Use of an individual’s fame by related entities: Draft Tax Determination released

By Frank Hinoporos, Martin Ross, Mark Lebbon and Rachel Law

Individuals with a public profile may enter into an agreement with a related entity, allowing that entity to license or otherwise exploit the individual’s fame with a third party for a fee. There has been uncertainty in Australia for the last few years about how these arrangements are treated for income tax purposes.

The Commissioner of Taxation recently issued a Draft Tax Determination (TD 2022/D3) (the Draft Determination) to clarify its administrative position in light of the ‘gap’ left by the absence of a legislative response, as had been announced in the 2018/19 Budget, but which remains unenacted.

The Draft Determination is subject to comment and submissions can be made to the ATO until early November. The details are outlined below but broadly, the fee will be treated as assessable income of the individual, rather than the related party.

What arrangements are covered?

The Draft Determination applies where an individual establishes a related entity, usually a trust or a company, and enters an agreement to allow that entity to use the individual’s fame. For these purposes, ‘fame’ includes the individual’s image, name, likeness, identity, reputation and signature.

The related entity will enter a contract with a third party, allowing them to use the individual’s fame for a fee.

How will these arrangements be taxed?

The Commissioner’s view is that income from the exploitation of a person’s fame will be treated as ordinary income and will be assessable to the individual under section 6-5 of the Income Tax Assessment Act 1997. The Commissioner takes this position on the basis that, in Australia, there is no recognised property right in ‘fame’ that can effectively be transferred or assigned to another entity.

The Commissioner distinguishes situations where an individual transfers separately identifiable intellectual property, such as a copyright, trade mark or a registered design, to a related entity for a fee. Those rights are recognised property rights in Australian law and are capable of assignment.

Although there is no property right in fame, there can be a cause of action if an individual’s reputation is exploited in an unauthorised manner by another person. In that case, the protected property is viewed as goodwill of the individual’s business. As goodwill is part of the business and cannot be assigned on its own, this is not seen as enough to create a separate property right.

The Commissioner indicates that it is still possible for individuals with fame to contract personal services through a related entity. An example of this is where the individual is engaged by a related entity to provide services, such as attending a promotional event for a third party. In that case, the related entity would be assessable on the income received from the third party. However, this is subject to the application of the Personal Services Income (PSI) rules.

The PSI rules are anti-avoidance provisions which are aimed at preventing an individual from alienating income from personal services to a related entity, where income may be preferentially taxed. If the PSI rules apply, then the income earned by the entity may be attributed and taxed to the individual who has provided the personal services. The likelihood is high that the PSI rules will apply where an individual with fame has contracted personal services through a related entity, so detailed advice should be sought with respect to such arrangements.

What is the status of pre-existing arrangements?

The Draft Determination applies retrospectively so may impact pre-existing arrangements unless they are subject to the Commissioner’s compliance approach.

The Commissioner acknowledges that this Draft Determination results in a change to his previous position. In Draft Practical Compliance Guideline PCG 2017/D11 (which was withdrawn in 2018), the Commissioner provided a safe harbour allowing individuals to apportion payments that were received in relation to the use of their fame such that part was assessable to the individual and part to the related party.

Given the change in view, the Commissioner says he will not devote compliance resources to apply the Draft Determination to income derived before 1 July 2023 if:

• the arrangement was entered into before 5 October 2022 (when the Draft Determination was released); and
• the arrangement was entered into in good faith consistent with the principles in PCG 2017/D11.

Why we needed this guidance

The Draft TD was driven by a need to clarify the law in relation to the taxation of image rights. As part of the 2018/19 Budget measures, the Government announced it would address tax integrity across several areas of the tax system. One of the focus areas was the taxation of an individual’s fame where it is licensed to a related entity. It was also in 2018 when the Commissioner withdrew PCG 2017/D11.

The Federal Government has not yet enacted any legislation in response to the 2018/19 Budget announcement, leaving taxpayers with no guidance on how individuals with fame should be taxed when they exploit their image to a related entity. The Draft TD is the Commissioner’s response to assist taxpayers and provide some clarification.

What’s missing?

The Draft Determination does not discuss the use of an individual’s fame in an international context. In some cases, individuals may be foreign residents, or have related entities that are foreign residents, who have a marketable image that they intend to apply for commercial purposes in Australia. Alternatively, an Australian resident individual or related entity may put the individual’s fame to commercial use overseas.

In some countries, ‘fame’ is recognised as a property right, and arrangements involving the assignment of an individual’s fame or image rights are mainstream and commonly used, both within the individual’s home jurisdiction and outside their home jurisdictions. Ultimately the tax treatment will depend on the interpretation of the tax treaty (if any) and the law of the country in which the income is derived. A consideration of such issues is not within the scope of the Commissioner’s Draft TD.

What’s next?

If you or your client’s have any pre-existing arrangements like those described in the Draft Determination, you should review the arrangement and the tax treatment and consider whether the compliance approach applies. Our team can assist with this process.

The Commissioner is also inviting comments on the Draft Determination by 4 November 2022. Hall & Wilcox will be making a submission and we welcome any feedback about the Draft Determination from you. If you have any questions arising in relation to the Draft Determination and how it may affect you or your clients, please contact a member of our team who can assist.