After years of uncertainty, the Australian Taxation Office (ATO) has finally released Taxation Determination 2023/4 (Income tax: use of an individual's fame by related entities) which confirms the ATO’s view when it comes to licensing arrangements for fame and image.
What are offending licensing arrangements?
When individuals begin to develop fame and a public following (e.g. Instagram, YouTube etc.) they can earn income from the use of their fame or image. This exploitation can consist of advertisements, sponsorships, wearing associated brand products or public appearances.
Income generated from the exploitation of an individual’s fame or image is generally taxed consistently with other forms of income when the income is earned and caught by the individual personally. However, high profile individuals have historically sought to license their fame or image (as a proprietary right) to a related entity such as a company or trust.
When individuals implement this licensing structure, the related entity may receive payments from sublicensing of the individual’s fame or image, and in doing so may achieve more advantageous tax outcomes.
What is the ATO's published view?
The proposed tax measures concerning licensing arrangements for fame or image were first tabled in the 2018-19 Federal Budget papers. At the time, the proposal was denoted as the “fame tax” and was expected to affect a number of celebrities, athletes, entertainers and social media personalities.
Following this, a draft determination (TD 2022/D3) was issued by the ATO in October 2022 providing insight into how the ATO will seek to assess those individuals who licence their fame and image to a related entity.
On 28 June 2023, the draft determination was made final by the ATO on the same terms through the issuance of TD 2023/4 (Determination). The release of the final Determination confirms that the taxation benefits historically derived through fame and image licensing arrangements have now been brought to an end.
What are the key concepts from the Determination?
In summary, the key legal principles established by the Determination include that:
- an individual with fame has no property in that fame, and therefore, cannot assign or transfer property in their fame to another entity; and
- as a result, a related entity of an individual is not in a position to enter into a licensing agreement with a third party to exploit the fame of that individual.
From a taxation perspective, the legal concepts above lead to some complexity, namely that:
- high profile individuals can no longer take advantage of lower tax rates by alienating their income through licensing their fame or image to related entities; and
- rather, all income generated from the licensing of an individual's fame or image will be treated as income that is derived by that individual personally. This will mean that the income will be taxed at the relevant individual's marginal tax rate.
Who does the determination not apply to?
In contrast to the abovementioned arrangements, the ATO accepts in the Determination that copyright, trademark, registered designs and other forms of intellectual property do have proprietary rights recognised under Australian common law and legislation.
As such, the Determination provides that these rights are capable of assignment or transfer and consequent income tax implications will follow.
What are the risks for high profile individuals?
High profile individuals who have previously established licensing arrangements for their fame and image will no longer be able to benefit from the alienation of their fame or image income and will be at risk of facing an ATO audit if the income is not properly disclosed in the future.
As to historic exposures, in some good news, the ATO concedes in the Determination that it will not devote compliance resources to apply the views expressed in the Determination to income derived before 1 July 2023, to the extent the income was earnt from arrangements entered into in good faith that are consistent with the principles outlined in a historic practical compliance approach document, namely PCG 2017/D11 (which was withdrawn on 24 August 2018).
How Can MCW help?
If you would like to discuss the implication of the Determination, please contact the MCW team for a discussion. Our team is able to assist with the following issues:
- reviewing (and if required, restructuring or unwinding) license arrangements that high-profile individuals have entered into in the past;
- considering broader income tax implications, such as whether income falls within the Personal Services Income (PSI) rules;
- providing advice on alternative structures for third party transactions involving the use of an individual's fame or image (and providing advice on whether such game and image is capable of registration); and
- assisting sporting organisations amend employment and contracting documentation for athletes that are separately remunerated for image or similar rights.
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With a market-leading corporate and taxation law practice, Team MCW would welcome an opportunity to assist you or your clients on any aspects of this topical area.
