The impact of this case on ATO policy is discussed in Decision Impact Statement: Spriggs and Anor v Commissioner of Taxation (M92 and M93 of 2008 ).
SPRIGGS v FC of T; RIDDELL v FC of TJudges:
Full High Court
MEDIA NEUTRAL CITATION:
 HCA 22
ATC 9701French CJ, Gummow, Heydon, Crennan, Kiefel and Bell JJ
1. These appeals arise out of the assessment of income tax made by the Commissioner of Taxation of the Commonwealth of Australia ("the Commissioner"), the respondent to each appeal, in respect of each of the appellants, Mr David Raymond Spriggs ("Spriggs") and Mr Mark Riddell ("Riddell"), for the year of income ended 30 June 2005 ("the 2005 income year"). Before, during and after the 2005 income year, Spriggs was a professional Australian Rules football player, who played for clubs in the Australian Football Competition, and Riddell was a professional rugby league player, who played for clubs in the National Rugby League Competition.
2. The issue in these appeals is whether the appellants were entitled to deductions, pursuant to s 8-1 of the Income Tax Assessment Act 1997 (Cth) ("the ITAA"), for fees paid by each of them to his respective manager during the 2005 income year ("the management fees").
3. The Commissioner refused to allow deductions for the management fees in assessments of the appellants' respective liabilities to income tax in respect of the 2005
ATC 9689income year. Each of the appellants objected to those assessments
4. For the reasons which follow, the Full Court was in error to conclude that the management fees were not deductible. Accordingly, the appeals to this Court should be allowed and the orders of the primary judge restored.
5. Both in the Full Court
6. Spriggs. The Australian Football Competition ("the AFL Competition") is the elite Australian Rules football competition conducted by the Australian Football League ("the AFL"), a public company limited by guarantee. At all relevant times, 16 clubs participated in the AFL Competition. From 2000 to 2006, Spriggs played for two of those clubs in succession. In each case, he was contracted to play Australian Rules football on a full-time basis pursuant to an AFL Standard Playing Contract between him, the club and the AFL.
7. Each AFL Standard Playing Contract entered into by Spriggs was a standard contract in a form prescribed by the AFL and the Australian Football League Players' Association Incorporated ("the AFLPA"), modified to include particular conditions relating to Spriggs. Each incorporated a Collective Bargaining Agreement between the AFL and the AFLPA, which will be described in more detail later in these reasons
8. As was agreed in each AFL Standard Playing Contract, the "AFL Player Rules", determined by the AFL, were binding on both Spriggs, as a player, and each club which contracted with him. The AFL Player Rules in effect require that any person playing in the AFL Competition be a party to an AFL Standard Playing Contract. The AFL Player Rules also regulate the conduct of the yearly "AFL National Draft", which enables clubs to select players to play for them from a list of eligible players who have nominated for the Draft.
9. In November 1999, Spriggs was selected by the Geelong Football Club Limited ("Geelong") from the AFL National Draft for that year. On 7 January 2000, he entered into a "Representation Agreement" with Connors Sports Management Pty Ltd ("CSM"). The term of the Representation Agreement was for two years, but it was extended by agreement between the parties and was in place for the 2005 income year. The Representation Agreement relevantly provided:
- " 1. Contract Services:
CSM hereby warrants that a duly accredited player agent will represent, advise, council [sic] and assist the player[
Defined in the Representation Agreement to be Spriggs.] in the negotiation and enforcement of his AFL Standard Playing Contract(s) in the Australian Football League.
- 2. Appointment:
CSM will for the full term of this agreement act as the Player's exclusive Agent throughout Australia in respect of the Player's activities as a professional AFL footballer including the players [sic] AFL Contract with his respective Club, endorsements, merchandising, appearances and media contracts.
- 3. CSM's compensation:
If CSM succeeds in negotiating an AFL Standard Playing Contract or contracts acceptable to the player, CSM shall be paid a fee as follows:
3% of the Player's total gross earnings for the term of the contract[.]
The player will pay the following fees for marketing and media activities:
20% of the total gross earnings in relation to marketing, and media activities."
10. Spriggs was contracted to Geelong, pursuant to successive AFL Standard Playing Contracts, for the 2000 to 2004 AFL Competition seasons. Mr Paul Connors ("Connors") of CSM negotiated terms to be included in all but the first of these contracts.
11. During the 2004 AFL Competition season, Connors and Spriggs considered that it might be appropriate for Spriggs to move to another club in the AFL Competition. Connors became involved in various negotiations with representatives of a number of clubs towards that end.
12. On 31 October 2004, Spriggs' then current contract with Geelong came to an end. Spriggs was thereupon eligible, under the AFL Player Rules, to nominate for the AFL National Draft. Following negotiations with representatives of the Sydney Swans Ltd ("Sydney") and another club, Connors ultimately agreed on the minimum terms and conditions that Sydney would meet if they selected Spriggs in the Draft. On 20 November 2004, Spriggs was selected in the Draft for that year by Sydney. On 9 December 2004, he entered into an AFL Standard Playing Contract for the 2005 and 2006 AFL Competition seasons, consistent with the terms negotiated by Connors ("Spriggs' 2005/2006 Contract"). Among other things, it provided for a "Base Payment" for the 2005 AFL Competition season of $70,000. The view of the primary judge was that it was a contract of employment
13. On 20 December 2004, CSM issued a tax invoice to Spriggs. Against an amount of $2,100, the notation on the invoice read: "Management and promotional services by CSM for season 2004". This amount was equivalent to 3% of the Base Payment for the 2005 AFL Competition season in Spriggs' 2005/2006 Contract. The conclusion of the primary judge was that the fee was paid by Spriggs to CSM for negotiating Spriggs' 2005/2006 Contract
14. At the end of the 2006 AFL Competition season, Spriggs' 2005/2006 Contract with Sydney came to an end. He did not subsequently play with any other club in the AFL Competition. The Representation Agreement with CSM came to an end.
15. Riddell. The National Rugby League Competition ("the NRL Competition") is the premier rugby league competition in Australia and New Zealand, conducted by National Rugby League Limited ("the NRL"), a public company limited by guarantee. Sixteen clubs participate in the NRL Competition. From 1998, Riddell played for three clubs in the Competition in succession. In each case, he was contracted to play rugby league on a full-time basis pursuant to an NRL Playing Contract between him and his club. There was a Collective Bargaining Agreement, between the Rugby League Professionals Association and NRL clubs, which dealt with industrial issues.
16. The rules and regulations of the NRL Competition, including the "NRL Playing Contract and Remuneration Rules", are determined by the NRL. Under the NRL Playing Contract and Remuneration Rules, any club that participates in the NRL Competition must ensure that the club and its players have complied with those Rules. Under the Rules, any person who wishes to participate as a player in the NRL Competition must, among other things, be a party to a current NRL Playing Contract with a club. The NRL Playing Contract is a standard contract. As was agreed in each NRL Playing Contract entered into by Riddell, the NRL Playing Contract and Remuneration Rules were binding on him.
17. On 29 May 1998, Riddell entered into an agreement with International Sports Management Pty Ltd ("ISM"). He was contracted to play for the Eastern Suburbs District Rugby League Football Club Limited for the 1998 to 2000 NRL Competition seasons. On 27 July 2000, he entered into an NRL Playing Contract with St George Illawarra Rugby League Football Club ("St George") for the 2001 NRL Competition season, and then on 6 June 2001 he entered into an NRL Playing
ATC 9691Contract with St George for the 2002 to 2004 NRL Competition seasons.
18. Also on 6 June 2001, Riddell entered into an agreement with SFX Sports Group (Australia) Pty Ltd ("SFX"), which had acquired ISM during the course of 1999. The term of the agreement was five years, and it was in place during the 2005 income year. The second recital stated: "The Player[
- "a) Advise the Player in respect of his sporting career.
- b) Negotiate playing contracts on behalf of the Player.
- c) Negotiate product endorsements and sponsorship so far as is reasonably possible.
- d) Access and arrange legal, financial, superannuation, taxation, insurance and other appropriate advices and services at the request and cost of the Player.
- e) Develop and maintain a mutually agreeable communication timetable.
- f) Provide such other services and advices as may reasonably be required by the Player."
Pursuant to cl 4(a), SFX was entitled to charge "[t]wenty per cent (20%) of all gross monies or other considerations paid to the Player for sponsorship, media contracts, endorsement for goods and services, advertising or any form of promotional work and any subsequent income earned from the above monies." Pursuant to cl 4(b)(i), SFX was entitled to charge "[s]even percent (7%) of all contract monies paid to the Player including bonuses/incentives negotiated by the Manager."
19. Each of the NRL Playing Contracts entered into by Riddell mentioned above was negotiated by ISM or SFX. During the 2004 NRL Competition season, Darryl Mather ("Mather") of SFX unsuccessfully attempted to negotiate a new NRL Playing Contract for Riddell with representatives of St George. Riddell was then granted permission, as required by his contract with St George and the NRL Playing Contract and Remuneration Rules, to negotiate with other clubs in the NRL Competition. Mather negotiated on Riddell's behalf with representatives of Parramatta National Rugby League Club Limited ("Parramatta") and another club, and, ultimately, agreed terms with the representatives of Parramatta. On 22 June 2004, Riddell entered into an NRL Playing Contract with Parramatta for the 2005 to 2007 NRL Competition seasons ("Riddell's 2005/2007 Contract"). Among other things, it provided for an annual playing fee of $275,000 for each of those years. The view of the primary judge was that it was a contract of employment
20. On 17 November 2004, SFX issued a tax invoice to Riddell. Against an amount of $19,250, the notation on the invoice read: "2005 Management Fees". This amount was equivalent to 7% of the annual playing fee under Riddell's 2005/2007 Contract. The conclusion of the primary judge was that the fee was payment to SFX for negotiating Riddell's 2005/2007 Contract
21. As at 18 July 2007, Riddell was contracted to Parramatta pursuant to an NRL Playing Contract for the 2007 to 2009 NRL Competition seasons.
The applicable legislation
22. Section 8-1 of the ITAA relevantly provides:
- "(1) You can deduct from your assessable income any loss or outgoing to the extent that:
- (a) it is incurred in gaining or producing your assessable income; or
- (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
- (2) However, you cannot deduct a loss or outgoing under this section to the extent that:
- (a) it is a loss or outgoing of capital, or of a capital nature ..." (original emphasis)
23. Section 6-5(1) of the ITAA provides:
"Your assessable income includes income according to ordinary concepts, which is
ATC 9692called ordinary income ." (original emphasis)
24. "Business" is defined in s 995-1 of the ITAA as follows
" business includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee." (original emphasis)
Decisions of the Federal Court
25. The primary judge. As noted above, the primary judge decided in favour of each appellant. Her Honour found that each was carrying on a business as a professional footballer, of which playing for a club was a part, and that the management fee paid by each was incurred in gaining or producing income from that business and carrying on that business. In the light of this finding, her Honour concluded that the management fees were deductible under both limbs of s 8-1(1) of the ITAA.
Federal Commissioner of Taxation v Maddalena ("Maddalena")
27. Finally, following
Sun Newspapers Ltd v Federal Commissioner of Taxation ("Sun Newspapers")
28. The Full Court. The Full Court unanimously reversed the primary judge's decision, primarily by focusing on her Honour's findings of fact that the management fees were, in each case, paid for the service of negotiating an employment contract. Despite factual distinctions which the Full Court recognised, the Full Court concluded that Maddalena applied to deny deductibility in respect of the management fees. The Full Court considered that even if the appellants were carrying on businesses to the extent of their various endorsements and media appearances, detailed later in these reasons, those businesses were separate from their employment by their respective clubs. The management fees, paid for the negotiation of a new contract with the relevant club, were therefore said not to have been incurred by the appellants in gaining or producing income from their employment or carrying on their respective businesses.
29. In the light of these conclusions, it was not necessary for the Full Court to consider s 8-1(2)(a) of the ITAA. However, the Full Court noted that, had it been necessary, it would have concluded that the management fees were not capital expenses and that s 8-1(2)(a) did not apply.
Submissions in this Court
30. In this Court, it was submitted on behalf of the appellants that each had turned his sporting prowess to account for money and that each was engaged in income-producing activity, a business, which encompassed two related streams of income: "playing income", from playing Australian Rules football or rugby league for his respective club, and "non-playing income", derived from sponsorships, endorsements and similar or related non-playing activities, whether carried out in conjunction with the club or independently of it. Thus, the management fees were said to be incurred in gaining or producing income from the appellants' businesses as professional sportsmen. Neither appellant could be fairly or completely described as having an "occupation as an employee", within the exclusion in the definition of "business" in s 995-1 of the ITAA, quoted above
ATC 9693As part of the appellants' argument, there was some attempt at clarification or expansion of two conclusions of the primary judge: first, that Spriggs' 2005/2006 Contract and Riddell's 2005/2007 Contract ("the playing contracts") were contracts of employment; and secondly, that the management fees, paid under the Representation Agreement with CSM and the agreement with SFX ("the management agreements") by Spriggs and Riddell, respectively, were compensation for negotiating the playing contracts. The appellants argued that the playing contracts were not solely contracts of employment, because they contained terms and conditions upon which the appellants could turn their sporting prowess and associated celebrity to account for money from both their playing and non-playing activities. The appellants also argued that the management fees were not paid solely for negotiating the playing contracts, but for all the services provided by the managers, the successful negotiation of a playing contract being merely the trigger for payment of the management fee.
32. Finally, in response to Notices of Contention by the Commissioner contending that the management fees were capital expenses such that s 8-1(2)(a) of the ITAA applied, the appellants argued that the management fees were not capital expenses because they were recurrent expenses referable to the process by which the appellants turned their sporting prowess to account to derive a regular stream of income.
33. The Commissioner characterised the playing contracts as solely contracts of employment, and the management fees as fees paid for the procuring of those contracts, governed by the long-standing authority of Maddalena. The Commissioner contested the appellants' characterisations of the playing contracts and of the management fees, and further submitted that it was not open to the appellants to challenge the primary judge's conclusions on those matters, as they were factual findings which were not challenged in the Full Court. The management fees were characterised by the Commissioner as "employee deductions" and therefore outside s 8-1(1)(b) of the ITAA.
34. Finally, it was contended by the Commissioner that s 8-1(2)(a) of the ITAA operated to deny the deductions claimed because the advantage the management fees had secured were the playing contracts, which were structural assets.
35. In resolving these competing submissions, it is necessary to consider in greater detail the income-producing activities undertaken by the appellants.
The appellants' income-producing activities
36. Spriggs. The association of players of Australian Rules football, now named AFLPA, has existed since 1974. It has been involved in the development of a Collective Bargaining Agreement between it and the AFL, containing terms and conditions incorporated into the AFL Standard Playing Contract. Thus, it has now been recognised that playing Australian Rules football in the AFL is work involving industrial relations and some need for collective bargaining.
37. Evidence was given at trial to the effect that players in the AFL Competition are increasingly able to market and promote their own images and personalities
38. Relevantly, cl 16 of the Collective Bargaining Agreement covers "Additional Services Agreements", which a player may enter with an AFL club or a sponsor of an AFL club as a part of the "promotions/marketing" of that player. Such agreements are required to be in writing, to "represent bona fide commercially based arrangements" and to be lodged with the AFL within 28 days of the date of signing any agreement. Schedule D of the Collective Bargaining Agreement contains guidelines for Additional Services Agreements.
39. In addition, cl 20 of the Collective Bargaining Agreement provides that, subject to certain restrictions, a player may use his own "Image", which is defined to include "a Player's name, photograph, likeness, reputation and identity". Schedule E contains guidelines for licensing and expressly recognises a player's entitlement to engage in promotional activity using his Image, with permission if using AFL property or intellectual property, but otherwise independently.
ATC 9694It can also be noted that the Collective Bargaining Agreement recognises the position of managers. The evidence was that 90% of AFL players employed the services of managers
41. The AFL Player Rules recognise that players may receive income under their AFL Standard Playing Contracts and also from other sources. Thus, the definition in the AFL Player Rules of "Football Payments" in r 1.1, which must, pursuant to r 2.2, be notified to the AFL for a player to be registered to play with a club in the AFL Competition, is as follows:
" Football Payments: in respect of a Player, any payment, consideration, advantage or other benefit directly or indirectly given or provided to, or applied for the benefit of, the Player or any Associate of the Player and which:-
- (a) relates in any way to, or which is connected with, the Player's past, present or future services with a Club as a football player, or any agreement, arrangement or understanding for the Player to join a Club or to refrain from joining a Club; or
- (b) is so given, provided or applied by a Club, or by any Associate of a Club, unless the Player, the Club or the Associate of a Club proves to the satisfaction of the Investigations Manager that the payment, consideration, advantage or benefit was paid, given or provided to the Player, or applied for the benefit of the Player or any Associate of a Player, in consideration of bona fide:
- (i) employment;
- (ii) marketing; or
- (iii) other services or rights
not falling within sub-paragraph (a), rendered by the Player ('Additional Services')." (original emphasis)
42. Pursuant to rr 2.1, 2.2(v) and 2.3.1, as noted above, all players with AFL clubs are obliged to enter a contract of service in a form prescribed from time to time by the AFL and the AFLPA, that is, an AFL Standard Playing Contract. However, Australian Rules football players are no longer tied to a particular club, as once they were
43. Each of the AFL Standard Playing Contracts signed by Spriggs, including Spriggs' 2005/2006 Contract, was a tripartite agreement between Spriggs, his club and the AFL. Spriggs' 2005/2006 Contract contained terms and conditions referable to a contract of service, such as cl 4.2, by which Spriggs agreed to:
"[f]aithfully, diligently and to the best of his ability, experience and talent, perform the duties applicable to employees in general and, without limiting such duties, the duties of a professional Australian Footballer as set out in this Contract."
However, as noted above, the Collective Bargaining Agreement was expressly incorporated into each of the AFL Standard Playing Contracts signed by Spriggs (pursuant to cl 2) and, pursuant to cl 10.1, both Spriggs and his club agreed to be bound by the AFL Player Rules. Thus, Spriggs' 2005/2006 Contract also contained terms and conditions referable to promotional activities, including those carried out independently of his club. It was, therefore, a contract of employment, as the primary judge concluded, but it was not solely a contract of employment. Even if this point was not raised by the appellants in the Full Court below, as a matter concerning the legal construction of a document, it was open to the appellants to raise that construction for the first time in this Court
44. As will be further explained in these reasons, the question of whether the management fees were incurred "in gaining or producing" the assessable income of Spriggs turns upon the characterisation of the tripartite arrangement between Spriggs, his club and the AFL. The answer to the question is not to be
ATC 9695found by isolating in those arrangements a contract of employment of the player.
45. From 2000 to 2006, Spriggs received Football Payments (as defined in the AFL Player Rules) under his AFL Standard Playing Contracts and, as a result of negotiations undertaken by CSM, he also derived income from non-playing activities. These variously included appearances at AFL and other promotions, appearances in the "Men For All Seasons Calendar", an appearance on television on the "Footy Show", and the use of his image on playing cards licensed by the AFL.
46. During the 2005 income year, Spriggs' only income from non-playing activities was $641, from licensing fees paid to Spriggs by the AFL for the use of his image on playing cards. His total income for the 2005 income year was $106,869. All but $215, which was interest income, was described in Spriggs' income tax return for the 2005 income year as derived from being a "Professional Sportsperson".
47. Riddell. Save that there is no national draft, the NRL Competition is characterised by arrangements similar to the AFL Competition. Clubs operate with a salary cap and the arrangements permit transfer, exchange and selection of players. As with the AFL Competition, there was evidence at trial that a large number of players in the NRL Competition use managers' services: it was estimated that 95% of the 25 highest paid players at any NRL club are represented by a manager
48. The NRL Playing Contract and Remuneration Rules recognise that NRL players may receive income under their NRL Playing Contracts, from playing rugby league, and also from other sources. Thus, for the purposes of establishing, in Pt 8.1, a "Salary Cap", providing that each club must ensure that the total aggregate "Remuneration" paid to its players during a season does not exceed a particular amount, r 65 defines "Remuneration" to include benefits paid pursuant to a "Third Party Agreement". Rule 7(1) defines "Third Party Agreement" to mean "any contract, agreement or arrangement, whether entered into by a Club, a Player or some other person or entity on behalf of a Club or a Player, whereby Remuneration is paid to, or for the benefit of, a Player by a Third Party". Rule 100 provides that such Remuneration will be included for the purposes of the Salary Cap calculation, unless, among other things, the agreement was entered into between the player and the third party at arm's length from the club. One factor relevant to that assessment is "[w]hether the Player is to be promoted by the Third Party as a sportsman independent of his Club who is associated with the Third Party as opposed to a Player from his Club".
49. Riddell's 2005/2007 Contract contains provisions referable to a contract of service, such as cl 1.1, which provides:
"The relationship between the Player and the Club, as evidenced by this Agreement, is one of employee and employer, for the purposes of participating in the NRL Competition ..."
However, it was agreed in cl 3.1(h) that, as noted above, the NRL Playing Contract and Remuneration Rules were binding on Riddell. In addition, under cl 3.2, he was permitted to make public appearances and to contribute to press, television and radio, provided the club's consent had been obtained and no conflict of interest arose. Further, the Contract made provision for dealing with "Player Property", defined in cl 29.1 to mean "the name, photograph, likeness, reputation and identity of the Player". Pursuant to cl 3.3, Riddell licensed his Player Property to his club and, pursuant to cl 3.4, Riddell was entitled to use his Player Property for "commercial purposes including, but not limited to, endorsements, advertising, promotions, events and marketing". Thus, in addition to conditions referable to a contract of service, Riddell's 2005/2007 Contract also contained provisions covering publicity and sponsorship, including independent sponsorships. Like Spriggs' 2005/2006 Contract, Riddell's 2005/2007 Contract was a contract of employment, as found by the primary judge, but it was not solely a contract of employment.
50. As with Spriggs, the answer to the question of whether the management fees were incurred "in gaining or producing" the assessable income of Riddell is not to be found by isolating a contract of employment from the arrangements between Riddell and his club.
ATC 9696From 1998, Riddell received payments under his NRL Playing Contracts and, as a result of negotiations undertaken by ISM and SFX, he also derived income from "sponsorship, media contracts, endorsement for goods and services, advertising or any form of promotional work". These variously included a sponsorship agreement with Puma Australia Pty Ltd, a licensing agreement with Legends Genuine Memorabilia for production of signed lithographs of Riddell, a sponsorship agreement with Microsoft Pty Ltd, an agreement with Playersinc Pty Ltd for production of a Riddell "Action Figurine", and promotional television and radio appearances.
52. During the 2005 income year, Riddell earned $11,394 from various promotional activities negotiated by SFX on his behalf, including a television appearance and various sponsorships. He received $220,174 under his NRL Playing Contracts with St George and Parramatta. All of his income was gained or produced from his activities as a player in the NRL Competition.
Deductibility under s 8-1(1)(a) of the ITAA
53. It is against this background that the operation of s 8-1(1) of the ITAA falls to be considered. For that purpose, regard may be had to the cases decided in respect of its predecessor provisions
54. The issue, in respect of s 8-1(1)(a), is whether a particular "loss or outgoing" was "incurred in gaining or producing ... assessable income". There was no debate about the appellants' assessable income. It included amounts paid by their respective clubs for playing in matches; it also included promotional or marketing payments for exploiting the celebrity associated with their sporting prowess. It was not disputed that these payments were income according to the concept of "ordinary income" under s 6-5 of the ITAA, that is, within "the ordinary concepts and usages of mankind"
55. It is well settled that incurred "in" gaining or producing means incurred "in the course of" gaining or producing assessable income
Ronpibon Tin NL v Federal Commissioner of Taxation ("Ronpibon Tin")
"it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income."
The essential question, rephrased in
Federal Commissioner of Taxation v Payne ("Payne")
Federal Commissioner of Taxation v Day
"That no narrow approach should be taken to the question of what is productive of a taxpayer's income is confirmed by cases which acknowledge that account should be taken of the whole of the operations of the business concerned in determining questions of deductibility." (footnote omitted)
56. While s 8-1(1)(a) of the ITAA does not, in terms, refer to the carrying on of a "business", in considering deductibility under that provision, it may be "useful and necessary"
57. Section 8-1(1)(a) is available both to a taxpayer who earns income as an employee and also to a taxpayer who earns income from a business carried on by the taxpayer
ATC 9697becomes necessary to ask whether the management fees were incurred in the course of gaining or producing their assessable income from that business. The answer may be different from that which would apply if the appellants were not conducting businesses, but were no more than employees.
58. This distinction was recognised in Maddalena
"Had the taxpayer claimed as a deduction the expenses of changing from one job to another as an employee electrician his outlay would not have been an allowable deduction. The expenditure would have been incurred in getting, not in doing, work as an employee. It would come at a point too soon to be properly regarded as incurred in gaining assessable income. Nor would the expenditure have been an outgoing in carrying on a business. There is a difference of first importance for present purposes between an electrician who seeks work as an employee and an electrician who seeks contracts to do work as a principal. In the former case the electrician would not have a business; in the latter he would. In the latter, therefore, what he spent to obtain contracts to do electrical work would be properly regarded as an outgoing of his business. There is, however, a clear distinction between the two cases."
The late Professor Parsons made the same point
"Whether the applicability of the first limb or the second limb is in question, the inquiry must be concerned with the connection between the expense and the particular process of derivation of income." (emphasis added)
59. The existence of a business is a matter of fact and degree. It will depend on a number of indicia, which must be considered in combination and as a whole. No one factor is necessarily determinative
60. Where it is determined that a taxpayer is conducting a business, the next question will be the "scope" of that business
61. The appellants relied on the decision of this Court in
Federal Commissioner of Taxation v Stone ("Stone")
"'Professional sport' may be thought to be a phenomenon of the second half of the twentieth century. It was during that century that the expression came to be associated
ATC 9698with those who made their principal pursuit the playing of sport for reward."
Their Honours added that the distinctions between amateur and professional status "were never tidy"
62. Even in previous times, in certain contexts, courts had no difficulty in finding that playing football was work. In 1909, in
Walker v The Crystal Palace Football Club Ltd
In a similar vein, in 1971, this Court stated in
"It may be sport to the amateur, but to a man who is paid for it and makes his living thereby it is his work."
Buckley v Tutty
"The fact that football is a sport does not mean that a man paid to play football is not engaged in employment ... The position of a professional footballer vis-à-vis his club is that of employer and employee".
63. In this case, the Commissioner did not dispute that the non-playing activities from which each appellant earned income constituted a "business". However, the Commissioner contended that, following Maddalena and in the light of the exclusion of "occupation as an employee" from the definition of "business" in s 995-1 of the ITAA, it was necessary to separate the appellants' Australian Rules football and rugby league playing activities, which could be characterised as employment, from their non-playing activities. On this basis, the Commissioner argued that the management fees were not incurred in the course of earning income as employees, as they were incurred to obtain new employment contracts, as in Maddalena. Further, it was argued that they were not incurred in the course of earning income from the non-playing businesses, because they were paid to the managers solely for procuring the new employment contracts, not for any purposes of the businesses, as characterised by the Commissioner.
64. The Commissioner's arguments must be rejected.
65. It is possible to obtain and perform an employment contract as part of, and during the course of, running a business, as is illustrated by
Commissioner of Taxes (Vict) v Phillips
66. Maddalena does not oblige the approach for which the Commissioner contended. As noted above, the Court there expressly considered that different results as to deductibility could follow if a taxpayer were conducting a business, as opposed to being only an employee. The Court concluded that Mr Maddalena's contract with the rugby league club was a contract of employment and that expenses incurred in procuring that contract were not incurred in the course of earning income under that contract. In reaching that conclusion, it is plain that the Court concluded that Mr Maddalena was not conducting a business. That is not surprising, given the facts of the case: his activities as a rugby league player were part-time; there was no evidence as to any indicia of a business, a part of which was Mr Maddalena's employment; in particular, nothing in the case suggested that Mr Maddalena conducted himself in a business-like way, for instance by retaining a manager; and movement between clubs was more difficult and less structured than it is today. This explains the distinction drawn by Menzies J
"[I]t is common knowledge that because a man is a successful professional he can earn fees from advertising and other sources which, of course, form part of his assessable income. Nothing I say in this judgment bears upon expenditure to earn such fees. Here it is the agreement with Newtown that the taxpayer spent money to secure."
On the facts of Maddalena, there was nothing to suggest that the gaining of any such advertising and other fees were, together with employment by a club, part of a business.
67. The definition of "business" in s 995-1 of the ITAA, set out above
ATC 9699The facts here are quite different from those in Maddalena. As noted above, it is not disputed by the Commissioner that the appellants' non-playing activities constitute businesses. Having regard to the indicia of a business described above
69. Looking at their activities as a whole, the appellants were engaged in the business of commercially exploiting their sporting prowess and associated celebrity for a limited period. Those businesses were well established before the management fees were incurred
70. The conduct of such a business by each of the appellants was anticipated in the framework provided by the playing contracts and the various other related documents described above
71. Furthermore, each of the appellants conducted the whole of his business in a commercial and business-like way, in particular by retaining a manager. The appellants' managers had duties which included, but went well beyond, the negotiation of playing contracts. The obligations imposed by the management agreements underscore the association between the appellants' playing activities and promotional activities.
72. Even assuming that the management fees were paid solely for the service of negotiating the playing contracts, that service and the management fees were productive of both playing income and non-playing income, each flowing from the business of each appellant of exploiting his sporting prowess and associated celebrity.
73. There existed here sufficient connection between the outgoing, the management fees, and the gaining or producing of assessable income from the business of exploiting sporting prowess and associated celebrity, for the management fees to be deductible under s 8-1(1)(a) of the ITAA. They were incurred in the course of gaining or producing income from the appellants' respective businesses.
Deductibility under s 8-1(1)(b) of the ITAA
74. The broad application of s 8-1(1)(a) of the ITAA, including its application to income derived from a business, means that, on the facts here, s 8-1(1)(b) adds little.
75. In Ronpibon Tin, the overlap between the limbs of the predecessor section to s 8-1(1) of the ITAA
76. As noted above, the Commissioner submitted that s 8-1(1)(b) had no application, because the deductions for the management fees were "employee deductions". However, as already explained, the appellants were properly to be considered as conducting businesses of turning their sporting prowess and associated celebrity to account for money. For the reasons already explained, the businesses included repeatedly performing the services of playing for their respective clubs under the playing contracts. Section 8-1(1)(b) is capable of operating in these circumstances. No inhibition to that conclusion arises from the definition of "business" in s 995-1, set out above
77. In the light of that conclusion, it is plain that the management fees were appropriate and adapted for the carrying on of the
ATC 9700appellants' businesses. They were reasonably capable of being seen as desirable or appropriate, having regard to the ends of those businesses. They were necessarily incurred in carrying on those businesses and were deductible under s 8-1(1)(b) of the ITAA.
Were the management fees capital expenses under s 8-1(2)(a) of the ITAA?
78. In the light of these conclusions, it is necessary to consider whether s 8-1(2)(a) of the ITAA, in respect of outgoings of capital or of a capital nature, is engaged. As already noted, on this point, the Full Court did not doubt the conclusion of the primary judge that that provision was not engaged.
79. The starting point is the frequently repeated statement of Dixon J in Sun Newspapers
"There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment."
80. The Commissioner contended that, in each case, the playing contract was a structural asset and that, as the management fee was paid to procure that playing contract, it was an outgoing of a capital nature.
81. That argument of the Commissioner must be rejected, even assuming that the management fees were paid solely for the service of negotiating the playing contracts.
82. As to the character of the advantage sought, namely the playing contracts, those contracts were revenue assets. They were not lasting assets, but were of a relatively short-term nature and subject to renewal. Each of the appellants entered into a number of playing contracts, with different clubs, in the course of his business.
83. As to the other matters mentioned by Dixon J in Sun Newspapers, the management fees were a recurrent expenditure, in respect of the playing contracts, which were revenue assets. The management fees did not secure a lasting asset. They were only incurred upon successful negotiation of the playing contracts. They formed part of the remuneration to the respective managers under the management agreements. Those agreements obliged the managers to provide services in several related respects, all of which were concerned with exploiting the appellants' sporting prowess and associated celebrity on an ongoing basis.
84. For those reasons, the management fees were not an outgoing of capital or of a capital nature and s 8-1(2)(a) of the ITAA did not apply.
85. The management fees paid by each of the appellants were deductible under both s 8-1(1)(a) and (b) of the ITAA, and they were revenue expenses which were not covered by s 8-1(2)(a). The orders of the primary judge should be restored.
86. The orders should be to allow the appeals to this Court, set aside the orders in paragraphs 1 and 2 of the Full Court's orders made on 22 August 2008 in each appeal to that Court and, in their place, order that the appeals to that Court be dismissed. In accordance with submissions made by the parties, there should be no order as to the costs of the appeals to this Court, and the orders of the Full Court that there be no order as to the costs of each appeal to that Court should not be disturbed.