The ATO has released in October 2022 a draft tax determination (TD 2022/D3) disallowing the use of an individual's fame by related entities. In summary, this is where a person licence the use of their “name, image and likeness” (“NIL”) to a company or family trust, and income received for the use of the person’s fame is split from the other earnings. However, there seems to be a “backflip” from ATO on their previous views as expressed through PCG 2017/D11, which provided guidance on what is acceptable income-splitting of a professional sportsperson's 'public fame' or 'image' (although that guidance was withdrawn in August 2018).
How this changed view came about
The Commissioner has relied on several case law precedents to form the view that under Australian law, an individual with fame has no property in that fame and therefore cannot vest or transfer any property in their fame to another entity. That is, the common law of Australia does not recognise as a proprietary right an individual's ability to exploit their fame separately from an accompanying business. Consequently, there is no recognised proprietary right (common law or otherwise) in an individual's fame that is capable of transfer or assignment.
The outcome of this view is that where an individual has licenced the use of their fame to a related entity, and that related entity receives a fee for the exploitation of that fame, the new determination provides that any income received by the related entity is deemed to be ordinary income of the individual to whom the fame belongs to. This is because the individual could not under law provide any property in their fame to the related entity that the related entity could then allow a third party to use for a fee.
Impact on you or your clients
Many famous persons, particularly professional sportspeople, have used their NIL in obtaining income outside of their professional sport, such as sponsorships and endorsements deals. Similar arrangements also exists for celebrities and other public figures.
A traditional arrangement in these cases is for the famous person to licence their NIL to a related entity (most commonly a family trust in Australia), so that any NIL deals are signed with the related entity rather than the individual themselves. This then allows an income-splitting arrangement whereby the individual receives an amount of compensation for the exploitation of their NIL, leaving the remaining payment under the deal taxed in the hands of other family members or entities. Per the withdrawn PCG 2017/D11, up to 10% these payments can be treated as the income of the associated resident third-party under the safe-harbour arrangement.
However, with this new draft determination, even the 10% amount is no longer allowable, as the Commissioner’s new interpretation is 100% of the income must be attributed to the individual to whom the fame belongs to. This squarely closes the door to this type of income-splitting arrangement.
Transitional arrangement
Under TD 2022/D3, the ATO has made commitment to allow taxpayers who have in good faith relied upon PCG 2017/D11 to continue receiving income from the arrangement until 1 July 2023. This means there is no immediate need to change your existing arrangements for the 2023 financial year, and you have a window of opportunity between now and 30 June 2023 to review and revise you or your client’s tax affairs to align with the requirements under the new tax determination.
For most Australian taxpaying individuals, unfortunately they will have no option but to comply with the new tax determination as the complexities and tax cost of being a non-resident with Australian-sourced income could far outweigh any tax saving gained. However, for those top-tier international stars with significant international exposure, it may now be worthwhile for those individuals and their advisers to weigh up the pros and cons of changing their tax residency, particularly if they do not have strong ties to Australia.
The reality is that many other countries around the world, particularly the US, continues to recognise an individual’s rights to control how their name, likeness, or other identifying information is used or exploited for commercial gains. Adding to that the generally more tax-friendly environment towards businesses and wealthy individuals, there may be an argument for taking up the tax residency in another jurisdiction for you or your client.
For more information on this topic and how it impacts you or your client, contact Manager of Taxation Charles Yuan at cyuan@prosperity.com.au.