With careful planning, high profile individuals (such as sportspeople and entertainers with valuable ‘Image Rights’) can structure their arrangements in ways that achieve important commercial goals like asset protection, and are tax efficient.
‘Image Rights’ are an individual’s right to exploit their name, image and other identifiable characteristics (such as their likeness, name or signature) on merchandise or in the media.
Under Australian law, an individual does not have a proprietary interest in their name, image or likeness, and therefore cannot assign these rights to a third party. However, the Australian Taxation Office (ATO) has accepted that an individual can grant a licence to a third party for the use and exploitation of his/her Image Rights1.
A common practice is for a person who has valuable Image Rights (Image Rights Individual) to set up a private company or a trust (Private Entity) and to grant a licence over their Image Rights to the Private Entity.
In turn, a third party that wishes to use the Image Rights (including, in the case of a sportsperson, the club or team they play for) will enter into an arrangement for the use of the Image Rights with the Private Entity. The fees paid by the third party for the use of the Image Rights are paid to the Private Entity and not to the Image Rights Individual directly.
Setting up a structure with a Private Entity holding the licence over the Image Rights can produce some significant commercial advantages and legitimate tax benefits for the Image Rights Individual, these include:
- The income produced from the use of the Image Rights is earned by the Private Entity. This segregates the Image Rights (as an asset) and the income from the use of the Image Rights from the Image Rights Individual’s other income and assets. This provides the Image Rights Individual with a degree of asset protection, which will be important if the Image Rights are likely to have value after their career has ended.
- Because the Image Rights income is not earned by the Image Rights Individual, it does not form part of their taxable income (which is taxed at the marginal tax rates applying for individuals2). Instead:
- if the Private Entity is a company, it will be taxed at the company tax rate of 28.5% (if it has an aggregated turnover of less than $2m) or 30% (if it has an aggregated turnover of greater than $2m). The company can, in turn pay a fully franked dividend to its shareholders
- if the Private Entity is a trust, it will not be taxed to the trustee of the trust but instead at the tax rate of the beneficiary who receives the income.
In setting up an Image Rights licensing arrangement to obtain these commercial and tax advantages, it is very important that:
- The arrangement has commercial substance; that is, that it relates to Image Rights with an ascertainable value.
- The arrangement be correctly structured and documented, particularly the licensing agreement between the Image Rights Individual and the Private Entity. If the structure is ineffective or the documentation imprecise, the arrangement will not be enforceable.
- The arrangement is correctly administered and operated by the parties in accordance with the documentation. This includes correct accounting and tax compliance.
- The tax implications are considered and advised on the facts and circumstances of each individual case. In particular, in entering into the Image Rights licensing arrangement, it will be important to determine whether the licensing of the Image Rights will, itself, give rise to a CGT event. This may be the case if the Image Rights have considerable market value when the arrangement is entered into. The documentation executed by the parties may also give rise to unexpected tax consequences (for example, if what purports to be a licence actually causes a transfer for legal purposes).
- In all cases, considering and discussing with the Image Rights Individual the opportunity to get a Private Binding Ruling from the ATO which confirms the tax consequences of a particular arrangement.
Hall & Wilcox Sports and entertainment and Tax teams, have experience establishing and advising on arrangements involving Image Rights. This includes preparing the necessary documentation, providing advice on the tax implications of such arrangements and obtaining private binding rulings.
1ATO TR 2001/7; ATO PBR 42837; ATO PBR 41494; ATO PBR 1011791878944; and ATO ID 2004/511.
2Note that special rules apply which can deem income earned by an entity can be attributed as ‘personal services income’ of an individual who controls or is connected with the entity (The ‘personal services income’ rules in part 2-42 of the Income Tax Assessment Act 1997). If the arrangement is correctly structured, the ‘personal services income’ rules will not apply to an Image Rights licencing arrangement, because the income is derived from the commercial use of an asset (the Image Rights) rather than services provided by an individual. It is, therefore important that Image Rights arrangements are carefully structured and documented.