allow a third party to use it for a fee. Therefore, Harry is required to include the fee amount paid by Products Pty Ltd to the trustee in his assessable income in the relevant income year.”

Notably, the determination is retrospective, with the ATO saying its compliance approach applies as far back as the 2018-19 financial year.

What earnings are exempt?

There are some significant exceptions to the ruling.

The ATO says it will not apply compliance measures to income earned from commercial agreements that were entered into “in good faith”, under prior tax guidance that was officially withdrawn in 2018.

The ruling does not apply when the notable individual is engaged by the related entity to provide a personal service to a third party.

For example, a record shop (third party) may pay a famous singer’s family trust (related entity) when the singer attends their fan meet-and-greet session.

That income may still come under separate Personal Services Income rules, however.

Nor does the ruling apply when the notable individual has granted a related entity the copyright, trademark or registered design rights to the specific photos, images, or visual assets used in those commercial deals.

How are athletes, celebrities, and influencers affected?

Tax agents who work with famous individuals have long contested the plan to consider those earnings as personal income.

WRP Legal & Advisory and talent management and advisory firm W Sports & Media (the W Group) have counted megastar cricketers, tennis players, and AFL heroes among their clientele.

Discussing the proposed changes last year, Garry Winter, a W Group director, said the new tax determination could convince sports stars to relocate internationally, potentially to the detriment of domestic sporting leagues and entertainment platforms.

The new ruling only makes that outcome more likely, says Nicholas McCann, a senior associate at WRP Legal & Advisory.

“The ATO confirming their position of reversing the tax treatment is likely to have a negative impact on Australia retaining their international sports stars (and other high profile individuals) and to entice international sports stars to Australia,” McCann told SmartCompany on Tuesday.

“In some ways it is similar to the UK tax laws that tax international sportspersons on a percentage of their income that is derived outside the UK.

“This has led to superstars such a Rafael Nadal and Usain Bolt not participating in the UK.”

In prior consultation with the ATO, the W Group stated the ruling could adversely affect lower-paid sportspeople, who may supplement their relatively low income with endorsement deals.

The ruling may also pose new challenges to related entities serving as custodians of a celebrity’s fame and image rights after their death, McCann adds.

“On a preliminary basis, in our view, the ATO’s position in the tax determination may have unintended adverse consequences, such as for deceased estates that currently hold and manage image rights,” he says.

McCann also noted the potential for the ATO’s compliance activities to look at income for years past.

“In our view, tax law should be applied prospectively,” he suggests.

W Group was not the only entity to signal the potential of the tax determination to reboot long-established financial arrangements.

While the determination was still in its draft stages in March this year, Michael Hatcher, a tax manager at BDO, advised relevant individuals to stay alert to the proposed changes.

“Taxpayers would be well advised to review their arrangements, regardless of whether the draft determination is directly applicable, for peace of mind,” he said.