Taxation of image rights in Australia: Key points for athletes from the Brisbane Lions decision

Published 26 October 2017 | Authored by: Cassandra Heilbronn

In Australia, a sportsperson does not have a right of property in their publicity or personality rights. Therefore, to protect any goodwill in their reputation, a sportsperson will generally enter into an agreement granting a non-exclusive licence to a trustee to use and exploit their image.

Two recent decisions handed down in Queensland relating to the Brisbane Lions have shown the importance of ensuring there is a clear separation between payments for use and exploitation of an image, and payments for promotional and marketing services (say through an appearance by a sportsperson).

This article examines:

  • the Brisbane Lions case
  • the Australian Taxation Office’s (ATO) treatment of image rights
  • the need for properly drafted image rights agreements, and 
  • the ATO’s proposed "Safe Harbour" for apportionments

Full reviews of the decisions can be found at the bottom of the article for readers not familiar with the facts.

Case analysis & the ATO’s treatment of image rights

In October 2016, Bond J handed down his decision[1] in the Brisbane Supreme Court regarding the appeal by the Brisbane Bears – Fitzroy Football Club (the Brisbane Lions) against the Commissioner of State Revenue's decision to impose payroll tax on payments made to players and coaches for use of their images, promotional and marketing services. Bond J dismissed the appeal by the Brisbane Lions and concluded that the payments were wages, therefore payroll tax was payable.

The Court of Appeal decision[2] was handed down on 29 September 2017, and again the Brisbane Lions' appeal was dismissed. But does this spell the end to the ability of players to capitalise, from a monetary sense, on the exploitation of their image? The short answer is no. 

Essentially, all those involved at the Brisbane Lions took the right steps to ensure that the respective Collective Bargaining Agreements (2007 and 2012) were complied with in terms of individual Standard Playing Contracts and individual Additional Services Agreements. The agreed facts (see below) show that there were Additional Services Agreements between the Club and the players personally (Type 2 agreements) and the Club, an associated entity of the player and the player (Type 3 agreements).

Throughout the AFL season, Brisbane Lions recorded each appearance of the player and use of their image under the player's Additional Services Agreement in a "Schedule 7B Reconciliation Form", which also set out the total of all amounts paid for the player's marketing and promotional services and the market value for use of the player's image. However, the forms did not record any split between payments made for marketing and promotional services and payments for the use of the player's image.

The recording of split payments is relevant in this context.

The ATO has previously issued an Interpretative Decision[3] and Private Ruling[4] which confirmed that if a sportsperson grants a non-exclusive right and licence to an associated entity, say a family trust, to exploit their image and the associated entity receives an income for the use of the image, provided that the sportsperson has not provided any personal services (e.g. an appearance), that portion of the income is not personal services income for the purposes of the Income Tax Assessment Act 1997. This essentially confirms that the formation of a triparty agreement when dealing with the image rights of a professional sportsperson would not be an arrangement for tax avoidance purposes, provided the agreement is specifically for the exploitation and use of the professional sportspersons 'public fame' and 'image', does not violate any collective bargaining agreement or requirement of the sport's governing body and any payment for personal services is attributed as personal income to the sportsperson.

While both the trial and appeal decisions go into detail on what constitutes a payment for services and the appeal grounds led by the Brisbane Lions, what is relevant for the sports industry is that the decisions are consistent with the positions set out by the ATO previously. If a sportsperson receives payment for their personal efforts and skill, for example, an appearance for promotional and marketing services, it would likely be classed as personal services income for that person.

The Court at first instance and on appeal found that what remained in issue was not what was attributed to the use of an image by the parties, rather the characterisation of the payments made by the Brisbane Lions to the players as employees pursuant to the contract. The Court of Appeal confirmed the initial finding that there was 'no warrant for a conclusion that payments made' by the Brisbane Lions, 'for the use of image rights, were made other than in the course of the provision of such services or independently from the provision of promotional or marketing services'.

 

The ATO’s proposed “safe harbour” & key takeaway points for image rights agreements

Where to from here? First, all involved in an image rights arrangement need to ensure that they have proper agreements in place. This generally would include an agreement between a player and an associated entity assigning a non-exclusive licence for use of their image and then a triparty agreement between the player, the associated entity and the company looking to make payment for use of the image. The agreements should ensure that apportionments are agreed upon (or valued) for both the image rights fee and for appearances, and tax paid accordingly.

Such an arrangement, however, will not seek to prevent players and Clubs looking to avoid salary cap restrictions or payment of tax, by assigning a high portion of a player's salary to use of their image.

To assist in addressing this, the ATO released a Practical Compliance Guideline 2017/D11[5] in July 2017 which called for submissions by 1 September 2017 . The Draft Guideline provides a 'Safe Harbour' for apportioning lump sum payments for the provision of a professional sportsperson's services and the use and exploitation of their 'public fame' or 'image' under licence. The ATO has proposed that it will accept that up to 10% of payments can be treated as referable to the use and exploitation of the sportsperson's 'public fame' or 'image'. A number of examples have been given to show how the Safe Harbour could be used in practice, including guidance on GST and PAYG consequences.

With image rights remaining a topic of interest in the sports industry, now is the time for players, intermediaries and agents, Clubs, governing bodies and companies to review all agreements and records of payments to ensure that:

  1. the sportsperson has appropriately licenced the image on a non-exclusive basis;

  2. there is an arrangement in place which satisfies the requirements of the governing sporting body, any collective agreement and is in line with any ATO Rulings; 

  3. they review any agreement which provides an apportionment of more than 10% (for image payments) of the total amount paid to the sportsperson; and

  4. if the Draft Guideline is confirmed, that they take steps to immediately review and amend agreements to minimise any future tax consequences. 

 

Case summary[6]

  1. Overview
    1. The Brisbane Bears – Fitzroy Football Club Ltd was the subject of a payroll tax dispute in respect of the taxable wages it paid to its players and coaches.
    2. On 30 October 2013, the Commissioner of State Revenue disallowed the objections lodged by the Club in relation to payroll tax reassessments for each of the financial years ending 30 June 2008 and 30 June 2012. The reassessments increased the payroll tax which the Club was liable to pay on a number of bases.
    3. The Club appealed against the Commissioner's decisions to the extent that they asserted a liability for payroll tax on payments made to various players and coaches for the use of image rights.
    4. The Club's central argument was that payments made under the agreements that governed the used of players' and coaches' images were payments in consideration for the use of image, and were not payments in relation to services rendered or performed by those players and coaches.
    5. This argument was rejected at first instance and on appeal, with the Queensland Supreme Court and Court of Appeal finding that payments made to players and coaches for the use of their images were made to them in their capacity as employees, in consideration for the promotion and marketing services provided by them as employees.
  2. Operation of the Act
    • The Payroll Tax Act 1971 (Qld) ('the Act') essentially operated in the following way:
      • a tax was imposed upon payments which bore a particular character. The process of characterisation was done in two stages:
        • by reference to whether the payment fell within the definition of 'wages'; and
        • by reference to whether the payments that fell within that definition were rendered liable to payroll tax;
      • subject to one qualification and except where a payment might fall within a subparagraph of the definition, the question whether a payment fell within the definition of 'wages' turned on whether it was a payment 'paid or payable to an employee as an employee';
      • the question of whether the payments that fell within the definition of 'wages' were rendered liable to payroll tax depended on whether the payments were:
        • paid or payable by an employer; and
        • paid or payable 'in respect of' or 'in relation to' services performed or rendered.
  1. The Player Agreements
    • For players, the relevant agreements were:
      • two Collective Bargaining Agreements (CBA), the first relating to the years 2007 – 2011 and the second relating to the years 2012 – 2016;
      • individual Standard Playing Contracts (SPC); and
      • individual Additional Services Agreements (ASA).
    • The CBAs took the form of an agreement between the AFL and the AFL Players' Association, but operated as binding agreements between those two parties and also each AFL Club and each player.
    • Each CBA provided that each player employed by an AFL Club had to enter into a SPC with the AFL and the relevant AFL Club. That contract was agreed to be the form of contract for the employment of a player by an AFL Club to play Australian Football.
    • The SPCs were tripartite contracts between the Club, the relevant player, and the AFL. They were governed by the terms of employment of the player by the Club.
    • The Club entered into two types of ASAs with players during the relevant period:
      • an agreement between the Club and a player personally (a Type 2 agreement); and
      • an agreement between the Club, an associated entity of a player, and the player (a Type 3 agreement).
  1. Use of Players' Images
    • The CBAs regulated the players' involvement in marketing:
      • 'Image' was defined to include a player's 'name, photograph, likeness, reputation and identity';
      • all players were required to make a certain number of appearances for the purpose of game development and promotion;
      • the AFL and its sponsors were entitled to use a player's Image in connection with particular awards, generally for promotions, and in accordance with the AFL's Licensing & Marketing Operational Guidelines or its Licensing and Commercial Operations Guidelines;
      • players were authorised to use their own Image or license provided its use did not conflict with certain types of sponsor, was not prejudicial to the AFL, and complied with certain other constraints;
      • one of the ways in which a player could monetise the use of their own image was by entering into ASAs with their employer either directly or indirectly. Clause 16.1 of the CBA provided:

'A Player, or an Associate of a Player which has been licensed to use the Player's Image, may contract with an AFL Club and/or Sponsor of an AFL Club to derive payments as a direct result of bona fide promotions/marketing by that Player in accordance with the Guidelines for Additional Services Agreements and the definition of Football Payments. Such arrangements are separate and distinct from the Standard Playing Contract which regulates the employment of a Player to play Australian Football for an AFL Club. Payments made pursuant to a marketing contract shall be in addition to and separate from payments made to the Player for performance of service as a professional footballer and shall not be taken into account in calculating Total Player Payments except as provided in sub-clause 16.2.'[7]

  • The intention revealed by the CBAs was therefore that players could monetise the use of their own Image by entering into ASAs in which they agreed to provide particular services to their employer, either directly or indirectly.
  • The provisions of the CBAs concerning the use of image and the player's involvement in promotion and marketing were specifically acknowledged and preserved by the terms of the SPC.
  1. Players' Fees for Additional Services
    • Each of the ASAs split up the lump sum agreed Fee for a particular year by reference to 'additional services' detailed by reference to description of different types of promotional activities which the player was obliged to performed in that year, such as:
      • sponsor promotion;
      • game development promotion;
      • Sunshine Coast promotion;
      • membership promotion;
      • public relations appearances; and
    • Bond J found that all of the promotional activities above were such that it would be inevitable that they involved some degree of use of the player's Image as defined in the CBA. This was consistent with cl 3.2 of the ASA, which authorised the use of the player's Image 'for purposes related or connect to the Additional Services'.[8]
    • Throughout the season, the Club would record each appearance and each use of image provided under each player’s ASA in a Schedule 7B Reconciliation form. That form also set out the total of all amounts paid under the player’s ASA for the season, attributed as between the market value for the player’s marketing and promotional services and the market value for use of the player’s image.
    • In some cases, no specific mention was made of Image and no fee was specified as associated with the use of the player's Image, even though a fee was specified for the player's involvement in the activity. In other cases, usually those involving 'membership promotion', the schedule made specific mention that the player's Image would be used in 'membership brochures, billboard, direct sale information and renewal information', a specific fee was mentioned for the involvement in 'membership promotion', but it was specifically stated that the player would not be paid for image use.
    • In only a few cases did the schedule specify a particular fee for image use, but the use of image was also associated with the player's actual performance of promotional activities, such as:
      • marketing work for the Club;
      • promotional work for a Club sponsor;
      • appearance work; and
      • media work on the Internet or TV.
    • The forms did not record any split between payments made for marketing and promotional services on the one hand and payments made for use of the player’s Image on the other hand; rather, they treated payments made for use of image as either a type of appearance by the player or as capable of categorisation into a type of marketing or promotional activity.
    • Accordingly:
      • activities were described, their duration recorded, the payment made for the activity recorded, and the payment categorised into one or more of the four categories of 'Membership', 'Media', 'Sponsorship' and 'Special Events';
      • where an activity was described as use of image, it was nevertheless attributed to one or other of those categories, with an amount associated with it; and
      • otherwise the form recorded total 'appearances' and, because the total appearances were allocated as between 'Additional Services Agreement appearances', 'Collective Bargaining Agreement appearances (AFL)', 'Collective Bargaining Agreement appearances (Club)', 'Use of Image' and 'Use of Signature', plainly regarded use of image as a type of appearance.
  1. Coaches' Contracts
    • The Club and its coaches entered into coaching contracts, the terms of which governed the terms of employment of the coach by the club. Each coaching contract contemplated that the Club and the coach would enter into a Marketing & Promotional Services Agreement (MPSA).
    • The agreements were similar to the Indirect ASAs, in which the coach granted to a company the right to exploit the coach's Image and the Club contracted with the company for the right to use the coach's image and to have the company procure the coach to perform marketing and promotional services for the Club.
  2. The Decision at First Instance
    • The Brisbane Bears contended that payments made under the Direct and Indirect ASAs and the MPSAs that related to the used of player or coach image:
      • were payments in consideration for the use and/or exploitation of image rights; and
      • were not payments in relation to services rendered or performed by those players and coaches.
    • This argument was rejected. Bond J found that the Direct and Indirect ASAs were the means by which it had been agreed that the players could derive payments as a direct result of the provision of promotional or marketing services to the Club or its sponsors. He also found that the indicia relevant to the characterisation of the payments made pursuant to the Direct and Indirect ASA were all one way, being;

'The use of the player’s Image was for purposes related or connected to the player’s actual performance of promotional or marketing activities. In fact it was necessarily integral to that performance. The result was that it was correct for the payments made by the Club under the Direct and Indirect Service Agreements to be characterised as payments made by the Club directly or through the associated entity to the player as an employee and in consideration of promotional and marketing services performed or rendered by that employee. There was no warrant for a conclusion that payments made for the use of image rights were made other than in the course of the provision of such services, or independently from the provision of such services.'[9]

  • The same conclusion was reached in respect of the coaches' agreements.
  1. The Appeal
    • On appeal, the Club argued that:
      • the definition of 'wages' in the Act applied to payments for services rendered by an employee as an employee, and not payments made to an employee for something else (ie in another capacity);
      • payment to an employee for the exploitation of his or her image rights was not a payment for services rendered in the capacity of an employee, but rather a payment for a licence to do something which would otherwise be unlawful and therefore capable of being restrained by injunction;
      • when a payment was made for both services rendered by an employee and for exploitation of his or her image rights, only the portion of the payment that was referrable to the services rendered by the employee was taxable as wages;
      • the payments in this instance were in part for the use of the image rights of players and coaches under a licence contained in cl 3.2 of each Direct ASA, Indirect ASA and MPSA. To that extent they were not payments for services rendered by them as employees, and therefore not taxable as wages.
    • Philippides J concluded that:
      • while payments must be made by the employer to the employee in the latter's capacity as employee in order to constitutes 'wages', it is not necessary that the payment be 'for' services rendered. The payments in this case were made to players 'as employees';
      • clause 3.2 of the direct ASA provided that the Fee entitled the Club to the use of the player's image 'for purposes related or connected to additional services as specified in schedule 1'. The use of the image was therefore tied to the purposes set out in schedule 1, and could not be characterised as being entirely separate from the performance of the additional services; and
      • the critical issue was the characterisation of the payments and whether they fell within the statutory definition. In this instance, there was no warrant for a conclusion that payments made by the Club for the use of image rights were made other than in the course of the provision of services provided by the players as employees, or independently from the provision of promotional or marketing services.[10]
    • The payments made by the Club under the ASA and MPSA were therefore liable to payroll tax.

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About the Author

Cassandra Heilbronn

Cassandra Heilbronn

Cassandra is a Senior Associate in the Insurance and Corporate Risk practice group at MinterEllison. She has over ten years’ experience in insurance claims and corporate risk advisory work, and her sports practice includes acting for Australian and international sporting Federations, Clubs and corporations in matters involving commercial disputes, player disputes, sponsorship and image rights issues, and general risk management.

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