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Individuals will pay tax on their fame unless there are changes to last year’s draft determination.
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How the ATO will turn celebrity into a challenge
19 May 2023
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The ATO’s draft taxation determination TD 2022/D3 sets out the proposed treatment of an individual’s fame. It say, in essence, that because the law prevents assignment of an individual’s fame (typically to a related company or trust), such arrangements must be taxed to the individual.
This is despite the fact that such arrangements (assigning someone’s fame to a related company or trust) have been accepted for many decades.
The draft says the ATO will accept arrangements pertaining to the assignment of copyrights, trademarks and registered designs and services provided by a famous individual to a related company or trust, but not their fame.
There are a number of problems with this approach.
1. To the extent that the Commissioner considers that the law does not allow for such an assignment for taxation purposes – and having regard to the fact that such arrangements have been in place for decades – a better approach would be to simply amend the federal tax laws.
Such an amendment would allow famous individuals to assign “everything” pertaining to their business (as with anyone operating a business assigning to a related company or trust), not just their intellectual property and services. This would be a better and simpler approach that meets accepted commercial practice.
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Instead, the entertainment industry will be unfairly targeted by having the absurd situation of their fame being taxed to the famous individual, even though every other aspect of their business is owned by a company or trust.
2. The second problem involves the question of valuation. The draft requires musicians, actors, comedians, celebrity chefs, professional sportspeople and anyone exploiting their celebrity to value their fame separately from their intellectual property and services income.
Because the entertainment industry in Australia is so small, this throws up related issues:
- Very few valuers, if any, could provide a reasonable apportionment of an individual’s fame versus their services and/or intellectual property.
- It is quite possible that the cost of the valuation will be more than the potential tax raised in most cases.
3. The third problem with the ATO approach is that, with some minor amendment, the existing personal services business rules could have applied in these situations.
In other words, where entertainers of a certain level satisfy the personal services business income rules, the position should be that there has been an assignment of every aspect of their business to a related company or trust. Instead, the ATO response is that because the law does not allow for an assignment of such fame on the part of an individual, the personal services business rules would not apply.
4. The ATO approach also proposes to capture international arrangements within the draft. For the small number of Australians who have a genuine international presence, this seems unfair. Australian entertainers with a global presence simply replicate the accepted business structures in internal jurisdictions by creating performance entities, licensing entities and so on. Quite simply, Australian global entertainers will be taxed differently to similar non-resident global entertainers because of the draft. There seems no logic in such an approach when on other international matters, Australia simply follows the position of mature tax jurisdictions.
5. Finally, and admittedly this is a secondary issue, there is the question of timing. The ATO intends to finalise the draft in June. However, the message seems to be that it will apply from the date when it was released: 5 October 2022.
In other words, it will most likely be necessary to apportion a famous individual’s taxation arrangements from 1 July 2022 until 4 October 2022 and then from 5 October 2022 to 30 June 2023.
Common sense suggests that such a significant change can only apply at the commencement of a financial year not during the year, having regard to the difficulties described above.
As you might expect, there were a number of submissions made to the ATO regarding this draft, pointing out the numerous problems it raises. However, the message from Canberra was that these submissions have been ignored and the ATO approach as stated in the draft will be the final position.
Dennis Tomaras is a partner with legal firm Cornwalls.
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