Sports stars will lose tax loophole following ATO crackdown

A TAX loophole used by Australia’s best athletes is about to become more difficult to exploit with the ATO to clamp down on image rights.

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A TAX loophole used by Australia’s best athletes is about to become more difficult to exploit.

The Australian Taxation Office is starting to clamp down on “image rights” companies, used by wealthy sportspeople to reduce their tax bill and claim a raft of expenses.

The image rights option has been available to Australian-based athletes since 2004.

Here is one example of how it works: a notable footy star earning $800,000 a year sat down with his accountant and decided to direct 40 per cent of his salary into a company created by them, for his own image rights.

He is allowed to do this because his “image” helps to promote the sport he plays, although the percentages vary depending on the athletes’ fame — the more profile they have, the more they can direct into their company.

Why do they do this? To reduce their tax bill.

Any athlete earning more than $180,000 a year is being advised to set up these companies by their money men.

While the top earners in Australia are taxed 49 per cent of their full wage, the image rights companies of athletes are only taxed at the lower margin of 30 cents in the dollar.

For the guy earning $800,000 a year, only $480,000 of his salary was taxed at the bracket rate of 49 per cent. The other $320,000 he directed into his image rights company was taxed at 30 per cent, saving him more than $60,000 in taxable income a year.

Then there are the expense claim perks of having this image rights company.

Some players use it to pay their wives a salary for working for that company and deduct it as a tax expense. Others use it to invest in property, buy cars, laptops, and swimming pools — all claimed as business expenses of the image rights company they own.

Some of Australia’s leading sports stars could take a hit to the pocket.

One athlete claimed more than $60,000 a year in expenses for his image rights company, including items as trivial as taxis to the airport and meals while on tour — despite receiving a per diem as an individual for meals while on tour.

When the Panama Papers exposed widespread tax fraud by wealthy individuals using offshore accounts last year, one of the most intriguing elements was how many athletes were having sponsors pay money directly into Cayman Islands accounts.

Those based in Australia have no such luxury, but the image rights loophole has made it enticing for some to exploit the possibilities that exist.

It’s why the ATO penned a new draft guideline of the image rights tax laws five months ago.

“The ATO reviewed deeds and agreements commonly used across different sports codes and found that these documents do not effectively create or licence image rights,” an ATO spokeswoman said.

“This means the sports people relying on them are not implementing effective arrangements, and may not be meeting their tax obligations as a result.

“The intent of the Practical Compliance Guideline, when finalised, is to clarify the way forward for sportspeople and their managers and ensure the correct amount of tax is paid.

“The ATO has worked extensively with expert counsel, professional sports associations and other key stakeholders to provide the guideline, which takes into account the status of image rights in laws in Australia along with an understanding of the nature of sportspeople’s promotional activities within their normal contractual obligations.”

One of the interesting elements of this situation is how the percentage of wages directed into image rights companies are worked out.

The ATO works with the various sporting codes during their enterprise bargaining agreement process to come up with a number.

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They bluntly said “the figure is considerably lower than some stakeholders were seeking”.

Within the codes, the percentage is worked out based on an athlete’s fame and appeal to sponsors, and the community awareness of the sportsperson.

The most marketable rugby, NRL and AFL stars can have a higher percentage than little-known rookies.

At the same time, getting into off-field strife could create problems for sportspeople who have significant money flowing into an image rights company when their image is tarnished.

Another consideration is the growing trend of coaches blocking players from giving interviews to media.

This could directly lead to a hefty tax bill for the athlete.

If a little-known footy star is being shielded from reporters by a worried coach, and then can’t produce evidence of media appearances and promotional work to the tax auditor who wants to know why they’re putting 30 per cent of their wages into an image rights company with a lower tax bracket, there’ll be consequences.

Many coaches believe that in shielding players they are helping them by reducing pressure on the individual, not building up too much expectation, or in some cases not wanting a young upstart to develop too big an ego.

But in this era of professionalism and financial manoeuvring of athletes’ money, those players visited by the tax man will have to explain just how their “image” is promoting the game when they’ve been kept invisible outside the field of play.