Taxing fame: The ATO’s U-turn

Sportspeople, media personalities, celebrities, and social media influencers, take note: the Australian Taxation Office (ATO) has taken a significant turn in how income derived from fame and image rights is taxed. Under a new draft determination set to take effect from 1 July 2023, the ATO is reshaping its interpretation of tax laws, potentially affecting how income tied to fame and image is handled and taxed.

Fame and Image Rights: The Current Practice

For years, it has been common practice for celebrities and high-profile individuals to transfer the rights to their name, image, likeness, identity, and reputation to a related entity, such as a company or trust. These entities then manage and exploit these rights, generating income from endorsements, sponsorships, or licensing deals.

For example, a sports star might assign their image rights to a family-owned company, which in turn negotiates deals for their likeness to appear on product packaging or advertisements. The key advantage of this arrangement has been the ability to:

1. Distribute the income to related parties with lower tax rates, reducing the overall tax burden.
2. Retain income within the related entity and pay corporate tax rates, often lower than individual tax rates.

This tax planning strategy has been widely adopted across various industries, especially in entertainment and sports, where an individual’s fame is their primary revenue driver.

What will change?

The new draft determination (TD 2022/D3) fundamentally challenges the ability of individuals to transfer rights to their fame and image. The ATO’s position is that:

1. Deduction Limitations: If the related entity does not earn income in its own right, it becomes much harder to claim deductions for expenses incurred by the entity.
2. Fame Is Not a Proprietary Right: The ATO argues that an individual’s fame is inherently tied to them as a person. This means it cannot be legally separated or transferred to another entity.
3. Income Attribution: Any income earned from fame and image, even if received by a related entity, is treated as if it were collected directly by the individual. Consequently, the income will be taxed in the hands of the individual, potentially at higher individual tax rates.

Exceptions and Special Cases

The ATO has clarified that the updated approach does not apply in all situations.

• Engagement by a Related Entity: If the individual is directly engaged by a related entity to perform services—such as attending events, product launches, or promotional activities—the income generated from these engagements may still be treated as the entity’s income for tax purposes.
• Personal Services Income (PSI) Rules: Even in cases where the related entity earns income from such engagements, it is critical to assess whether the PSI rules apply. These rules ensure that income derived from personal efforts or skills is ultimately taxed in the hands of the individual providing the service.

Additionally, the general anti-avoidance provisions under Part IVA of the Income Tax Assessment Act could apply to arrangements deemed to have been created solely for tax minimization.

Transitional Arrangements

The ATO recognizes that many taxpayers may already have arrangements in place under the guidelines provided in PCG 2017/D11. For those who entered into such arrangements before 5 October 2022, the ATO has offered transitional relief:

• The new approach will only apply to income derived from 1 July 2023.
• This provides a window for affected individuals and entities to reassess their arrangements and seek advice on compliance under the revised interpretation.

Practical Implications and Next Steps

This change has far-reaching implications for high-profile individuals and their tax planning strategies. Key points to consider include:

• Increased Tax Liabilities: For many, this reinterpretation means higher individual tax rates on income previously taxed at corporate rates.
• Reevaluation of Structures: Existing arrangements that separate fame and image rights into entities may need to be restructured.
• Careful Application of PSI Rules: It’s essential to ensure compliance with PSI and anti-avoidance provisions to avoid further scrutiny.

Taxpayers affected by this change should immediately consult with qualified tax advisors to evaluate their current structures and implement strategies to mitigate potential tax impacts.

The ATO’s shift in its interpretation of fame and image taxation signals a tougher stance on tax minimization strategies involving related entities. While exceptions may still apply in certain cases, the overall trend is clear: income derived from an individual’s fame will increasingly be taxed directly at personal rates.

With the new determination set to take effect from 1 July 2023, proactive planning is essential to ensure compliance and manage tax obligations effectively. If you’re unsure how these changes might affect you, now is the time to seek professional advice to stay ahead of the curve.