The Treasury has on 13 December 2018 released a consultation paper seeking comments on improving the integrity of the tax system to ensure high profile individuals cannot take advantage of lower tax rates by licensing their fame or image to their family business entities. This follows the earlier 2018-19 Budget announcements that the Federal Government will legislate to stop tax avoidance by including in the income of all such proceeds as income of the individual. The proposed tax integrity measure is to commence from 1 July 2019.
The Government proposes a broad definition for tax purposes, that is, a fame or image would cover anything that can be attributable to a person’s reputation or appearance and can include an individual’s name, image, likeness, identity, reputation and signature, irrespective of their occupation or how they obtained their fame or image.
The current practice of high profilers
The Government is of the view that high profile individuals participate in taxation arrangements where they license their fame or image to a separate entity such as a company or trust to take advantage of tax concessions or tax avoidance.
Prior to the Federal Budget announcement, the Australian Taxation Office’s (ATO’s) position in its Taxation Ruling recognised that professional sportsperson’s business could involve the commercial exploitation of their fame or image. Furthermore, in its Interpretative Decision (withdrawn 24 August 2018), the ATO stated professional sportsperson could grant a licence to a trust in relation to the use of their fame or image, with the resulting income from the use of the licence being the income of the trust and not alienated as their personal services income.
On 19 July 2017, the ATO issued Draft Practical Compliance Guideline (also withdrawn 24 August 2018) which provided a safe harbour of 10% for apportioning lump sum payments for the provision of a professional sportsperson’s services and the use and exploitation of their fame or image under licence.
How high profilers grant their licence to cut tax?
Before the Budget announcement, the Government and the ATO were increasingly concerned with the use of licensing structures by high profilers, and not just professional sports persons.
As an example (see diagram below). Jane Rich is a high profiler and she granted her JR Family Trust the licence to use her fame or image. Her image is used by an independent clothing company and the payment of $100,000 to the trust in the 2018 tax year was distributed to Jane’s spouse Robert, who has no other income. By alienating her $100,000 income to her family trust and income splitting:
- Instead of Jane paying tax at top marginal tax rate of $45,000 (before Medicare levy);
- Robert, paid only $24,632 (before Medicare levy) at his marginal tax rate;
- This is a tax saving (before Medicare Levy) of $20,368.
How will high profilers be taxed?
The proposed measure will stop high profilers from taking advantage of lower tax rates by disallowing them alienating their income and licensing their fame or image to their business entities. Instead, it is treated as income of the individual and taxed at the individual’s marginal tax rate.
Specifically, from 1 July 2019, all individuals (not just sports persons) earning income from the exploitation of their fame or image, and their related entities, including family trusts, that hold a licence to use the individual’s fame or image, will be subject to the measure. As such, they may need to unwind or renegotiate contracts and agreements and payments underlying these arrangements.
This proposed measure does not extend to the payment for the use of recognised forms of intellectual property, e.g. copyrights, patents or trademarks.
The ATO will not seek to apply compliance resources to review an arrangement entered into before 1 July 2019.
What should high profilers do?
Income alienation was given life via exploiting the ATO’s former position which allowed high profilers the granting of licensing fame or image to their business entities, including family trusts. These income alienation structures are now under scrutiny and certainly is not viable going forward. Taxpayers at risk will need to restructure or unwind, as the tax law will no longer let income aliens use their family business entities, including their family trusts unnoticed and under-taxed!
This article was co-authored by Bill Leung, HLB Mann Judd Melbourne.